Investing in India - 5 Minute WrapUp by Equitymaster
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What 16th May could mean to your portfolio? 

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In this issue:
» RIL makes lame statements on gas issue: Says it's a victim of honey trap!
» Is India ready for a differentiated banking model?
» China's bad debt ratios eyeing sky
» What should you buy for long term - gold, equities or real estate?
» ...and more!


00:00
 
The election verdict will be out on 16th May. Events like these are known to create excessive volatility in stock markets. Take for example the case of 2009 general elections. The verdict came out on 18th May 2009. And within seconds indices hit upper circuit. The benchmark BSE-Sensex opened with a gain of 11% and trading had to be halted. When trading resumed again, the Sensex shot up another 17%. Subsequently, trading was called off for the entire day. There was complete hysteria on street. A 27% gain was clocked in a single day just because UPA government came to power as widely expected.

A complete reverse sequence of events happened in 2004 when UPA emerged as a surprise winner. Sensex fell 6% on the day elections results were announced and further succumbed to a loss of 11% the very next day.

It is natural for stock markets to react excessively on the day election results are announced. However, excessive volatility creates systemic and liquidity pressures in stock markets. For example, in 2009 significant margin pressures were evident when index hit upper circuit. Banks came to the rescue of brokerages then.

However, it seems that this time around, Indian regulators are well equipped to deal with such excessive volatility risks. Both RBI and SEBI have formed a special committee to oversee the risk management practices of markets via stress testing. This will ensure that the liquidity risks are well managed.

The decision to set up formal committee and run stress tests signals that the risk management practices in India have evolved. And the regulators this time are well equipped to deal with the unforeseen contingencies.

But are you election ready? Arguably this is the most crucial election of last two decades. Ten years of anti-incumbency against UPA and the development propaganda of the NDA have polarized the nation. Final election verdict will determine the growth path of the Indian economy and thus stock markets. And this time the influence of poll result on growth trajectory is more than ever.

So, how should one position his portfolio after the election verdict?

If NDA government does come to power will infrastructure and engineering stocks receive a boost? Secondly, will interest rates be lowered considering the capitalistic leanings of the NDA? We know it is questions like these that worry you currently. And that's precisely why we are organizing a WebSummit on 17th May 2014. Yes, the day after the election results... when all the dust has settled and it's time to plan ahead. The ONLY agenda of the WebSummit will be help you plan your post poll investment strategy. So, block your calendar, and start looking forward to it! Full details of the WebSummit will be released shortly. In the meantime if you have any questions already, please post them here...

Will you juggle your portfolio post the election verdict? If yes, do you have a post poll strategy in mind from a 2-3 years perspective? Let us know in the Equitymaster Club or share your comments below.

Editors Note: We hope you've been following American wealth coach Mark Ford's writing on the Daily Reckoning. More recently, Mark began revealing his 11 Secrets to Building Wealth with his Indian readers... They make for great reading and we strongly recommend that you access them (for Free) now.

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01:50  Chart of the day
 
That the growth rate of the Indian economy is on a declining spree since FY10 is no news to us. But the same period marks a slump in core sectors too. Over the past three years, manufacturing sector has lost the plot. And that's rightly reflected in the declining profitability trend over the same period. Have a look at the chart below. The profit margins have consistently dropped from 8.2% in FY10 to 5.7% in FY13. The sector did report a moderate recovery in FY10. But it continued to languish till date. The slump can be largely attributed to the weak industrial output for the past three years. Besides, high inflation has impacted the costs and profit margins of the manufacturing sector.

There is no denying the fact that the Indian economy has remained service oriented. And waking up to this realization, the government has increased focus on the manufacturing side of the industry. It aims to enhance the growth rate of manufacturing sector to almost 15-16% in the medium term. Now given that the economic recovery has yet to take shape, we believe it is no small feat to have such a buoyant manufacturing growth.

Have manufacturing margins bottomed out?


02:10
 
If 60% of the previous full year's figures are reached in just the first two months of the current year, it is certainly not a good sign if the data being analysed is that of bad loans. And this is exactly the situation in China right now. The country's bad loans rose to around US$ 10 bn in the first two months itself as compared to US$ 17 bn in the whole of 2013. What makes matters worse is the worsening economic environment that will make repayments extremely difficult if not impossible. A lot of experts saw this coming a long time ago we believe. They argued that the Chinese Government was resorting to massive investments left, right and center and without any regard to the return on those investments. What happens in such cases is debt keeps getting less and less productive. And then there comes a point where debt cannot increase fast enough to continue stimulating the economy. Has China reached such a point yet? While its growth has certainly slowed down, it will have to put brakes on its indiscriminate lending to prevent any further damage we reckon.

02:45
 
That IDFC and Bandhan Financial are not destined to be the last set of entities to become banks is known. The RBI has promised to make issuance of banking licenses a more regular feature. However, it has not offered enough clarity on when and how the next set will be issued. There are speculations that the central bank is not very keen on having more 'universal banks'. These are entities that offer all financial products and services under a single roof. The RBI believes that the universal banking model tends to give rise to conflict of interest. Having said that, the universal banking model remains the dominant and preferred model across the globe. Particularly in economies such as the US, Australia, Singapore, Hong Kong (China) and Indonesia. Further nearly 40% of India's population has no access to financial products. Hence specialized financial entities may not be able to address the problem of financial inclusion. In fact, as per a research note by SBI, it is too early to offer differential banking licenses in India. For it would be very difficult for a differentiated bank to survive by selling only one or two products. Most, except foreign lenders which undertake niche business activities, would fail to keep up with the costs. However, the differentiated licensing model can be tried for fee-based business. The report recommends companies in credit card, remittances, payment and settlement businesses for differentiated licenses.

03:10
 
Here is a company that has seems to have a penchant for controversy. Reliance Industries is again in the news. Often targeted for getting a favorable treatment from the Government and taking for granted India's crucial natural resources, the company has lashed back with a point that seems to be lame.

In its defense against favoritism, the company's counsel has to say that the company was lured by the Government to explore, develop and produce gas in KG D6 basin. Until that time, it was not aware that natural gas was a national resource and that it could be subjected to price controls. Apart from blaming the Government for creating bureaucratic hurdles, it has gone a step further and dragged state run ONGC. The latter has been blamed for lagging at development stage for 18 years.

The entire incident and blame game has made a mockery of a very grave issue. The development activity on a block is preceded by signing comprehensive production sharing contract. So, taking control of the crucial resource and then not meeting its commitment on lame pretext is something that should not be accepted. It is implied that natural gas, being a crucial national resource, cannot be treated as personal property and cannot be expected to be free from all state controls. We hope that the Government and policy makers will learn lessons. And that going forward; only responsible players will be awarded contracts that deal with resources of national importance.

03:35
 
If you ask most investors where they prefer to invest, the top answer would probably turn out to be fixed deposits. Real estate is also another avenue that attracts investors. So is gold. But when it comes to equity investing many people hit some sort of a mental block. The perception is that putting money into equities is akin to speculation and gambling. And more often than not you will lose than generate healthy returns. Nothing could be further from the truth. As per an article in Mint, between 1980 and 2014, while gold delivered 11% returns, that from the Sensex was much higher at 17%. A five year FD yielded an annual rate of around 9%. Real estate returns are always tricky to estimate given the lack of transparency in the sector. The other way to look at this is in term of costs. FDs in that sense do not generate much after taking into account taxation and inflation. Real estate tells a similar story. Costs mount when you take into account stamp duty, registration, and maintenance among others. The overall point is that equity investing if done the right way can adequately reward investors. But at the same time, it would not make sense to allocate your entire corpus to any one asset class but to follow the principles of asset allocation depending upon your age, risk profile and financial goals.

04:30
 
The Indian stock markets continued to trade strong. At the time of writing, the benchmark BSE-Sensex was up by 115 points (+0.5%). Barring realty and power, all the sectoral indices were trading in the green. Capital goods and consumer durable stocks were the biggest gainers. Majority of the Asian stock markets were trading negative with Hong Kong and Singapore being the major losers. However, the Japanese index was trading firm. Most of the European markets opened the day on a weak note.

04:50  Today's investing mantra
"Don't buy a stock just because everyone hates it" - Warren Buffett
Today's Premium Edition
Dismiss the myth of sector allocation
Why having a finger in every pie may do no good to your portfolio!
Read On...Get Access
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