Bulls need more oxygen to climb higher

The Sensex raced past the Dow, ending the week at 11,279, for a weekly gain of 329 points (3 %). Its dizzying climb is being fuelled by the oxygen of money, as both foreign and domestic investors pumped fresh funds into the market.

Now, as any mountain climber will confirm, the higher the altitude, the greater the need for oxygen. While the longer term is still bullish, a shorter term correction is very desirable.

With the Indian markets and economy more integrated globally, they can be, and are, affected by global factors. An accident at a polyester plant in America can cause its prices to shoot and Indian manufacturers can benefit. Thus investors may find it increasingly difficult to pick stocks.

They may have to leave decisions to a mutual fund manager who will have better access to information and the resources to process it.

For individual investors, an interesting alternative is to invest in an exchange-traded fund (ETF). In the US, ETFs are most popular; the two largest funds in the world are both ETFs, managing over $ 1 trillion in assets! They have overtaken managed funds.

The difference between ETFs and managed funds is that while the former only mirrors the underlying index, managed funds try and better it by tailoring a portfolio. In the US, more than half the managed funds underperform the S&P 500 index, selecting one that outperforms can be as difficult as selecting a stock!

The Nifty Bees is one ETF which exactly tracks the National Stock Exchange Nifty. For an investor, one advantage of an ETF is that it has lower costs because it does not try to outperform the index by tailoring a portfolio.

Hence, it has much lower management fees and no entry/exit load (since it is, as the name indicates, traded on the exchange). The difference can be 5 % or more.

Secondly, in a mutual fund, the investor always carries a one-day price risk. In an ETF, an investor can buy or sell by calling his broker, just like in a stock.

Another interesting product in the pipeline is an “inverse fund”. This will behave in exactly the opposite manner to the underlying index.

Thus investors in an inverse fund would make money if the index went down and lose if it went up. It would be a good hedging instrument not only for small investors but also for high net worth investors and banks who cannot use futures for hedging.

Individual investors can thus merely take a view on the market and buy either the ETF, when they feel it is going up, or the inverse fund if they think it is going down.

They will not have to worry about which stocks will take it up or down!  Overall, the key message for investors is that the long term trend is up, but a correction is desirable and needed. What will trigger one is not clear. One ought to wait for it.

In corporate news of interest last week, Reliance Petroleum raised Rs 2,700 crore in a pre-IPO deal for its huge Jamnagar refinery, which is the world’s largest single location one. It may also consider taking in a strategic partner, such as Chevron. Ranbaxy was in the news for a spate of acquisitions, including Terapia of Romania; which caused its share price to spurt to a high of Rs 460.

Draft guidelines on takeovers in the aviation sector seem set to approve the transfer of valuable assets such as parking bays and landing rights, which would allow the Jet Airways takeover of Sahara to proceed unhindered.

There is, however, a woeful absence of long-term resource planning. For example, India’s largest import item is oil, but the finance minister offered excise concessions to small cars in the budget, which can only lead to more car sales and more demand for fossil fuels. More cars lead to parking problems and demands for flyovers.

Europe has found this to be an exercise in futility as better flows increase the number of cars on the road again! The solution to both flow and parking, as well as to oil consumption, is better and reliable public transport.

Chinese planners are doing a better job; just consider that since 2000 China’s contribution to global GDP growth is 1.5 times the combined contribution of the other three BRIC countries, including India.