Asset Allocation owes its origins to the Nobel Award Winning Professor Harry Markowitz’s Modern Portfolio Theory or ‘ Mean Variance Analysis’. Research conducted over long periods of time on markets and specifically on equities, bonds and cash indicated that the proportion of these 3 major categories played a vital role in the portfolio performance. In fact, the asset allocation contributed 91.5% towards the portfolio’s performance vis a vis ‘market timing’ that contributed just 1.8%.

Also ’security selection’ contributed 4.6% to the portfolio performance. Few other factors like ‘re-balancing’etc contributed 2.1% towards the portfolio performance.

As you can see..clearly the winner is ‘asset allocation’.
Well… so much for market timing and security selection!!

Asset Allocation is the way to go!

Amen to market timing!

Indian markets continued the bull run for the fourth straight year with 46% returns
in 2006.
FII flows in the Indian equity markets for the year 2006 stood at $ 8 billion
compared to $ 10 billion in 2005.
Domestic mutual funds contributed $ 3.5 billion. It is 17% higher than last year.
This is a healthy sign which indicates that more retail investors are entering the
equity market through mutual funds.
Tough to time correction in the markets, especially for the first few months.
Data and Analysis points to India in the over valuation zone.

According to Morgan Stanley estimates markets could have a downside of 18%
and an upside of 21%.
Various external and internal factors could contribute to the downside..
The key ones are possible U.S. slowdown in 2007, interest rate sensitivity, geopolitical
risks, liquidity squeeze, oil factor etc..
But the broad consensus[estimates by brokerage houses] is that the corporate
earnings growth will be in the region of 30% for FY2007.
Data and analysis points to aligning one’s portfolio predominantly to large caps
and select mid caps stocks/funds.
Overall.. the long term equity story for India is intact and one could get
reasonable returns [with a time horizon of 2-3 years] by holding investments predominantly
in large caps and in select mid /small cap stocks/funds.
On the flip side.. will we[Indian Stock Markets] show the money in 2007!?
Time will tell..

The derivative statistics and trends for Dec 2006 indicate a clear bullishness
for the month of Jan 2007.
The trend in high open position contracts point to the expectations of strong quarterly results and a run up on pre-budget sentiments.
Quarterly results is expected to be strong due to consumption boom during Diwali and Christmas. This will reflect in the 3Q 07 results.
Lower crude oil prices and softening in other commodity prices have reduced the input costs for manufacturing companies.
Higher Advance tax payments made by corporates are a clear indicator of the bullishness in the quarterly numbers.
Post results season, budgetary news flows will be the key factor driving the markets.
Overall, the month looks quite bullish for the markets.