Should investors shun stocks and buy this in 2011?

Jan 4, 2011

In this issue:
» Most investors have their eyes on China in 2011
» A turnaround in fortunes for Indian IT
» What if the diesel prices are not raised?
» Are MNCs posing a threat to Indian healthcare?
» ...and more!!

---------- FREE Webinar with Ajit Dayal - Register now - Limited Seats! ----------
Will 2011 be a prosperous year for Indian investors? What is Ajit's prediction of the BSE Index in 2012? Will there be an earnings risk? At what time should you book profits? How to make the right asset allocation based on your risks? Should you buy gold or silver? Register now for our FREE Webinar with Ajit Dayal as Chief Guest. The Webinar airs on 10th January, 2011 at 5.30 pm. Hurry! Register NOW!

Stocks did have a decent run in 2010. But not if you compare them to the gains in commodities. In fact the ascent in prices of other asset classes like gold and silver far outpaced that in stocks. Those who expect stocks to catch up with the precious metals this year in terms of gains could be in for disappointment. True that the precious metals have already had a steady run up in prices. But the outlook for them continues to be rosier than that for stocks. The fortunes of the latter are likely to be hammered by higher input costs and lending rates. Besides, the valuations leave very little upside.

On the contrary, commodities as a whole and not just the precious metals have their fundamentals supporting better valuations. Commodity experts like Jim Rogers have been making the case for agri commodities for a while now. Rice is one commodity the legendry investor is keen to buy more of. With the weather conditions playing truant in Russia and Australia, we will not be surprised if the prices of wheat also move northwards. Low productivity of food and more mouths to feed is a problem of global magnitude. One that will affect the developed, developing and under developed nations. Hence the incremental demand for such commodities and scope for their price rises is uncontested. Meanwhile, the precious metals, will find takers amongst investors fearing runway inflation and devaluation of currencies.

Given such a scenario we would not be surprised to find investors shunning expensive stocks in favour of commodities. Are you too planning to do so? Share your views with us or post them on our Facebook page.

 Chart of the day
As banks gear up to levy higher charges on their lending, it may help to know which sectors the entities currently are most exposed to. As shown in today's chart, it turns out that large and mid sized corporates and agriculture assume half of the lending pie. Loans to residential projects and NBFCs have seen amongst the maximum growth over the past two years. With that the relatively riskier sectors like commercial real estate, personal loans and micro credit have a marginal share in the total exposure. Although the rise in lending rates may bring in some NPA risk, the impact of the same will be minimal on the sector. Little wonder that Indian banking entities are looked upon with favour by global investors.

Data source: RBI

A short quiz. What could be the most important news for global financial markets in 2011? If you based your answer on what the US Fed or the European Union would do, it is likely that the WSJ may not quite agree with you. This is because the business daily has China and only China on its mind. And not just WSJ, but an entire army on Wall Street. Be it private equity players, investment banks or hedge funds, almost all of them have their fingers in some or the other Chinese pie going into 2011. And guess what, the fingers are only increasing in number. Indeed. How can one ignore an economy that apart from being one of the fastest growing is now the world's second largest? Not to forget the more than US$ 2 trillion of reserves that it has at its disposal.

However, is everything hunky dory in the dragon nation? Far from it. For every growth story, there are others which point to the sorry state of regulation in the country. Besides, a close attention is also being paid to whether the enormous investment activity currently underway will bring any economic benefits at all or would lead to poor investments. Thus, we have both, bulls as well as bears lined up; trying to work out whether 2011 will be the year of reckoning for their China centric bets. As far as we are concerned, we will go with the bears we guess. Taking a cue from our India experience, we find it hard to believe a country the size of China growing year in and year out without any major economic upheaval. It just isn't human you see.

Year 2010 saw a turnaround in fortunes for the Indian IT industry. The sector that had been reeling under the burden of the global crisis, witnessed a turnaround in terms of revenues and deals. This was spurred by the increased IT spending by companies during the year. As per a leading market research firm, almost 25% of the IT spending in 2010 was from the first time outsourcers. The crisis and following downturn has brought about a greater acceptance of outsourcing for most companies. Companies that were not outsourcing work before have now started to look at it as a cost effective method to improve profitability as well as firms' efficiency. Interestingly the first time outsourcers not just included smaller companies in both US and Europe, but it also included our very own Central Government. The government has become a serious customer for the IT companies as it has started awarding major outsourcing deals in recent times. As this continues, 2011 may turn out to be a much better year for the IT industry; even better than 2010.

No other ministry has been in the news of late than the environment ministry. Even as we read now, the ministry's actions have created doubts over the future of several projects in the country. These projects range from those in the steel industry, to those in power and cement. As per a leading business daily, the total worth of these projects is around Rs 400 bn, which is huge. This is the amount which has already been invested by companies in these troubled projects. But the environment ministry is not ready to budge from its stand, or so it seems as of now. One of these projects pertains to the Korean steelmaker Posco's US$ 12 bn steel plant in Orissa. The project recently got the regulatory approval. But a 'yes' from the environment ministry is still pending! Looks like we analysts need to add one additional row in our financial models - Adjustment for pending approvals from environment ministry!

Last week, the government deferred the decision on raising diesel and cooking gas prices. This was due to a spurt in food inflation. But the reluctance to do so comes at a heavy price to the state-owned oil marketing firms. They continue to incur losses on selling these products below market prices. The oil secretary had estimated revenue losses for these firms in the current fiscal year at US$ 14.6 bn (Rs 660 bn).

Let us consider the possible scenarios for diesel pricing. Suppose prices are held steady. This is a safe political bet at a time of high inflation. But the fiscal burden will get heavier. For this fiscal year, the government has offered a subsidy of US $3.79 bn. This is about 1.5% of total expenditure, but over 5 times the budgeted amount and 15% more than the previous year. The move may not immediately imperil the FY11 fiscal deficit target of 5.5% of GDP. This because the government has a large cash balance at the central bank. But it may hurt valuations of explorer ONGC and oil marketing companies. Their share sales could be pushed over to the next fiscal year. This would mean the government missing its US $8.86 bn stake-sale target.

The other option is to raise prices. The government may be forced to do so if oil prices rise further or even remain steady at current levels (around US$ 92/ barrel). But this will further elevate inflation. That could put pressure on the RBI to further raise rates. And that could be a dampener to growth. So either way, the gun remains pointed at the government.

Chances are the government will maintain status quo given some major state elections this year and the already high inflation.

Foreign drug companies in recent months have shown heightened interest in India. To capitalise on the opportunities in these markets, they are either partnering with Indian companies or acquiring them. The biggest last year has been Abbott's takeover of Piramal Healthcare's domestic formulations business. Prior to that Daiichi Sankyo had acquired a major stake in Ranbaxy. The trend seems to have intensified in recent times. So much so that it has set alarm bells ringing in the Indian government. For instance, the commerce and health ministries are considering whether the government should brand the pharmaceuticals industry a 'sensitive sector'. If this happens foreign companies seeking more than 49% in any Indian drug maker would be required to first obtain government approval.

The government is worried that more MNCs in India would mean higher drug prices. Which means that the common man would not be able to afford them. But we believe that the government's fears are misguided. For starters, drug prices in India are already one of the lowest in the world. Despite this, healthcare standards in India remain poor. This is largely due to the government's inability to make medicines accessible to all sections of the society. Secondly, there has been no valid conclusion that the presence of MNCs have led to increase in drug prices.

Continuing with the lukewarm opening for 2011, the Indian indices have had a very volatile outing today with stocks from the banking, auto and telecom sectors leading the pack of losers. The BSE-Sensex was trading 38 points lower at the time of writing this. The BSE Midcap and BSE Small cap indices were hovering close to the dotted line. The Indian indices were amongst the few losers in Asia while China and Japan featured amongst the top gainers today. The European markets have opened on a mixed note.

 Today's investing mantra
"Be aware that the market does not turn when market participants begin to see light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before." - Jeremy Grantham

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Should investors shun stocks and buy this in 2011?". Click here!

13 Responses to "Should investors shun stocks and buy this in 2011?"

anupam majumdar

Jan 20, 2011

maight be best in 2011



Jan 7, 2011

give me suggestion to purchase some share



Jan 5, 2011

Long inversment stocks



Jan 5, 2011

Hi,though over all the analysis tends to be balanced, sometimes we commit blunders--like for instance- "presence of MNC's does not lead to increase in Drug prices" -- is surely an understatement. maybe the authors should visit Indonesia to see how MNC's have played havoc with the drug prices, charging them so obscenely that they remain out of the common man's reach. if the government is considering branding the pharm as sensitive, I feel it is a most judicious move. we should go all out in supporting it. regds


dipen nashikwala

Jan 4, 2011

give me long term investment script in this horeble sensex ..............


Chandrakant Sakharwade

Jan 4, 2011

I tend to agree with the comment on precious metals fetching better returns.

I haven't heard about Silver fund(s). Are there any available?


Jan 4, 2011

Son to Father: Papa why do we call the nations in Europe and America developed nations?

Father: Because they are going to accumulate
15 trillion dollars of debt by 2011 and creation of debts in geometric proportions thereafter for all time to come. Since they are developing debts to be repaid by their projenies in the years to come, they are called Developed Nations! Crystal clear.? Any more doubts?



Jan 4, 2011

Yes. Commodities is the way to a go for the medium term. I do believe that corp performance may not live upto market expectations and PE's in 2011. As regards your view on designating pharma as a sensitive industry, I support the gov. view. Having worked for more than 2 decades with one of the largest multinational in the world, i know that drug prices will rise substantially if they start to dominate the the sector. While multinationals are necessary to ensure development of new products, the advantages of our generic pharma industry must not be lost.


dr vijay barve

Jan 4, 2011

i do not agree with your opinion. drug costs are lowest in india because of indian pharma companies.if we loose few more we will be putting our country in a disater.there is no ideal health model to follow in the world. american and european health care is already bankrupt and supported by government and is just unaffordable. it is a sad state that we are following a failed global model on our poor country. our mixed model is good goverment needs to incrase health budget as there is a population explosion and health spending per capita is much less.thanks dr barve



Jan 4, 2011

Increase in petroleum products in India would fuel he inflation further and put common man particularly (not employed in organised sector,govt.,etc.)these people are already suffering.If Govt. could control the malpractces involved in crude oil contracts,and other contracts etc the deficit could come down considerably.I am really upset about how the public resources are wasted in this country.Let govt. take care of that first.

Equitymaster requests your view! Post a comment on "Should investors shun stocks and buy this in 2011?". Click here!