Is the SEBI getting populist??

Yes..it does seem so given the almost complete U turn on P notes restrictions just issued an year ago by the erstwhile renaissance man of SEBi Mr.Damodaran. The restrictions were placed in the first place to improve transparency and disclosure norms of FII's, hedge funds and other Overseas institutions wanting to participate in the Indian stock markets. This aim was to prevent re routing of black money/illegal money into India from the so called tax havens, improve tax compliance and to keep a tab on the nature and veracity of the "hot money" flowing in from across the shores. The KYC norms imposed were a blessing in disguise and comforted the regulatory agencies of the country over the fact that terrorist money would henceforth find it difficult to penetrate Indian markets. Though these P note restrictions, when imposed at a time in Oct 07 when equities were close to their peak, were considered draconian (on par with capital controls)by market men, it was a well thought out measure with long term positives for our markets. The aim of the then SEBI chief was to protect the lay retail investor from violent gyrations in the stock market on account of sudden outflows of hot money for reasons best left to the P note holder's conscience.

One year down the line, we are in Oct 08 and those restrictions are no more valid. The whole world has changed in a span of 12 months. Bulls have become violent bears resulting in wealth destruction across the world. Banks have collapsed, the financial system is in systemic crisis.Fund flows into emerging markets have dried out completely given the global liquidty crunch and risk aversion. Outflows to the tune of $12 billion have eloped with the FII's from the Indian shores in a span of 8-9 months. The dollar is reverting back to the US. No more carry trades, currency swaps or exotic derivatives. Deleveraging is the new universal mantra for fund managers.

Given this background, Indian markets have collapsed close to 50% and are back at 2005 valuations. With elections looming large, the politicians and market men alike needed a scapegoat. SEBI became their whipping boy. Though every man worth his salt knew the true reasons for this market collapse driven by the credit crisis, excessive valuations and leverage, no soothsayer foresaw the magnitude of this fall. Obviously the intensity of this fall has not spared anyone's portfolio. Therefore, a conjectured and concocted logic started doing the rounds that it was SEBI's P note measures implemented last year that led to a fall of this magnitude for an economy growing at 8%p.a. The restrictions required sub accounts of FII's to stop issuing fresh P notes and provided for existing P note transactions to be winded up within a timeframe of 18 months. Most FII's were long India in 2007 and therefore gave room to assumptions in certain sections of the market that these series of outflows witnessed now is on account of P note unwinding. This concocted logic maybe true but funds always flee during times of crisis with or without capital controls. All the emerging markets have fallen 40-50% along with India, therefore this logic doesnt hold good. Ironically its been the US that has outperformed other global markets even on the downside. The place that has been the foundation of greed has done well to limit its losses compared to emerging markets. Just goes to show how dependant emerging markets are on foreign fund flows. Clearly the dollar is going back to the US.

SEBI has failed to display regulatory forbearance. It has panicked and played to the gallery sacrificing the long term interests of investors. This act of SEBI is akin to a trader cutting down his positions on account of margin calls. SEBI too has become a momentum player

Should Indian investors buy US homes

RBI has relaxed provisions relating to investments abroad by resident individuals under the liberalized remittance scheme. The scheme provides for investments abroad in capital assets like stocks and real estate by Indians upto a limit of $2,00,000 per annum.

There has been a growing demand among Indian HNI’s (High Net Worth individuals) to make investments in overseas markets like US and the UK to take advantage of the low property prices prevailing there consequent to the subprime credit crisis. With prices getting depressed to the levels of $1500 –2000 for properties in certain areas of US, on the face of it, it does sound like an attractive bargain hunting investment opportunity for our fellow investors. But we need to consider the following aspects carefully before making use of the relaxed RBI provisions to buy properties abroad:
Ø Whether the investor is buying the property abroad with the intention to emigrate to a foreign country in future or just purely as a profitable investment opportunity to benefit from price appreciation in the short to medium term. If price appreciation/capital gains is the sole objective of the investor, it makes better sense to invest in our domestic real estate sector as prices have corrected significantly over the last one-year. There is more pain left in the US post the credit crisis and real estate prices can remain depressed for a long periods as the US economy goes through periods of recession. Relatively, India has been fairly insulated from the global crisis and the domestic real estate sector may offer better scope for return in the medium term.

Ø The costs of maintenance of properties abroad, the distance barrier that reduces the scope for frequent surveillance/monitoring of the property by the investor, the local laws and regulations governing property acquisitions by non residents are factors to be considered by the investor before embarking on a decision to buy a property abroad.

Ø Currency risk and tax incidence are important decision making drivers. It would be a good decision to invest abroad when the rupee is appreciating against the dollar. However given the bleak future outlook for dollar as a currency, realizations in rupee from sale of the property abroad might be significantly lower due to continuous dollar depreciation. India has a double taxation avoidance agreement with the US and any taxes paid on foreign property can be claimed as a deduction under Indian tax laws.
Considering all the above factors, it makes better sense to wait for domestic real estate prices to bottom out and make fresh investments in property, as the entire exercise of investing in a foreign property might not be worth the trouble. Those families who want to emigrate or those who have children working or studying in the US (which indeed is a sizeable community) may consider buying these properties abroad as prices have become more affordable now

Interesting analysis on the sensex

Please have a look at the table below with details of the sensex performance right from the year 1991. Last evening's closing has been taken for 2008 data temporarily. We have already knocked down 41% from 2007's close.

Year Sensex YoY return
1991 1909
1992 2615 37.01
1993 3346 27.94
1994 3927 17.36
1995 3110 -20.79
1996 3085 -0.81
1997 3659 18.60
1998 3055 -16.50
1999 5006 63.83
2000 3972 -20.65
2001 3263 -17.86
2002 3377 3.51
2003 5839 72.89
2004 6603 13.08
2005 9398 42.33
2006 13787 46.70
2007 20287 47.15
2008 11802 -41.83



If we compute the CAGR for the sensex from 1991 to 2007 spanning 17 years we get a return of 14.91% explained as {(20286.99/1908.85)^(1/17)-1}. We have seen extraordinary/ astronomical returns in certain years namely 1999, 2003 and 2005-07 in the band of 40-70%. This year having slipped into a bear market we need to adjust for the excesses on the downside and fall in line with the CAGR of 14.91% p.a. To maintain this CAGR going ahead into 2009 we need to make a bottom of 8069 or fall 60% from the highs.

Though the above is purely a quantitative analysis based on historical data, Elliot wave theory has already shown us an indicative target close to 9000 for the 4th corrective wave on the sensex and 8096 doesnt seem to be far off. We are at 11800 already and another 25% fall in the bellwether stocks like RIL and LnT will easily take us there. There seems to be excesses still left in capital goods stocks which have not yet witnessed the capitulation seen in metals and real estate counters. Once the poison gets out of the system we can form a nice base for the reemergence of the bull market or the fifth supercycle wave as the elliot wave theorists call it.

But for that to start we need a time wise correction. The value wise correction seems to be happening but time wise we need to travel a bit more. We are nine months into this correction and we have broken important support levels along the downside taking cues from global markets and concentrated FII selling across the cap curve.

Therefore reaching out to these bottoms of 8000-9000 may not happen so soon. We might have violent retracements, sharp rallies that give u a 20-25% pullback in a short span of time. But these pull backs will be short lived lasting for a week or two before we head back to lower lows once again. The confidence in the system, despite belief in long term story of India, has been severely dented at the moment. The patience of the retail investor is slowly fizzling out like a dim candlelight with each passing day, as he wipes his forehead with his already wet handkerchief seeing the sensex drop in hundreds and thousands, watching stock prices collapse under the force of gravity. Every recovery aimed by the indices is being met with selling as highly leveraged investors try to make an exit from their bleeding positions. Three to four pull back attempts from the lows of 3800 were attempted by the nifty, but each time we have seen the index making a lower top which indicates structural weakness and provides evidence of the deeper lows staring at the bottom, which is what has happened today with the index breaking down to a new low of 3581 and the sensex decisively collapsing to levels below Rakesh Jhunjhunwala's psychological "12000". He would, going by his own words, still be drinking like a fish, eating like a pig and smoking out his costly cigars without major worries as he has invested in the market right from levels of 3000 on the sensex. So even at the worst bottom of 8-9K he would still be making 3 times his cost.

Therefore friends, we are headed towards making decisive lows that might happen over a period of time but until then trades will keep happening in a range bound manner. Dont get fooled by smart V shaped recoveries and bet all your money . Typical bear markets end in a saucer bottom formation which means timely consolidation around the support levels before a strong rally emerges.Regular investors should be wise enough to catch the bottom of this range to buy and exit at the top of this range for short term gains. It requires regular tracking of the markets and considerable effort/knowledge. For those who believe in the India story, this is the time to invest and cherrypick with a 3-5 year view, as in the short term you might still see your portfolio heading down 10-15% even from these attractive levels. A new bull market will start only when there is extreme pessismism around, low volumes,analysts on TV predicting total gloom and doom issuing ridiculous targets for the sensex on the downside etc etc From now on, watch out for your neighbours, relatives and people u meet in your day to day life, the ones who were gung ho about new highs for the sensex at 21K.Even my autorickshaw guy was giving me a target of 5000 for reliance 10 months ago. People felt that the bull market was permanent and eternal, an easy gambling paradise to double one's networth in days n weeks, without realising that investing is a tough business. Now is the time to start engaging them in a conversation about the markets. If they disappear from your sight, then thats the time to start investing heavily. Guess we are heading closer to those exciting moments, the so called "once in a lifetime" investing opportunity which intelligent investors capitalise upon to make a lifetime bargain.

The only risk to my estimate of 8-9K on the sensex is the "patience risk" as i would term it whereby long term investors and the domestic institutions in India say "Hey look, we are not selling the India story so easily for an economy growing at 7-8%. We are holding on come what may". This resilience will throw all market theories out of the window and a few months down the line we may be left ruing the fact that we kept our purse strings zipped and tight at these levels.

Markets are indeed supreme!!