Monday, March 5, 2012

Come - Join the party

Three months back, Indian markets were one of the worst performing ones globally –and today we are one of the best performers. The market has gone up by 15% in the past two months and many people feel that they missed the opportunity to profit from the rally in Jan / Feb 2012.

This increase in market valuations was because of funds coming in from foreign institutional investors into the Indian stock markets - FII inflows in Jan and Feb 2012 were around USD 6 Billion and this was the reason why market valuations went up by 15%.

Why did the FII come into the Indian stock markets?

Well the FII’s did not just come to Indian stock markets - they went to all the emerging markets – to China, Indonesia, Brazil and to Russia - all these markets have given good returns in Jan/ Feb 2012– and this can be traced to an action of the European central bank ( ECB) towards December end.

Somewhere before Christmas 2011, the ECB gave away about 500 billion Euros to European banks at a low interest rate of 1% for 3 years. This injection of liquidity was required to support the European banking system, which was close to collapse due to the sovereign debt crisis in Greece, Italy, Spain and Portugal. However, this easing of liquidity in Europe resulted in the FII inflow to emerging markets and that in turn resulted in the 15% appreciation in our stock markets.

We had a very similiar situation just two years back - In 2010, the Indian stock markets gave a 70% plus return and that was because of infusion of liquidity by the US Fed in 2008 and 2009 ( it was then called Quantitative easing – QE, now it is called LTRO –Long term refinancing option).

So why am I giving you all this information?
Because last week, there was one more infusion of liquidity by the ECB – again ECB has loaned 530 B Euros to European banks at 1% for 3 years – just like in 2010 and in Jan/ Feb 2012, some of this cheap money will find its way to Indian stock markets and it will result in the markets again going up.

So for those who missed the Jan / Feb 2012 rally, there is one more on the opportunity in the coming three months – this is the time to enter the Indian stock markets.

So what are the stocks to buy – I recommend at present BHEL (around Rs. 280), Colgate (around Rs. 1025), Crisil (around Rs. 950), Dabur (around Rs. 100), ESAB India (around Rs. 530), Maharashtra Seamless (around Rs. 370), Mahindra Holidays (around Rs. 290), Sundaram Finance (around Rs. 620), Noida Toll (around Rs. 23) and Shriram Transport (around Rs. 535).

Each of these stocks have a potential to give 100% returns in 3-5 years (15- 25% returns per annum). The methodology of forecasting the future value of the shares has been shared by me in this blog in Sept 2010 you can refer to it ( it’s called Investing in equities –part 1 and part 2). This is a very well known methodology and is used by almost all well known long term investors in stock markets globally – the key to making money using this methodology is  to stay invested for 3-5 years.

Another way to enter this rally would be to buy an Index based mutual fund – I recommend the Goldman Sachs Nifty Bees – this tracks the Nifty and by investing in this fund, you will mirror the stock market movement.

So I would recommend that you invest in the Indian equity markets immediately and do not miss out on the party.