Is 'Election watch' the best strategy to invest in stocks?

Feb 6, 2014

In this issue:
» Silver jumps the most in four months
» Anand Mahindra baffled with the current consumer trends
» Faber: US stocks far from being attractive
» Smaller banks' brand values increase over time
» ...and more!

"If I knew with confidence we would have a decisive government, India would be at the top" . These are the words of Mr. Jim O'Neill, the former chairman of Goldman Sachs who coined the famous BRICs (Brazil Russia, India, and China) acronym. He is of the view that it is better for one to take a wait and watch approach - until the election results come out - before buying into India.

In an interview with Mint, Mr. O'Neill mentioned that China, Mexico and Nigeria are his current top picks amongst emerging markets.

The rationale behind choosing India his top emerging market pick are those similar to the traits of the country's long term consumption story. These include favourable demographics, rapid urbanisation, and strong growth opportunities.

It would not be wrong in saying that the broader view that Mr. O'Neill shares pretty much reflects the sentiments of all long term foreign investors - who have been quite bullish on Indian stocks in recent times. While they have been praising the country's central bank, their views on the current government are quite the opposite. Essentially what the country requires is positive change, something which an effective government would bring in.

Mr. O'Neill also discussed his views on India being included in the list of Fragile Five, a term coined by Morgan Stanley. Countries that form part of this group - India, Indonesia, Brazil, Turkey and South Africa - have been included because of their vulnerability to volatile capital flows. Nevertheless, Mr. O'Neill believes that the worst for India is over. He however does believe that there is no escaping the US dollar dependent market in the short to medium term, which is why the US government's monetary policies will continue to keep the markets volatile; and that for countries to safeguard themselves from this vulnerability, the focus should be on increasing foreign direct investments.

All said and done, this is just one of the many views making rounds.

Essentially, there is a lot of uncertainty around. And with investing veterans providing views that are quite varied in terms of their outlooks - with some predicting the scenario to get worse than what it was a few years ago - how things will actually turnout is anyone's guess.

One thing is sure. All of this has led retail investors in India to simply stay away from investing in stocks; with them pulling out because of having their fingers burnt or just simply booking profits, making up for past losses. Relatively safer instruments are being preferred now. With yields of such instruments being at high single to low double digits, the demand for fixed deposits and bonds has increased substantially.

But as we all know, over the long term such instruments do not have tendencies to beat inflation levels as one's purchasing power gets eroded over time. So it would be a matter of time before people start moving back to stocks. And this seems almost certain given that the current retail participation levels are at their lowest in many years.

Retail investors (in general) have the tendency to enter markets when stocks are not very cheap. Only after having seen the performance of the markets is when they consider parking money into stocks. Morgan Stanley in its retail survey last year learned that retail investors tend to look at the short term performance of the market to base their decisions on whether to invest in stocks. The period gauged by them is usually one year.

The outcome of the general elections is being keenly awaited. As such, people have taken a wait and watch approach. Stocks of quality largecaps are seemingly expensive at the moment. Whether their valuations will remain at similar levels post the elections cannot be commented on. We urge investors not to blindly enter markets and believe they would do well by keeping a close watch on good companies at attractive valuations. Buying into stocks at higher valuations (even in the cases of good quality companies) has not always been a market beating strategy, which is why retail investors have had bad experiences with stocks in the past.

Do you believe investors should take a wait and watch approach till the outcome of the elections? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
India's services sector has seen contraction over the last seven months. As today's chart shows, the HSBC Purchasing Managers Index (PMI) for services sector has been below 50 over the last 7 months. Though it witnessed a slight recovery in the month of January this year and stood at 48.3, it was still below the benchmark figure of 50. It may be noted that any reading below 50 is a sign of contraction.

Service sector: Going through its ups and downs

Slowdown in retail & wholesale trade, telecommunications and real estate sector was the primary reason for contraction in the index. Further, increased competition and weak confidence added to the woes. The index movement is based on the general economic environment and hiring activity in the services sector. The hiring activity, in turn, will increase if businesses expect new orders. If new orders fail to materialize the index is likely to remain below the critical 50 level mark in the near future as well.

Precious metals could be down but are they out? We don't think so. Especially in light of the tremendous money printing that's happening and that seems to be passing off as economic recovery. Therefore we were not surprised on hearing that silver prices jumped the most in four months recently. And could be well on their way to gaining even more. What's further supporting the prices is the turmoil that's been happening in global stock markets, especially the emerging ones. And now with fresh concerns emerging with respect to the US economy, the reputation of gold and silver as a store of value seems to be making a comeback of sorts. Not everyone is convinced though. Leading brokerages like Morgan Stanley and Goldman Sachs believe that there's more pain still to come for gold investors. We are not so sure though. We prefer to go by the theory that when currencies are being printed on an almost unprecedented scale like they are now, its devaluation is all but certain. What cannot be predicted however is the timing of the same. It therefore makes sense to keep accumulating precious metals on every meaningful dip.

The Indian auto industry is going through one of its worst slumps ever. So severe has the slowdown been that it has also caught many companies' managements by surprise. For instance, Ashok Leyland reiterated how bad the scenario has been for the medium & heavy commercial vehicles space, which has seen another 25% drop in volumes on the back of a 25% fall in the previous quarter. Mahindra and Mahindra Chairman Anand Mahindra has also professed to being baffled about the trends in the industry. He believes that the demand for vehicles is very much there. It is just that because of various issues such as irregular fuel price increases and policy paralysis of the current government, people have decided to adopt a wait and watch policy. This means that there is enormous suppressed demand which will get unleashed post the conclusion of the general election results. The bleak scenario has not deterred auto companies from investing in and launching new models. Although the near term prospects look tepid, the long term growth story for the sector still remains. It is important to note that the auto industry is highly cyclical. This means that periods of depressed sales are followed by a considerable jump in volumes. That is why it is important to look at the average growth trend for companies over a longer period such as 10 years.

Just yesterday we shared Mark Faber's view on emerging markets and the impending global meltdown he believes has started. He has some interesting views on the US stock markets as well. As per him, US stocks are fully priced and seem due for at least 20% to 30% correction. In fact, he goes on to say that the markets would become attractive from a value point of view if were to correct by 40%. Criticizing the US Federal Reserve's monetary gamble, he believes that the QE program has been a failure. It has only artificially pumped up asset prices. But has it done anything for the economy or for people's standard of living? The answer seems to be 'no'.

It is no mystery that banks in India have had a tough ride over the past few months. The pressure on their margins and erosion in asset quality has been evident over several quarters now. And for the PSU banks at least, the pain in asset quality is far from over. An article in the Economic Times has published the latest report by Brand Finance on brand value of Indian banks. It cites recent underperformance being the key reason for loss of brand value by top banks in India. However, it also mentions that the smaller banks in India have seen their brand value increasing over time. This includes entities like Allahabad Bank, Indian Overseas Bank, Syndicate Bank etc. Globally Wells Fargo is the most valuable banking entity in terms of brand value, while not a single Indian entity features in the list of top 10.

According to us the reason for smaller banks in India doing well is their increasing presence and reach. Do their fundamentals also fare better than their larger peers? Well, that is not always the case. As such, investors must be careful to not invest in banks based on factors like brand value. Instead assessing their long term performance, management quality and valuations could lead to safer bets.

In the meanwhile, Indian stock markets lost the morning gains and slipped below the dotted line. At the time of writing, the benchmark BSE-Sensex was down by about 9 points (0.1%). Stocks from the realty and capital goods sectors were leading the losses, while those from the metal and FMCG sectors were trading strong. Asian stocks were trading mixed with Singapore being the biggest gainer. The European markets opened on a positive note.

 Today's investing mantra
"The best investment against inflation is to improve your own earning power, your own talent. Very few people maximise their talent. If you increase your talent, they can't tax it or they can't take it away from you."- Warren Buffett

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6 Responses to "Is 'Election watch' the best strategy to invest in stocks?"


Feb 7, 2014

It is a very valuable suggestion given by you in this article. One should be careful.
I don't think election is anything to do with the stock market. But, some reaction may be there and will vanish in few weeks time. The market is fully run by the FIIS. Retail investors are powerless.
Shares like Aurobindo Pharma, Aban Offshores have just jumped to their peak, which do have high debt as well. One rupee share of Aurobindo pharma is at Rs 507. It is higher than any well established debt free companies.(The bubble may burst).

Like (1)


Feb 7, 2014

It has been rightly pointed out that a stable Government would boost the market and the investor at this moment cannot be sure of a stable Government.

Therefore it is better to follow a wait and see policy.

Like (1)

kandoi Enterprises

Feb 7, 2014

i feel we should start investing slowly in value pick on every fall. otherwise we may miss the bus. invest approximately 25% to 40% before election and balance on political views on time to come.

Like (1)

Swapnil Gangele

Feb 7, 2014

The kind of government we are part of has shown its influence in deteriorating one's claimed most attractive rising economy. Actually its not always true they are not willing to bring some changes but what is missing substantially is their incapability and reluctance towards roots of problems and absence of visionary direction so for now we have to accept wait for the right hands if we are going to be handled with care by is the safer option for taking investment decisions in market.

Like (1)

Raghuveer Singh Rathore

Feb 7, 2014

Its obviously true what Mr. Jim O'Neill, the former chairman of Goldman Sachs has commented that "wait & watch" could be the best option unless India is given stable Government after 2014 Elections. In fact, retailers like me have burnt fingures in past and they would love to make good their huge losses to some extent, which is why in the existing volatile market they are hesitant to invest even in said Blue Chips. We never know when Blue Chips will turn Rotten Chips & vice-versa. There doesn't seem any likelihood of any relief to global inflation. Once it eases considerably, people would feel a sigh of relief and retailers then would make entry in stock markets.

Like (1)

vijay kumar shah

Feb 6, 2014


My comments is relating participation of retail investor, whether there is election or not..

My few questions to all the expert of the stock markets / positive reforms / action by Govt etc. I think the policy of Govt of India does partiality with FIIs and Domestic retail investors are punished and their participation is discouraged by Govt Policies few of them are:

I) Sector, which are doing well the FDI is as high as 100%. From where the retail domestic investor shall come?

II) FII investing through certain investment need not to disclose the source of fund.
III) FIIs get the benefits of FCCBs (optionally convertible bonds) where is such opportunity to our Domestic investor ? If share price is high he gets share or otherwise refund with quite higher interest.
Who offers such lucrative opportunity to our domestic investor.
IV) All good companies does buy back of retail investor shares i.e. recent case of HUL.
V) The good public sector companies line ONGC, NTPC, PFC, Oil Companies etc. have majority stake with Govt. The dilution is also not favorable to Indian Public. Those given to public in NTPC, PFC. NHPC etc at exorbitant price is quoting at below the offer price.

Can some body may explain how retail investor can come into market. Only lower category of loss making stock is available for the domestic retail investor.

Last but not the least where is manipulation power with retail investors against mighty FIIs and their floating money getting evaporated in no time.

I expect a acknowledgement of the comments please on my email to encourage me to participate in future also.

With regards

V K Shah

Like (1)
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