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Why you should be particularly worried about this category of investors...

Feb 27, 2015

In this issue:
» Risk vs. return for FIIs
» Better management for public sector banks in the offing?
» Does India have the ecosystem to churn out Zuckerbergs?
» ...and more!

  Chart of the day
You should not be surprised if Finance Minister Jaitley's Budget does not make the best attempt to please you. For you are certainly not the category of investor he is most worried about!

Yes, if the Budget 2015-16 wants to remain a populist one, goodies like direct tax exemptions, lower indirect taxes on an array of capital goods etc can be counted on. And you have to be happy for the rest of the year paying a few thousand less in taxes and buying your next television, car, mobile phone a little cheaper.

But if the FM is thinking like we are, he would most likely be more worried about a different category of investors. They are notorious and fickle minded ones and are known to chase hot money in and out of markets before you can blink. You must have guessed it by now that we are referring to FIIs. As much as we would like to replace these hot money investors in Indian markets with more long term money like pension funds etc., we have to acknowledge the fact that FIIs have a role to play. As we write, the FIIs own over 40% of the free float (non promoter holding) in Indian stock markets. And more importantly, the money pumped by them into Indian stock markets over the past year is at a record high. In fact, as per an article in Business Standard, for a typical FII portfolio, the exposure to Indian stocks is much higher than that to other emerging markets. And therefore, as we highlighted earlier, FIIs are keen to gauge whether India will remain their 'best bet'.

Now, when it comes to risk versus returns for FIIs, there are a lot of factors influencing the same. The near zero cost of funds in the US and Eurozone has allowed FIIs to keep their risk appetite high. But at the end of the day, they would want to compare the returns from stocks in India versus that from other markets. Although the second half of 2014 was very encouraging, 2015 has not started on a very buoyant note. And hence they will be keen to know whether the government will do enough to ensure that Indian economy offers commensurate risk adjusted returns.

Will India justify the fund flows?

Tax implications on FII and FDI investments apart from opening up the economy to foreign investments will be important cues that this category of investors will be looking out for. And if FM Jaitley is not able to convince them enough that government's execution intent is as good as its promises, we could have a very disgruntled lot of FIIs here.

What this could mean is that all the froth in terms of valuations that has accumulated over the past 6 - 9 months could go away, as the FIIs head home. And therefore the overvalued stocks of today could offer you enough surprises.

So as an investor, you should be worried about the valuations of largely FII owned stocks today. However, do look out for opportunities to buy if and when markets offer sufficient margin of safety.

Which category of investors do you think the FM will be most worried about? Let us know your comments or share your views in the Equitymaster Club.

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Besides the fact that the coming Budget should set the tone for reforms, it should also help unlock value in India's large and inefficient PSUs. Particularly PSU banks! The key factor ailing PSU banks is that their managements have been poorly selected and inadequately compensated. Without enough incentive to improve the lending quality and efficiency in the PSU banks, the top managements have largely been temporary representatives of the government. Hence the top priority to change the management style of these banks. In a major revamp of the selection process for chiefs of state-run banks, officials from private sector banks will be eligible to compete. In fact the government is allowing them to compete with public sector counterparts for the vacant posts of managing director (MD) and chief executive officer (CEO) at five state-run banks. While this will mean that the government may have to shell out more and bring in some parity in the compensation level of top bankers, it could help revive banks that comprise 60-70% of India's financial system! Most importantly, autonomy to these managements and minimal government interference in the lending norms could mean a huge valuation upside for certain top PSU banks.

Can the next Mark Zuckerberg come from India? Why not? As a matter of fact any person from any part of the world can emerge to be the next big thing in the world of technology. However, what matters is whether India has the ecosystem, or the environment if you will, to keep churning out Zuckerbergs on a consistent basis. Well, if a leading business daily is to be believed, we have perhaps miles to go on this front as compared to countries like the USA and Israel. And what is it that has slowed us down so much? The usual culprits in the form of difficulties of doing business in India, seed capital and last but not the least, the challenges in retention of talent. Of course, we have some unique advantages like a high consumer base and lower costs. Unfortunately, a more vital role is played by the other factors we just highlighted and unless those are improved upon, there's going be a slow progress at best.

The Indian stock markets were trading firm today on the back of buying interest in engineering, banking and power heavyweights. At the time of writing, the BSE-Sensex was trading higher by around 387 points. Losses were largely seen in IT and energy stocks.

 Today's investing mantra
"If you can find a company that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you've got a terrific investment." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

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1 Responses to "Why you should be particularly worried about this category of investors..."


Feb 27, 2015

Given the situation the FM could not initiate Economic Reforms as FIIs and world community expects, since already the bills viz., Insurance, Land Reforms could not be pushed and passed at Rajya Sabha due to lack of majority. Even the opposition parties are not evaluating the reasons for submission of the bills and the importance thereof. Whereas they are simply going against the ruling party in a concerted manner. Hence one need not expect any big bang reforms in the budget and it may not be a populous budget also.

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