A much better investment than infrastructure bonds

Jan 12, 2012

In this issue:
» Will 2012 be the last and most painful year for global economy?
» Former GE boss Jack Welch blasts stifling nature of US regulations
» Infosys predicts a lacklustre March quarter
» US bond markets could be in bubble mode, feels Robert Shiller
» ...and more!
---------------------------------------- Did you miss the Webinar? ----------------------------------------

Equitymaster's Webinar on the Future Prospects for the Indian Economy with Mr Ajit Dayal was broadcasted on 30th of December, 2011.

The webinar answered questions that could be troubling any Indian Investor today. Where is the Indian Economy headed in 2012? Is Gold still a good investment? Could the Stock Market touch the 21000 figure in 2012?

If you missed watching the webinar, here is your chance to access the same.

Click Here to watch: Indian Economy - From Darling to Damned (Rebroadcast)

And let's understand what lies ahead for India and how could this impact your investments.


 Chart of the day
There have been a lot of historic years for the global stock markets. The year 1999 would fall in the category of one of the most important we believe. This was the year when the US stock market had come out of a prolific bull market that had lasted all of 17 years. The benchmark index was up more than 10-fold during the period. Quite understandably, the investors were upbeat about the future. A poll conducted back then showed investors expecting returns of more than 20% over the next five years. Even the most experienced of them felt that returns could be no less than 12%-13% per annum. What transpired though left even the most pessimistic of them shell shocked. Over the next 10 years, the markets returned next to nothing, making a mockery of all the predictions. One would wonder where did these investors, and it consists even the most skilful ones, go wrong?

Well, the answer lies in the all too common tendency of us humans to rely too much on past performance and herd mentality and thus, completely ignore the fundamentals in the process. In their exuberance, investors forgot to account for the fact that not only were interest rates at historic lows back then but the corporate profit margins were also at an all time high, thus making valuation growth in double digits a next to impossible task. What this shows is that if markets have moved in one direction for long periods of time, a move in the other direction is almost guaranteed for an equally long period.

Are investors in India falling prey to the same investor psychology currently? We have a strong feeling that this is certainly the case. Like their US counterparts, they too seem to be relying too much on the performance of the stock market in the recent past and taking very little note of fundamentals. Agree that the stock markets have gone nowhere in the past three years but this does not mean that they will continue to do so in the future. Infact, the very fact that they have underperformed makes a move in the other direction a strong possibility over a long term period. Hence, just as the chances of making money in equities over the long term are getting brighter with each passing year, investors are making a move away from equities and putting their money in fixed income instruments such as infrastructure bonds. As today's chart of the day shows, for every 10 year period starting from 1997, Sensex returns have remained in the low to high teens on a CAGR basis. This is certainly much higher than what one would get from even the most attractively priced infrastructure bonds today. Hence, the strong returns from Sensex over a 10 year period combined with the relative underperformance of the markets over the past few years makes the case for investing in stocks from a long term perspective a very potent one indeed.

Source: Ace Equity

Do you think stocks will return more than infra bonds over a 10-year period? Share your views with us or you can also comment on our Facebook page / Google+ page.

IT bellwether, Infosys Ltd, has announced a 24% sequential (QoQ) growth in net profits for the quarter ended December 2010. However, the good rise in earnings failed to enthuse investors. The main reason for the dull response is the fact that the management has cut down its full year guidance. In dollar terms, the management expects full year revenues to grow by only 16% YoY. This translates to pretty much zero growth in the last quarter of the year. And this lacklustre guidance has irked the investor community. The reason cited for the low guidance is the slower growth in the developed world as well as the Euro zone troubles. These combined would lead to lower growth for the Indian IT industry. As such quarterly results are not really an indicator of long term growth. However, one thing is for sure, companies that are dependent on the developed world for driving their growth are definitely in for tough times at least in the short term.

Robert Shiller, a Yale University professor predicted the collapse of the US housing bubble. He also wrote a book called 'Irrational Exuberance', which predicted the dot com crash in 2000. Now when Shiller says that the US bond market is in bubble territory it makes sense to sit up and listen. Demand for US Treasuries has pushed government debt due in 10 years or more up 28% over the past 12 months. These bonds have seen the most action among 144 other government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Shiller says that US long term rates are at a record low. Thus, bond prices which inversely related to yields may soon run out of steam. But, with the Euro zone still in a crisis, where should safe haven investors go?

Subsidies. The world would have been a different place without this. American and European governments subsidizing healthcare and retirement benefits. Indian government subsidizing agriculture, petroleum products and below poverty class welfare. Without these, the political class has very little hopes for winning votes from the masses. Thus, whether an economy is developed or not, it is the freebies that make the government popular. Unfortunately none of these have been known to make an economy stronger or more self reliant. In fact, the lesser the citizens depend on government funds for survival, the better are the chances for efficient policymaking and utilization of taxes.

Government's social obligations have made some of the world strongest economies debt ridden. The continuation for a prolonged period could spell doom for the global economy. Who better than one of the shrewdest corporate bosses of America, Jack Welch, to corroborate this? The former chairman of General Electric believes that the US is making a big mistake by passing needless and politically-charged regulations. Without them the economy's recovery can take shape much faster. Unfortunately, very few politicians run the government like a good CEO!

The economic and financial crisis that engulfed the world economy post the bust of the US housing market in 2007 has shown no signs of abetting so far. In fact, the crisis has only grown worse, spreading like cancer. Where to from here, you may ask. Well, if a certain leading analyst is to be believed, 2012 will be the 'final year of pain and disappointment'. As per the script, China's hard landing will be the climax of this crisis. Not just economists, even historians are thumping the same point. China's recent economic growth seems to be akin to patterns of manias and bubbles that have happened throughtout history. At the same time, there is a risk of double-dip recession in the economies of the West. Well, there is no denying that these risks are very valid. The coming months will be testing times for investors. How well an investor sticks to the fundamentals of value investing will separate the wheat from the chaff.

Rising interest rates, fuel price hikes, inflation and lack of progress in reforms have been the bane of the Indian economy in the fiscal year so far. Hence, pessimism has taken centre stage with many of the view that Indian GDP growth will be quite subdued for the year. But Mr Anand Mahindra, Managing Director of Mahindra & Mahindra (M&M), is quite optimistic and believes that growth of the Indian economy will never fall below 6%. He is of the view that the challenge for India is not performance (the country has crossed that hurdle), but outperformance. This implies achieving and sustaining growth of 9% on a consistent basis going forward.

This is a challenge that the government and the industry faces and this is where the government will have to shake itself from inaction and implement some much needed reforms. But that is easier said than done and with party politics taking up much of the government's time, we wonder when it will actually get down to taking India's growth to the next level.

Meanwhile, indices in the Indian stock markets have been trading weak today with the Sensex lower by around 140 points at the time of writing. IT heavyweights seemed to be causing the maximum damage. Asian stocks closed mostly lower today with Europe too trading down currently.

 Today's Investing Mantra
"The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts" - Warren Buffett

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1 Responses to "A much better investment than infrastructure bonds"

kirubakaran samuel

Jan 12, 2012

Looking at the bar chart given by you it looks the sensex may range between 18 and 16 (% CAGR). The trend lines suggest that.

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