Straight from the Hip - A Weekly E-Letter
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While stock markets have had a brilliant run in 2009, there's another asset class that we believe has grabbed the headlines. Gold! And that's just with a 23% returns since January (in rupee terms). Compare this with the 75% gains that the stock market indicator - BSE-Sensex - has seen during this period.
One key reason for gold's bigger mind share than stocks during 2009 we believe is - the future.
With the printing presses of central banks (led by the US Fed) working overtime, many noted experts are now predicting a return to the Gold Standard! One amongst them is Porter Stansberry, chief of the leading US-based private publishing company, Stansberry & Associates Investment Research.
Porter has been a gold bull for quite a number of years now. And his current view is that gold is ‘nowhere near the top'. This he believes is because central bankers, the key players in the gold price - have begun to buy gold only since the last six months. "So this bull market for gold has a lot, lot further to run," he put its straightforward!
Like he keeps all his savings in gold, Porter also advices people to hold their savings in the yellow metal. And to own as much as they can reasonably afford.
As for Equitymaster's view, we believe that while gold can still perform very well in 2010 and beyond, one should have not more than 10% of his/her investments in the yellow metal. Stocks in good Indian companies must form the biggest portion of this portfolio, especially if it has time on its side.
01:12 Chart of the day
Today's chart of the day shows that the past decade (1999-2009) has been excellent for the Indian markets. In fact, these have outperformed the gains seen in the US and even Chinese markets. Opening of the economy post 1991, the rise of a knowledge economy and appreciation of India as a low cost yet quality base is what we believe has aided Indian markets during these years.
Small-caps have outperformed mid and large caps in 2009. One big reason we think led to this outperformance was that small-caps started the year on a very low base of valuations. The BSE-Smallcap index was trading at a P/E (price to earnings) of just around 6.2 times in January 2009. Against this, the multiple stands at 17.6 times currently.
So where are small-cap stocks headed in 2010?
We do not expect small-caps to repeat their performance of 2009, in 2010. One of the foremost reasons is valuations. These stocks (on an average) are now trading at valuations that are very close to those of mid cap and large cap stocks. In fact, the gap between BSE-Smallcaps' P/E and Sensex's P/E currently stands at just around 18% as compared to 49% in January.
But this does not take away from the fact that there are numerous small companies out there, which are still available at attractive valuations as compared to their good long term prospects. One however has to be very cautious while searching for such valuable opportunities. After all, it's not every day that we hear about a new small company that's doing great things.
