In this issue:
» Forecasters turn gloomy on India
» The crude oil price dilemma
» SEBI chairman discusses some important matters
» Blackstone cancels its proposed Asia fund
» ...and more!

00:00

Small cap stocks have been amongst the fastest gainers since the current rally began on March 9th. The BSE-Smallcap index has gained around 51% since then, as compared to 50% returns apiece for the BSE-Sensex and BSE-Midcap indices. If one were to dig deeper within the BSE-Smallcap list (consisting of 466 stocks), around 56% of the stocks have gained 50% or more during this period and only about 7% have recorded negative returns.

While there’s no taking away the fact that well-managed small-cap companies can generate huge returns for investors in the long run, sharp stock price movements like these are something we do not understand and remain fearful of.

Source: Prowess

Take for instance one small-cap stock we had recommended to our subscribers earlier in March. It doubled within a month! While we are happy that our subscribers made a lot of money, we are also concerned by such unusual jumps in share prices.

00:34

In a move to broaden and increase its stream of revenues, Accenture, the world’s third largest IT services company has formed a subsidiary in India to cater to low-priced contracts. On account of the ongoing slowdown, companies across the world have cut back on their IT spends, thus leading to lesser number of low-priced contracts. Accenture has set up this unit to capitalise on the same. It is believed that the company usually charges around US$ 27 to 28 per hour to its premium clients, which makes it one of the most premium pricing players in the industry. As compared to Indian IT players, the rate is higher by around 20% to 30%.

While IT companies are expected to struggle to maintain momentum on account of the slowdown, they will now also have to worry about the increasing competition from experienced players and brand names such as Accenture.

01:06

There are mixed opinions on whether the recent rally in crude oil prices is sustainable. On one hand, there are early signs of recovery in demand. For example, China’s crude oil imports grew by 14% YoY in April, for the first time this year. On the other hand, the International Energy Agency reports that inventory level in the major oil consuming countries is the highest in 2 decades. In fact, it predicts that global demand for oil this year will be around 83 m barrels a day - a contraction of 2.6 m barrels, the biggest in 30 years.

01:28

Based on the results of a survey of professional forecasters as carried by the RBI on its website, India’s GDP is expected to grow at an annual rate of 7% and 7.5% over the next 5 and 10 years respectively. We have always believed these growth numbers (7-7.5%) to be appropriate for an economy like India, even when all other experts were talking about a 10% annual growth! The current 10-year forecast for GDP growth is interestingly lower than the 8.8% levels that these very forecasters had predicted just around three months back, and is possibly a measure of how the current economic scenario might have clouded these long term forecasts.

01:52

The world’s largest retailer, Wal-Mart recently announced its first quarter results wherein it reported a slight decline in revenues but a marginal growth in profits. The company’s management is of the view that the slowdown has helped Wal-Mart as buyers choose to purchase goods at discounted rates. As such, the company’s same store sales increased by 3.7% during the quarter. If we were to compare the same store sales of Wal-Mart to the major Indian retail houses, the difference is not very vast. During the quarter gone by, India’s largest retailer Pantaloon recorded a year on year growth of around 7% (value retailing), while Shopper’s Stop’s same store sales declined by 3%.

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02:17

In an interview with Business Standard, SEBI chairman Mr. C.B. Bhave has discussed some important issues with respect to peer review of companies, buyback offers by companies, segregation of assets under portfolio management services (PMS) and the like. While the Satyam fraud led to the concept of peer review of companies, the obvious concern is the payment of fees for the same as this would lead to conflict of interest. While SEBI has decided to pay the peers auditors’ fees for the first year, various options will be explored as to how this exercise will be carried out thereafter.

As far as PMS is concerned, SEBI is contemplating empowering investors to verify their accounts by bypassing fund managers. In this regard, SEBI had already issued a directive informing PMS managers to segregate investors’ accounts rather than operating the funds in pooled accounts. The rationale for this move is to put some proper checks and balances in place given that PMS are small setups. Besides this, SEBI is also looking to tighten its regulations as far as buyback offers by companies are concerned. Thus, while the regulator plans to carry out a slew of initiatives in the interest of the market and investors, it remains to be seen whether execution of the same is smooth going forward.

03:04

The way the global stock markets have been moving these past few weeks, we were wondering that risk taking seems to be back in vogue. It may have, but is still a far cry from the highs reached during the peak of the previous bull-run. Had that not been the case, hedge funds would have begun mushrooming across the globe. But the fact that even as high profile a name as Blackstone has to cancel plans of launching a fund gives enough feelers that people are still risk averse out there.

As per Bloomberg, Blackstone Group LP was considering starting a US$ 1 bn Asia focused fund that would invest in Asian companies affected by events such as mergers and reorganizations. While the firm has attributed the cancelation to the fund’s poor rank on its list of priorities, there are some who believe that lack of investor interest could be the reason. Furthermore, with things in the US and Europe worse than Asia, it would make more sense to launch the fund in these regions first.

03:43

Source: Kitco

The movement in the price of gold this year so far has been volatile with high uncertainty prevailing on account of the global financial crisis. Fuelled by the recession, commodity prices considerably cooled off from their highs while gold (in comparison) continued to attract investors on account of the precious metal’s reputation as an alternate avenue of investment. Various bailout packages announced by governments across the world, especially the US, and the likely role that those will play as catalyst in stoking inflation (especially if the US government resorts to printing money) has further enhanced the appeal of the yellow metal. Currently, gold is trading at US$ 925 an ounce and as long as fears of inflation persist, the metal is only expected to chart an upward path in the future.

04:12

Indian indices ended the day on a strong note with the BSE-Sensex closing with gains of around 300 points. Buying was witnessed across sectors led by banking and capital goods space. As for other markets in the region, barring Indonesia, all the other Asian markets also ended the day on a positive note. European indices were trading firm at the time of writing.

04:26

The uncertainness over the election results can be seen in the way Indian markets have behaved over the past week. The uncertainty has been aggravated following the exit poll results which indicate that no major political party (Congress or BJP) will win enough votes to form the next government at the Centre. Whatever the case may be, we, like you, hope for stability in governance once the next government comes to power.

04:42

Today's investing mantra

"Bear markets happen for a simple reason. The owners of the merchandise can't get their asking price. The shortage of buyers forces them to lower the fare, until a buyer can be coaxed into making a deal. It's a common occurrence in retail. Stores have a bear market after every Christmas rush." - John Rothchild