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Investing in 2007

I think 2007 will see lots of winners but the winner-to-loser ratio will be worse than 2006. It will be a year during which making the right choices will be critical

For investors, the best aspect of the year was the stock market crash. I know that sounds bizarre but let me explain. Writers on investment like me often express contempt for the joyous celebrations that often break out when stock market indices like the Sensex touch round numbers like 5,000 and 10,000. It's just a Big Round Number (BRN), we like to say, it is no different from 9789.5436 or any other number. By that principle, we should be just as dismissive of the new year, and indeed, of birthdays and anniversaries in general. They're just round numbers of a kind, nothing more.

Having said that, I shall now eat my words and wish everyone a happy 2007 and try and figure out what investors should expect during this year. It hardly bears repeating that the past year has been an amazingly happy one for investors. The major indices rose about 45 per cent during the year. More to the point for the retail investor, a good proportion of equity mutual funds also did very well, with as many as 25 funds (out of 145) gaining more than 50 per cent during the year.

However, as I said right in the beginning that wasn't actually the best part of the year. The best part of the year was that it turned out be so good on the whole despite the huge crash in the middle of the year. Historically, whenever the Indian stock markets crash after a long boom, they stay crashed for a long time. 2006's mid-year crash wasn't at all like that.

The fact that it wasn't really a crash and the markets recovered so well, was what proved that times have changed and things are different this time. This also means that almost the entire year's gains actually came in the first five months and the rest of the year was spent in clawing back those gains bit by bit but that's OK.

And that brings us to the coming year. Do we have any right to expect 2007 to get us the kind of returns that 2006 did? The simple answer is that we don't. If 2007 was to repeat 2006's returns then the Sensex would be around 21,000 a year from now. This is possible but unlikely. On an average, the companies that make up the indices are no longer the bargains they once were. Despite the stunning rise of stock prices over the last few years, corporate earnings had more or less kept pace and many stocks were available at reasonable valuations till the beginning of 2006. This isn't really true any more.

We will see a year in which it will make more sense to look to individual companies for cues than to the Sensex. Many companies and sectors will run out of steam and lag but many others will not. It will be a year in which making the right choices will matter even more. Not that 2006 saw absolutely uniform growth. 1,200 stocks out of the 2,400 odd traded on the BSE ended the year in red and even among relatively larger companies (those with market capitalisation of more than Rs 100 crore), 368 out of 951 companies saw their stock prices decline during the year. I think 2007 will see lots of winners but the winner-to-loser ratio will be worse than 2006. It will be a year during which making the right choices will be critical.

And perhaps, the right thing to focus on is not whether we will be better of in 2007 than we were in 2006 but that we will certainly be better off than we were in 1999.