Should investors look for listing gains from 'bond IPOs'?

Mar 21, 2011

In this issue:
» Panic more damaging to global markets than the earthquake
» Earthquake in Japan Creates 'Buying Opportunity': Buffett
» FY11-dividend party for investors
» A Ferrari on an Indian road. Will it survive?
» ...and more!

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On the face of it, listing of bond issues adds another dimension to India's capital markets. Unfortunately, so does it to the woes of ignorant retail investors! Readers may recall our view on brokers trying to lure retail investors into applying for the SBI bond issue on their behalf. That itself was a criminal act in trying to manipulate market forces and cornering gains from the issue. But going a step forward, many retail investors have also been convinced of listing gains. The fact that institutional investors will get a pie of the bonds only when they start trading on the exchanges firms up this belief. And brokers themselves are the key facilitators of the investors' hunt for 'listing gains'.

But is "listing gain" the right way to look at a bond IPO? Bonds typically represent long-term investment opportunities. They are the safer investment destinations as compared to equities. The underlying principle of investing in a bond is to earn a stable income, through interest rates, and get back the principal investment at the time of maturity. However, by treating it as any other IPO and looking at the listing gains only, the entire purpose of bond investing gets defeated. The investment mentality switches to the short-term investing and that is not what investing in bonds is about. One may make some gains through listing but one may also end up getting stuck with a terrible issue that falls flat on its face. And this one issue is enough to wipe out all the gains made.

Therefore, it is important to remember the basic principle. When investing, whether it's a bond or an equity stock, one must look at the fundamentals of the underlying asset. Once the investor is sure about the fundamental strength then the best way to maximize your gains would be to remain invested over the long-term.

Do you invest in bond IPOs only for listing gains? Share your comments with us or post your views on our facebook page.

 Chart of the day
Urbanization is a key measure that can help judge the level of development in a country. As a country moves up in the path of development, there is a physical growth in its urban areas. Today's chart of the day shows the level of urbanization in the BRIC countries. Interestingly, India ranks the lowest in this chart. Many may argue that this is good for India as lower levels of urbanization indicate lesser abuse of the environment. But it still indicates lower levels of modernization in the country as compared to its BRIC peers. We believe a key reason for the lower level of urbanization in the country has been the poor infrastructure in the cities of India. This has deterred the migration of rural to the urban areas. It has also caused reverse migration from urban to rural in recent times.

Data source: CIA World Factbook
* Data for 2010

The scale of loss to the economy and human lives from natural disasters is not easily discernible. But its long lasting impact on human mind has the potential to multiply the aftershocks. A report in the Wall Street Journal attempts to throw some light on this. Quantified in numbers by Goldman Sachs, the economic loss to Japan stands at US$ 193 bn or 3.3% of its GDP. The power shortages and supply chain issues may shave off a couple of percentages more from Japan's GDP growth in the coming fiscal. The impact on tourism could last even longer. Nonetheless, the fact remains that the economy will find its foothold once again. Not immediately but a couple of quarters down the line.

However, doomsayers and panic mongers are using the current situation to their advantage. The impact of panic selling on Japanese and global stock markets was evident in the past week. Panic stricken Chinese hoarding iodized salt to protect themselves against radioactive substances is another instance of herd mentality. The stock price of salt processors in the country rose and fell by more than 10% in the past week. Having said that, such instances are not unknown in times of distress. What they do is potentially cause more damage to economies and lives than the actual disaster did!

A natural disaster creates troubles for humanity. But for investors, these bring in opportunities. This is what even Warren Buffett believes post the recent disaster in Japan. Bloomberg reports Buffett as saying that Japan's calamity has created buying opportunities for investors looking at Japanese stocks. Call it opportunism, but that's what successful investing is all about - buy bargain stocks when the markets are in tatters for whatever reason.

Who else other than Buffett can vouch for this? After all, he has created his fortune identifying and acting on such asymmetries in the stock markets. As we've seen in recent times, he is looking at markets outside the US to identify such opportunities. Currently, he's on a visit to Asia and will be soon in India to visit Berkshire's operations and look for opportunities. We hope he does find some investing opportunities here!

2011 has definitely been a volatile year. The Indian stock market lost a fair bit of the gains that it ramped up over last year. The Middle East crisis and now the Japanese disaster have also added to overall uncertainties. But, if you hold on to your 'blue chip' stocks for a few months more you should receive some good benefits. Corporate India is poised for an expected increase in dividend payout in FY11. This is due to an expected 18% increase in profits. According to estimates by a leading business daily, if companies maintain their FY10 payout percentage, total payments could rise by 12% to Rs 848 bn. And holders of PSU stocks and large cap private sector company stocks especially could be the biggest beneficiaries. This is according to the 9 month performance of these companies, which has so far been quite encouraging.

Already, 14 PSUs have paid Rs 120 bn for FY11 as dividends. The large caps under BSE-A group are expected to pay Rs 657 bn, while those under the B-group may get only Rs 120 bn. We believe that well run PSUs and largecap stocks are the best place to park your money if you are looking for stable, and safe returns. But, buying them when they are priced reasonably is the key to multiply wealth.

In the meanwhile, Indian stock markets continued to trade flat with a positive bias. At the time of writing, the benchmark BSE Sensex was trading higher by around 20 points. Stocks from the healthcare, energy and FMCG space led the pack of gainers. However, realty and IT stocks are trading in the negative territory. The Asian stock markets closed in the green. The European stock indices have opened the day in the green as well.

Ferrari SpA, the celebrated Italian sports car maker will soon find its way on Indian roads. But imagine a stunning red Ferrari stuck motionless in a traffic jam or wobbling tepidly over bumpy roads. Are Indian roads ready to welcome such a car? Well, the company seems quite confident about it. They say that driving a Ferrari is almost a secondary point. It's more about owning a Ferrari. Really? Well, that's the only way the company can position itself in the Indian market. Also, the company boasts that it is pretty selective about who gets one. They plan to stick to their core philosophy of keeping supply below demand. All this to preserve the car's key selling point: exclusivity. That's quite funny in the Indian context. Are they afraid everyone will start buying one? Do you know how much the least expensive car in Ferrari's India range costs? The price tag flaunts a staggering Rs 22.3 m label! That's equal to 500 times India's annual average per capita income. So in India, the car will remain exclusive by default, not by choice.

If you are under the impression that the government is borrowing more because it does not have sufficient cash, think again. Currently, it is sitting atop a cash mountain of Rs 300 bn. Disinvestment programmes, spectrum auctions and abundant tax revenues have all helped in amply swelling the government's kitty. But what has also led to this increase in cash is that the government went slow on expenditure in the second half of FY11. Because inflation has already been rampant in the country for quite some time now, the government put the brakes on its spending spree for fear that it would stoke inflation further. That said, increase in cash reserves is not expected to do much in terms of denting the government's borrowing programme. In fact, higher food and subsidy bills mean that the government is likely to exceed its borrowing target of Rs 3.4 lakh crore for FY12. The government believes that running deficits for the good may not be bad. But it will have to ensure that indiscriminate borrowing does not strain its overall finances. Indeed, it will be interesting to see what steps it takes to stick to the targets of bringing deficit down.

 Today's investing mantra
"Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market." - Warren Buffett

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