Why Depreciating Rupee is good for short term..

If you look at Indian currency INR (Rupee), it has been depreciating from past 45 days, the reason might be the outflow of dollars. High inflation numbers and poor industrial performance is also not helping the stock markets. We are seeing the spur in demand of precious commodities like gold and silver as lot of economist are fearing a double dip recession. Our currency has now depreciated to more than 48 per dollar from 44.5 just 45 days back which is nearly 7 to 8%. But this deprecuition of currency might be good for the country in short term.

1. It will make exports Competitive and might improve the capacity utilization of manufacturing companies. 

2. Increase the investment in Indian equity and Debt market as dollar will get god valuation.

3. Curb outflow of investments from India and the money might be invested in Indian businesses.

4. Natural Hedge against the selling by FIIs as the FIIs will loose in dollar terms.

Stock Market Puzzle

Nobody Knows when the markets moves up or down !

The market was going smoothly in 2010 and than it declined nearly 20% all of a sudden. What were the reasons for it ? People can only find out the reasons after the market actually falls. People gave lot of reasons

• Egypt Crisis
• Inflationary Conditions
• High Interest Rate to reduce the Profitability of India Inc
• Corporate Governance issues emerging in Indian Companies
• Libya Crisis
•  Manmohan Singh Government and scams
• Crude Oil to hit the growth of India 

Few of the economist had even written off India. Likes of Goldman Sachs said that developed countries will outperform the emerging economies .. hmm too many views all of a sudden..

Now the market has recovered almost 1000 points in a short run. The conditions are actually quite similar to earlier conditions or much worst that what they were. The crisis in Japan can also affect the growth of the world, than you have RBI increasing the policy rates yet again and none of the earlier conditions have actually changed.

The truth is that no one can predict the direction of market in short run and whenever market takes sharp turn than most of the market players are caught unaware of it and it is not logical.

The funny side of the story is that whenever there is a strong rumor that the market it is going to decline, usually there is no actual decline in stocks and when the market declines, nobody knows it.

Investing in Mid Caps .

Small and mid caps companies looks very attractive at times on stock indices. You might find them rightly priced, far cheaper than the regular blue chips but investing in them is a tough question.

The biggest problem in these companies is lack of transparency. Inspite of strict discloser norms enforced by SEBI, there are companies which frequently cook up their numbers.


The corporate governance issues are creating lot of volatility in the mid caps stocks off late.The mid caps actually corrected by nearly 25% in last one month as some of the companies were found to be either involved in unethical business practices or their owners were involved in some types of scams which puts a question mark on the whole company.  

Mid caps also have problem of cash and seldom a recession can eat of all their cash reserves and a company might never be able to become profitable even after the return of good times . In case of blue chips the resilience to survive a few quarter of negative growth is much more.

I believe the best way to pick a good mid cap stock is :

1.      
      How to pick the real Infosys of the future amongst hundreds of scripts? The real multi-baggers will be found in mid or small caps only . 

            1. Analyze the leverage of the company: A highly leverage medium sized company is more likely to fall in bad times.

2.      
      2.Disclosures and Transparency

3.      3.Quality of management

4.      4.Business Model

5.      5.Barriers to Entry in the business

6.      6.Profit margins 

             

        All said and done , its a tricky exercise . If one is not very sure of investing in equities than investing in mid caps is definitely not a option . 

My Introduction to stock markets …

When I first heard about stock markets way back in 90’s, it was always from the kind of money my relatives or my neighbors are making in the business, they all became my role models. They used to be surrounded by people asking for tips to invest or rather trade in the market.I used to think if I have money, I will invest in a 5 Rs stock , it will jump to 20 than again I’ll invest in another 5 Rs Stock and it will again jump to 20 in few days , the money will become 16 times .. Oh is it so easy, I said to myself, I just need to have 1000 Rs and I will become millionaire one day..this was how I was introduced to the stock market and I was barely 8 year old.

My father used to invest only in IPOs (Initial Public Offering, where one invest in the companies going for listing). I used to wonder why he is so conservative with investment, why not invest in the rapidly moving stocks in the exchange, the money is so huge there, you need to just bet on one and make merry for yourself.

I used to check out daily stock prices of father’s holdings, finding out whether we are making money or losing? In a classic bull market everything used to move so fast, wow we are making money even in IPOs. Everyone just used to talk about share and its returns those days. I used to feel that everyone is so intelligent, I should also know about it. Then there was an Uncle living close to our home and used to always talk big about the latest killing he has made in the market. I used to think, he must be so rich.

The euphoria didn’t lasted long, the whole market crashed, few of the people were badly hit, few sold of their houses, Harshad Mehta became the talk of the town. The Uncle living next door was never seen again in the neighborhood, people say he fled with his family due to the fear of creditors..

Then I thanked my father for being conservative, It’s not so easy after all.. but still that feeling was there inside me ,may be these people were not wise enough I can still make money in this market .. They should have short sold the stocks and they could all had been so rich.. I can do it one day, I used to say to myself..

To be continued..

Budget 2009

Sensex may have crashed 600 points after the announcement of the budget, but I still found the budget very responsible although it has fair share of negative policy decisions too .

Positives

1. Government high degree of spending on rural and poor India clearly signals the accountability to the people of the country. They are fulfilling the promises made in the general elections.

2. Infrastructure spending will give boost to the manufacturing industry which is facing trouble due to recession. It will also have increased multiplier effect and will boost the overall economy.

3. Increasing MAT to improve the tax revenues from the company which are avoiding tax due to tax incentives given to them. If we see companies like TCS, INFY, they have established themselves well and don’t really need any tax breaks further. Ideally there should be a limit set on net profits and the time company crosses the limit, it should be taxed as a normal company.

4. Boost to agriculture sector in the form of 7% loan will improve the rural economy further, it will improve the purchasing power of almost 650 million Indians.

Negatives

1. No announcement of disinvestment in both loss and profit making companies is really shocking news. When the country is sitting on huge fiscal deficit and borrowing nearly 34% of the money used for spending, disinvestment could have been a trump card solution which is missed.

2. Imposition of Fringe Benefit Tax was a smart move by the earlier government, by abolishing it tax revenues will be reduced as companies will start paying its employees in the form of benefits and perks to reduce their tax load. This may also increase the fiscal deficit even further.

3. Reducing duties on Plasma TV, Mobile Phones and imported Car - This may be one of the decisions for the galleries, but it really doesn’t help the rising fiscal deficit of the country.

I think the major issue of this budget is clearly the lack of fiscal management by the finance ministry, increased borrowing by the government will cause following effects: -

1. Sovereign Ratings: - Increase fiscal deficit to more than 6%, it may also affect our sovereign ratings and increase the cost of borrowing by the government and the institutions.

2. Crowding out Effect: - Government is borrowing almost 34% of the expenditure from the markets. It will reduce the options for the private sector to get easy funding as it will be competing against the government to secure funds.

3. High Interest Burden: - Around 19% of the budgetary expenditure goes in just paying the interest on the loans taken by the government. High interest burden and increased borrowings is a negative sign for the growth targets of the country.

Are Bulls Back?

Outcome of general elections have changed the face of Indian Equity Markets. People who are staying away from the market are suddenly all excited about the easy money from stock markets.

 Is it really the revival of great Indian bull market which is ignoring all bad news and simply concentrating on the development agenda of the newly form UPA government without the fear of LEFT parties  or its just yet another short lived  trend. I personally feel that there are less chances of it being a sustainable upside trend for long, reason being: -

 

1.      1.  The earnings figure of the companies are still on the declining trend, nearly 33% of the top 1000 listed Indian companies by market capitalization have shown losses in the last Quarter. Majority of the companies are seeing a decline in the EPS growth.

 

2.       2. GDP increase of 5.8% might look very comforting but if look at the breakup of the GDP growth rates only the infrastructure sector has shown good growth with rest of the sectors still far from the last year’s level.

 

 

3.       3. Global recession seems far from over with heavy weights like General Motors filling for Bankruptcies and US markets still struggling for confidence.

 

4.       4. We are facing the challenge of large fiscal deficit and there is a high expectation for the populist budget this year which might stretch it even further. High Fiscal deficit combined with soaring current account deficit can even make a case of downgrade of India’s sovereign ratings which will increase the cost of funding for both the government and the companies of India.

 

5.       5. Low credit off take from banking sector clearly reflects the declining trend in the capital expenditures of the companies.  It can reduce the extent of growth rates and job opportunities both in manufacturing and services sector.

 

6.       6. Delayed Monsoon can negatively affect the agriculture and the rural economy making it tough for recession neutral industries like Food and FMCG.

 

7.       7. Declining exports and increasing crude prices can even the increase the current account deficit of India and with less capital account inflows due to grim external conditions the balance of payment condition of India can denigrate although we are sitting in huge Forex reserves.

 

I can clearly see a classic case of retail investor’s excitement about entering the market when it’s too hot to handle. It’s very tough to predict the direction of the markets but the macro economic factors doesn’t really reflect any signs of sustainability of this rally for long time and I think it will be in interest of the small time investors to go a bit slow on their buying frenzy in a quest to become a millionaire in a month.  

Corporate Governance ..

Satyam scandal has unnerved lot of market participants about the chances of corrupt practices being undergoing in lot of other companies, people who use to believe in fundamental analysis of the securities are now suspicious of the real intrinsic value of their stock holdings. Clearly discounted cash flow analysis , relative valuation or even DDM cannot account for the risk of marked up employees or fudged balanced sheets. In such a scenario what method of valuation can actually discount for the risk of abysmal corporate governance is a real issue for modern day finance practitioners and there is a need to add this qualitative measure in quantifying the intrinsic value of any stock. This risk can be called risk of asymmetric information .One of the way of quantifying such risks is increasing the discount rate for company with less transparency or lesser number of independent directors. The high discount rate will reduce the value of the stock but quantifying the value of this premium is a very difficult process.

SEBI is coming out with a new formula to add another check in the auditing process by introducing peer review. In a peer review internal auditors from some randomly selected company will check the books of some other company and vice verse.  There may be lot of operational intricacies in actually adopting this process but it can act like a good deterrent for the company to take up innovative accounting practices . What is interesting is that the industry is not supporting this new check. Let’s hope we have it implemented and it can identify most of the Satyam’s in the process.  

Crowd Behavior, Social Networking and financial Decisions ..

Majority of our decisions are based on how others are doing it. Crowd behavior gets mostly influenced by the social network one maintains. Most of the people invest in stocks as his neighbor is investing and making money in it. Most of the people invest their hard earned money in risky trades without any knowledge of market, As Shankar Sharma of ‘First Global’ gives the analogy of a revolver with only one bullet in it, and the investor is asked that he will earn a million if he tries it on himself, few people might get richer in such games but end of the day more people shoot themselves rather than earning the money. The probability of becoming a millionaire is getting reduced by every trial and the rule of the games also keeps changing. Nobody knows if there is only one bullet in the gun.

Social networking is giving way to a regular crowd behavior pattern which is very prominent in many ways: -

1. Increased Information Levels: - Social networking keeps people informed about others and leads to an increasingly informed society. Such level of information might not be very useful for all.
2. Comparisons in Society: - Increased information about friends and peers leads way to comparison of decisions, similarity in life style and even peer pressure at times.
3. Peer Pressure: - (From my earlier Blog) When we talk about the art of decision making and psychology behind it, we believe that peer pressure has the most significant influence behind our decision making. We may live our own life but the rules of the life are mostly defined by the people with whom we work or study. The reason is simple, we spend a significantly high portion of our time with them and hence their personalities and reactions affect our decision making process. The more important the decision, the more is the peer pressure. Infact even the decision of selecting a job or going for higher studies is sometimes influenced by the peer pressure. People constantly fear that they will be judged by other people on the basis of their decision.
4. Financial Decision Making: -Financial success of peers and friends whom a person can easily associate in his network motivates other people to take similar risk or even at times more risk than a person can actually afford. Social networking thus makes you believe that you can also achieve the similar level of success in financial decision making.
5. Incentives and Recognition: - Social networking also prompts a person to take increased risks as the society can make a hero out of him if he succeeds in his plans and financial decision making. The improved recognition in the society acts as a big incentive in making financial choices for a person.

Market Timing ..

All technical and short term investors usually try to achieve something called market timing. Most of the traders believes that they can buy at low levels and sell at higher level in short duration of time. Although the term might look very simple but it is one of the toughest task according to industry experts. 

Technical analysis is the study of demand supply which is analyzed by reading different chart pattern which can daily, 3 day, 7 day or 30 days moving averages. The logic behind this exercise is said to be decoding the fundamental nature of human behavior that react to market scenario in either Fear or Greed. Most of the time people behave like a herd and as per the technical analyst the chart pattern actually help them in predicting the future direction of the market.

I am never able to appreciate the art of charting. Infact I seriously doubt the technique of reading charts for predicting future market scenario is something which can be proved or done on a regular basis. 

If we check the history of stock markets, the research suggests that the past information cannot be used to predict the future trends in market as that information is already discounted in the share price. This theory is called Weak form of ‘Efficient Market Hypothesis ‘ and has been proved by several quantitative research experiments.

Few weeks back I was reading a book on market timing by a prominent author who was trying to explain in a very unconvincing manner that the market timing does exist and people can actually do it. It is actually this belief which is making the markets liquid, nearly 60% of the volumes on BSE and NSE is from day traders who want to make the most in a day. They have literally zero holding time in comparison to the Warren Buffet philosophy of holding the stocks forever.

All said and done but I am yet to meet a person who says that he makes money 3 times a week by day trading specially in such volatile markets.

Value Investment revisited in Troubled Times..

The value investing was losing relevance off late due to global Equity markets reaching new heights. When market was breaking all barriers and going high every day who would have given a thought to the precautionary principles of value investing like margin of safety, splitting of investment In debt and equity etc. Benjamin Graham, Guru of celebrated investor Warren Buffet and writer of ‘The Intelligent Investor ‘ is the originator of value investing Philosophy. 

The most important principle of value investing is margin of safety .Margin of Safety is a conservative investment strategy. By margin of safety, Mr Graham meant that any stock bought should be worth considerably more than it costs. The worth of the stock can be determined by checking the book value of the share although there is no generic rule to define it, as per Mr Graham if the market value of the share is less than or in close vicinity of the book value it provides good margin of safety. If we look at the present valuations of the Indian equity market, there are so many stocks with good margin of safety. It was tough to spot such stocks when Sensex was at 22000 but at present valuations many good companies like ICICI Bank, DLF etc are all trading below book values.

Mr. Graham was a conservative investor throughout his life and strongly felt that the money invested should be splitted into both debt and equity as it provides a natural hedge against each other. If we check the present scenario the stock markets are plunging but interest rates are increasing proving good yields. 

As per Graham a shrewd investor is one who bought in a bear market when everyone else was selling and sold out in a bull market when everyone else was buying. But I don’t know how many people will actually have courage of buying in bear conditions.

I think history repeats itself over and over again and the core principles which were valid before are valid even now. The whole environment, technology etc may change and these principles may lose significance or ignored by investors for some time but they keep reappearing to upset us all and remind us the significance of basics.

Under Pricing of IPO’s

When we were taught pricing of IPO’s in class of Management of Financial Institutions I found it very interesting. The concept was that the primary aim of the merchant banker should be to get the full subscription of the shares and leave enough gravy on the table so that even in case of strong bear sentiments in market the investors to the IPO don’t lose money. 

Our professor told us that there is phenomenon of overpricing of the IPO’s by the Indian merchant bankers. They overprice in order to get merchant banking contract from the company going for listing as there is lot of competition among the merchant bankers. The banks which can get the shares fully subscribed at the highest price are the preferred one in the industry. It clearly brings more funds for the company; hence companies want to overprice. This phenomenon causes lot of loss to the IPO investors in case the listing price of IPO is less than the IPO book building cutoff price. The overpricing of IPO’s happened throughout 2008 in Indian stock markets including the likes of Reliance Capital. Hence the IPO’s should be under priced. 

Today I came across a piece of statistics which confused me about the whole theory. The American merchant bankers in order to have full subscription repeatedly followed this principle of under pricing. IPOs were underpriced by 11 percent between 1990 and 1998, but that gap soared to almost 70 percent during 1999 and 2000. In 1999 and 2000 alone corporate America left more than $60 billion on the table money that could have been invested in the development of the newly listed companies. Now thinking that the promoters of the company are the major subscribers in any equity issue, it’s not the common man who is only benefiting out of these under priced issue. Infact it can be seen as a major issue of corporate governance. 

So what should be the correct strategy of the pricing of the IPO’s? By looking at the demerits of both under pricing and overpricing I think fair pricing of the IPO with regards to the risk and relative to industry peer might be a good way of pricing. But the question remains, deciding the fair value is very subjective and there is nothing like fair value of any company.So confusing !

Is it Safe to Invest in Indian Equity Markets ..

After the advent of globalization in mid nineties the Indian Stock Market has repeatedly shown its strength of being well regulated and trustworthy institute, thanks to the efforts of SEBI but still for Indian punters it is hard to digest the monotonous upswing in the capital markets from last few years . The main rationalities behind it is the periodic down trends in the market when it’s the small investors who have lost heavily, be it the black Monday after the fall of BJP in the general election , be it the havoc of rising oil prize or the inflationary pressures , is it common to only Indian mindset or is it a global trend of being a skeptical towards the stock markets ?

Last 8 months has been dreadful for the global capital markets due to sub prime woes which has engulfed almost whole of US and Europe due to securitization of Debt , the companies are still writing off billions of dollars of assets due to the subprime lending and the world commodity prices has also become a pain for central bankers , there are more than 60 countries facing double digit inflation , the oil bills is increasingly putting pressure on the inflation and growth of economies , Sensex along with the major world stock exchanges have seen major corrections , it has come down from the level of 21000 to 14000s , the real question now is that is the correction over and is it safe to invest in equities now ?

The Indian stock indices mainly Sensex and Nifty are seen as heavily overvalued by many of the analyst who keep bringing there dooms day theory now and then , they say that Indian market is at P/E ratio of 18 which is very high as other high growing economies like Korean , Brazil , Russia which is also showing tremendous growth is at a P/E of 11 , so is it worth investing in market at this time when Oil is boiling , federal interest rates has seen five negative interest changes in past 1 year just to pull the ailing US economy out of recessionary pressures and Japan is no more distributing dept at zero interest rates. Another theory much hyped by the promoters of doom is the redemption of foreign investor’s money from capital market to more secured bond market as the interest rates are hardening in India and other emerging economies, with these theory in newspapers now and then we can hardly blame the Indian mindset for panicking under slightest hint of trouble.

If we see the historic bull run , the shortest bull run lasted for 16 years in Japan and by that landmark we have barely reached the half stage , but again our impatient mind constantly remind us that our valuation are reaching a peak , the international scenario is no more stable with lot of economists say is the compounded effect of loose monetary policies right from from the dot comm. Bust and now they can no more hide it. . By analyzing our industrial growth one can find that India has shown a 7+% GDP growth in last 16 consecutive quarters , high industrial growth with full capacity utilization in most of the sectors , SEZ being seen as increasing the demands of industrial goods and for that capacities are increased to milk the profit , so is there any need to panic, When we compare Indian market to its peer we forget that India is one of the best regulated market where we are giving a big pie to FII’s , if we compare China where capital market is still suffering from xenophobia , FII’s are seen with distrust and most of the companies are state regulated we can easily find the answer to the high valuations , Indian market have 50% more listed companies compared with any Asian market which can be attributed due to loose IPO regulations which still need to develop to filter hundreds of dead companies coming to equity market for funding , the trading volumes are also a cause of concern for lot of companies and its only 400-500 companies which are actively traded out of 9000+ companies ..

So the question again comes ‘ Is it safe to invest now ? , Is it the time to do some bottom fishing ‘The answer is not easy but one thing is timely tested and trusted by all that if we are long term investor in any market we will seldom loose our money and most of the time can make a good Fortune , but timing the market is not easy., As warren Buffet says , don’t invest in equities, invest in business you trust and invest in them thinking that even if stock markets gets closed for next 10 years your company will still be there’. So what are you betting on!