Monday, April 6, 2015

Responses given to ADC on Questions relating to Markets.

 What is driving the markets crazy?

There are several factors that are on the minds of traders (investors can ignore many such factors) like the conflict in Yemen, Strong economic data from the US and its resultant impact on emerging markets, the untimely rains and its impact on crops leading to further inflationary trends and its possible impact on the RBI policy with respect to further reducing interest rates. Add to this the volatility in international prices of crude and its impact on the Rupee and the ability of the government to pass contentious legislations successfully.

- With the markets yo-yo-ing 500- 600 points alternatively ...what according to you is the reason for such volatility?

Many times the volatility is witnessed due to technical factors also, which seems to be also contributing to the see saw. Our markets have seen stocks surging, and soon we shall have the result season, where the expectations are that the results of individual companies may not keep pace with the prices already risen, hence that has added to selling pressure. Add to this the expiry of March contracts on the FNO segment. We also have to account for some positions being pared on account of the Financial year end when liquidity is generally tight and the focus is mainly on closing the books. Alternately, factors like expectations of a further rate cut and firming of prices for year end NAV’s try to  tilt the scales on the other side.

- With the weather playing the spoil sport with current crops ...and danger of El Nino looming large .. where do you see the markets six months from now...

Predicting markets is something like predicting the weather.., the kind of weather we have lately had has impacted crops and will lead to a situation where prices go up further. This inflationary impact could have a bearing of further rate cuts unless it is balanced by prices of crude falling. This is in the immediate short term, by second/third week of July we should know the monsoon situation clearly, and that will largely dictate the trend for the market thereon. Although initial assessments are that we may have a near normal monsoon. By September I see the Sensex between 30000-31000.

- At what level do u see the markets by December 2015 

If we get atleast two interest rate cuts by the RBI till December 2015 the markets will be in the range of 32000-33000 during the period Sept- Dec 2015.

- Any suggestion for the small investors  

For the small investors, the best bet is to keep investing small portions of money regularly either directly in select high quality blue chip stocks or go the Mutual Fund route. Either way they should not react adversely to the volatility and be aware that even hard core professionals find it difficult to time markets. It is finally the Rupee cost averaging that will work in their favour.

Wednesday, April 1, 2015

Alpha of a Stock Demystified!

·         What alpha of a stock means to investors? Simply put, Alpha is a measure of an investment's performance compared to a benchmark, such as the S&P BSE 30. It's a mathematical estimate of the return, based usually on the growth of earnings per share.Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return.

·         Can you explain with the help of an example how an investor can calculate alpha of a stock? A positive alpha of 1.0 means the stock has outperformed its benchmark index by 1 percent. A similar negative alpha of 1.0 would indicate an underperformance of 1 percent.

Let’s assume company XYZ’s stock has a return on investment of 12% for the year and a beta of + 1.5; our benchmark is the S&P BSE30 which was up 10% during the period. Is this a good investment?

A beta of 1.5 implies volatility 50% greater than the benchmark; therefore the stock should have had a return of 15% to compensate for the additional risk taken by owning a higher risk investment. The stock only had a return of 12%; three percent lower than the rate of return needed to compensate for the additional risk. The Alpha for this stock was -3 and tells us it was not a good investment even though the return was higher than the benchmark.

·         What negative or positive alpha signify to investors? How good is it to invest in high alpha stocks  A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

·         What are the qualities of high alpha stocks? High-return stocks tend to have strong sales growth, strong earnings growth and realize high returns on invested capital. there are typically three ways stocks might achieve multi -fold gains. "The first is that it is truly a growth company and consistently puts up high-growth numbers. The second is a company that may be near bankruptcy or is really deep value and it comes back from the dead. The third is a little of both: A company that may be under the radar screen, perhaps with a checkered history, and it's really cheap, but not because it's a horrible company. It's just been neglected and hasn't performed very well, but maybe new management comes in and the company starts doing better."

·         What are the advantages and shortcomings of alpha?  Positive alpha is achieved with asset allocation, diversification, risk management, valuation strategies, and choosing individual investments with strategic advantages.

·         Can you suggest two stocks from the CNX Alpha index which can give positive return to investors in the next 24 months? Please give reasons. CNX Alpha Index aims to measure the performance of securities listed on NSE with high alphas. It is a well-diversified 50 stock index accounting for 12 sectors of the economy, in order to make the 50 stock index investible and replicable, criteria’s such as turnover, liquidity and market capitalization are applied while selection of securities. Weights of securities in the index are assigned based on the alpha values i.e. security with highest alpha in the index gets highest weight
Our company policy prohibits individual stock suggestions but going by the fact that Automobiles & Industrial Manufacturing have the highest weight in the Index, companies from these sectors can be a good bet.

(As narrated to MoneyToday)