Friday, July 2, 2010

Asset Classes

This is a theoritical topic to start with, but should be easy as we understand the concepts. explains the investment pyramid as this:

It's the Asset Class, then the Market, then the Sector, then the Stock.

If the stock asset class is not in favor, then the stock market isn't either. If the stock market is out of favor, then the sector will not matter that much. If the sector isn't working, then the stocks within the sector won't work either. Conversely, when stocks are in favor, and the market is trending up, and the sector is under accumulation, stock-picking is redundant, almost anything in the right sector will work.

In case you didn't hear me up in the balcony - Asset Class, then Market, then Sector, then Stock. You live in an asset allocation, ETF'd world right now. Why fight yourself?

In a down-trending tape, feed your buy recs and price targets into a shredder. In an up market, dart-throwing monkeys can go head-to-head with the best and the brightest out of Wharton.

Over-generalizing? Of course. Could this change? Of course. But still.

That's how it is.


My Notes: In the USA, the stocks as an asset class are not really in favor. What about India? Reader comments are welcome. More important, can we have an objective method of determining favored or not favored?



I donot know it is an co-incidence or not, there was a discussion i had with some my friends, who are very actively managing / having good stake in the global markets, be it euqities / commodities.

One thing common i noticed was: All are afraid of value erosion in equity market; that means the fancy pe multiples we have in India, would die soon. The same sentiments i had from them prior to October 2008.

Since March 2009, bull euphoria was created artificially with stimulus funds - fii pumped in more money - election result was better than expected - all these things fired the bull rocket. Fine. Is there any fundamental improvement to justify such high valuation of 20+ pe? That is exactly the point of argument with respect to the equity market.

Important reason we found in the discussion was deflation or so-called smooth landing of overheated markets, unemployment. so, they expect lesser demand for products and services than the growth expected, that could directly affect the capital markets globally. Now metal counters are facing downward pressure. NMDC subscribed for Rs.300 is now available around 265.

Equity as an Asset class will face a lot of valuation pressure, and my friends are questioning whether pe 20x are sustainable. Many of them i noticed are still holding longs, but fully hedged, with an expectation that price valuation could range between 10 - 15X. Risk aversion will rule the roost.

My observation is: It is foolish to withdraw completely from equity market; one has to allocate some amount of his capital in equities, with a complete understanding of the risk and also should not expect high appreciation in the values year by year. If possible try to bring down the cost by trading on that shares (only if you have a sound trading rule and you must be able to stick to your own rule / abide without questioning it).

Finally market is king. It does not care about our discussion and it is capable of throwing our point of view into dustbin. So, i love to follow the market even though if it is wrong.

Nitin Gupta said...

I agree with you, considering that stocks are the asset class to be in , in india considering that we have strong consumption demand but we are not decoupled from the world markets because our external deficit is funded by fii's and not fdi's which should be the case for any growing economy and we should look to get more fdi's going forward. so there is short term pain in there if the world markets tumble but in the medium term and long term we are in a structural bull rally.

Harsh said...

Short term pain is very likely since we are nor decoupled from the world markets.History has shown that the magnitude of the problem is always underestimated by the people in power and Europe is still a huge problem.
Infusing currency notes into the economy wont make it healthy in the long run.It will only devalue the currency(reduce the buying power of the currency) which has it's own set of problems.
India on the other hand though in for some short-term pain will eventually recover.Lower levels from here will be seen.Active supervision from the RBI should help from time to time.
Not all stocks look attractive at current rates like private banks quoting at 20x their P/E ratios.Another example being Fortis Healthcare.
All in all a time to be cautious while investing in stocks.