31 Dec 2011
Wish you all a very happy and wealth generating new year -2012.
2011 will definitely be remembered as one of the forgettables years for the Global stock markets as far as investment returns are concerned. While the US markets closed virtually unchanged with respect to 2010 closing level(0.4% down), Europe market closed at 12% down (STOXX Europe 600 index).Indian market was the worst performer among the major markets with Sensex down by 25%. A combination of domestic factors like high inflation and interest rates, slowing indian economy, Govt. policy paralysis, high fiscal/ current deficit along with global headwinds like Euro debt crisis and US slowdown led to withdrawl of invested funds by FIIs leading to a bear market in India.
The Million Dollar question in all investors mind is "what is in store for 2012?”. It’s always very difficult to predict the short and medium trends in the market. However , taking into consideration all the factors and issues playing in 2011, I would like to put my bet on a positive 2012.
2012 should be a brighter and better year because of couple of reasons. Almost all the bad factors - global and domestic - have been already factored into the prices and hence market should start looking up by end of Q1. Inflation has already started coming down with food and primary articles inflation showing <6%. Interest rate cycle has already peaked with RBI showing signs to cut down the rates in near future. Govt. has started to move on reforms/policy, though the attempts on Retail FDI and Lokpal - didn’t produce positive results. Euro crisis will continue in 2012 with Europe going into a recession, though the immediate threats of sovereign defaults have blown away due to some recent actions and agreements like higher emergency funds for IMF and Europe Financial Stability fund and agreement on better fiscal controls in Europe. US economy is showing its inherent strength lately by bouncing back in the last quarter when it showed 3% growth with respect to 0.9% growth in first half of 2011. The unemployment rate has come down to 8.6%(lowest in last 3 years) and job market as well as housing market is looking up after a long time. The only event the market has not factored is a potential sovereign default in Europe in one of the PIIGS nations. Any market can’t factor such kind of catastrophe event anyway.
One should use these times of fear and uncertainty to invest in staggered manner with every fall in the market in the next few months to build up a long term portfolio of strong businesses at discounted prices. The market prices for most of the blue chip stocks/ businesses are attractive and are available at good “margin of safety” to their intrinsic values. The sensex companies are available at an average of forward PE of 13 to 2012 earnings estimates and forward PE(Price Earning multiple) of 11 to 2013 earnings estimates. The average forward PE historically has been 16 for Indian market in last 2 decades. Unless we don’t have any catastrophical events in 2012, we should see sensex reaching levels of >20,000 by end of 2012, assuming forward PE of 15(>30% returns on the current levels). These investments should be made only with a horizon of atleast 3 years so that we will get handsome returns of >20-30% annualized.
Next big question is which stocks to invest in 2012?
I would stick to the same list of stocks which I had advocated in my last blog “Time to invest and build long term portfolio”. I would recommend these stocks/ businesses( using my "Hi-Five principles/framework mentioned in one of my prior blogs) in the high potential sectors of Banking & Finance, Infrastructure, Power, Energy and Agriculture/ rural plays.
Banking and Finance space - This has faced the brunt of market reaction and fear recently and hence have some solid buying opportunities. With RBI indicating the end of interest rate cycle, Banking and finance sector will be the first to start rising. Bank of Baroda and Axis Bank are very attractively placed now. Consistent performers with > 20% ROE and >25% growth rate in last 5 years with very attractive prices/ PEs. The NPA(net performing asset ratio) is <1%
Infrastructure space - L&T and IDFC - Solid and consistent performers with very attractive prices/ PEs. These businesses are the best proxies to India infrastructure story with solid growth track record and strong balance sheet and excellent revenue visibility of >2-3 years(L&T has order book of > 3 years of current revenue; > $25 Billion order book size.
Capital equipments/ Power space - BHEL and REC(Rural Electric Corporations) . Very strong performers with consistent growth track records(>20% CAGR) and >20% ROE . BHEL has strong balance sheet(almost debt free) and big order book( equal to almost 4 times current year revenue). REC is very strong player in power finance and has monopoly in rural power programs . You could also consider Power Grid which has huge expansion plans with virtual monopoly in transmission sector
Energy space - GAIL and Reliance Industries . GAIL has huge pipeline expansion plans with strong performance and balance sheet . Virtual monopoly on gas transmission. Entering into profitable city gas distribution in a big way. Reliance has been an underperformer for some time which makes it attractive as all the negatives have already factored in the price(<750) and it has huge cash surplus of $13 Billion which could be deployed productively.
Agriculture & rural space - This sector is looking up due to big govt. planned expenditure on rural and irrigation space as well as potentially high growth rates in rural and agricultural economy. Jain Irrigation and Coromandel International are very strong businesses with attractive prices and long term growth potentials. While Jain irrigation is the market leader in micro-irrigation , Coromandel is the market leader in complex fertilizers and special nutrients. Both have shown high ROE as well as EPS growth rates of >25% for the last 5 years with manageable debts. Both of them have corrected to attractive levels in recent times.
All these players are dominant or big players in their sectors with consistent growth and profit performance, robust business models, well managed companies by competent management teams & strong balance sheets with sustainable competitive advantages in their areas. And they are available at great prices now with respect to their intrinsic value or historic PE, providing a great "margin of safety" for the value investors.
Wish you a very happy New Year again and Happy investing,
Cheers
