'We are advising our clients to buy India long-term'

Mar 23, 2010

In this issue:
» Bill Bonner is positive on India long term
» FII or FDI? What's better for India
» Buffett halo just got bigger
» India's PM bullish on GDP growth
» ...and more!!

It is not just the fickle minded and mostly short term oriented FIIs that are bullish on India. We were happy to know that there are some like Bill Bonner who are willing to consider India from a 10-year perspective. 'We are advising our clients to buy India long-term', Bill observed at the recently held Equitymaster Investment Summit 2010. This, coming from a person who is believed to be an astute observer of long term economic trends is indeed pleasing.

As Bill further notes, there is no difference between what a labourer does in US and what he does in India. Yet, the same person earns many times more there than here. The only reason the person in the US has an advantage is because countries like US and UK got a headstart over India. They benefited from the industrial revolution and hence built up a huge capital base. However, now the advantage is eroding and wage differentials are getting corrected. Thus, over the next few years, while real wages in developed countries could come down, those in emerging nations like India would go up and so would overall prosperity. Hence, India does like a very good long term bet to Bonner.

Hmm, a unique perspective you would say. However, this was not the only one. Bonner went to great lengths to simplify concepts like quantitative easing and velocity of money and really made those present in the summit see some light.

Those who missed out on this wonderful presentation, this would be perhaps your last chance to grab the opportunity. Please click here.

 Chart of the day
What sort of money is good for India? FII or FDI? We believe it is the latter type of money that is better for India. As the year FY09 has amply demonstrated, FII money tends to be really volatile and could lead to huge asset price shocks when things turn bad. On the other hand, they also tend to fuel inflation and create asset bubbles when the going is good. The FDI money on the contrary, tends to be more long term in nature and helps in nation building by creating real on the ground assets. It is not as if the FII money does not achieve the same objective. However, in India, a greater part of the FII inflows, especially in equities are speculative in nature and hence, not that useful to the real economy. Thus, the increase in FDI inflows into India in the near future is indeed heartening. While the FII inflow is also expected to remain buoyant, we just hope that most of it is also long-term in nature. Otherwise, be prepared for a volatile ride.

Source: LiveMint

We are not big fans of taking cues from market prices. But sometimes market prices do point at some startling conclusions. Take bond yields for example. A low bond yield indicates strong demand from investors. When it comes to bonds perhaps the single most important characteristic is safety. Hence, generally government bonds have the lowest yields. Generally. Currently, 2 year notes issued by US blue chip companies like Berkshire Hathaway, Procter & Gamble, Johnson & Johnson have lower yields than 2 year notes issued by the US government.

This is an extremely rare occurrence in the history of bond markets. It is a telling indicator of the toll the financial crisis has taken on the world's premier economy. The US government is currently struggling to control its mounting funding gap (fiscal deficit) even as it needs to keep its stimulus package in place. So at least for the time being, lending to Warren Buffett is safer than lending to Uncle Sam.

The sharp rise in prices over the past year had made several stocks out of reach for small investors. What this has meant, for instance, is that an investor with Rs 100 who could've bought 10 units of a stock trading at Rs 10 in March 2009, can now buy just 2 stocks with the same money. This is assuming that the stock has moved up 5 times from Rs 10 then to Rs 50 now.

To handle this, and to make their shares more 'affordable' for small investors, numerous companies are now announcing stock-splits. For example, some are splitting their one Rs 10 face value share to five shares of Rs 2 face value each (5:1 spilt). The impact on the stock's price is similar. A 5:1 split would bring a share's price down from say Rs 100 to Rs 20.

So that's now an affordable price. Right? Wrong!

While it is right that a post-split price would let you buy more shares with the same amount of money, it does nothing to the underlying value of the business. This is because, as the stock price get's divided by 5 (as per the above example), so does its earnings per share and book value per share. So the stock remains as expensive or as cheap after a stock-spilt as it was before one. As such, if someone entices you to buy 'that' stock as it has come down in price due to a stock-spilt, you know what to tell him.

Economists are a busy lot these days. Left to analyzing everything from the direction of interest rates to GDP growth to inflation, the number crunchers have their hands full. The recent simultaneous upmove in prices and interest rates have in fact made their opinion on future economic variables all the more sought after. A leading business daily recently conducted a poll amongst some economists to gather their opinion on the RBI's next move.

Not surprisingly, the unanimous view was that the central bank is not done with tweaking the borrowing rates. Although bankers are of the view that liquidity scenario is comfortable and rates are nowhere near their historical highs, the RBI had so far been reluctant to pull the trigger. However, the recent unexpected tightening suggests that the central bank is no more comfortable with the price levels. Economists therefore believe that the upcoming monetary policy review will have some more indicators. It goes without saying that investors need to once again get wary of companies with high debt levels.

It's not just economists who are kept busy. As the current fiscal of FY10 draws to a close in a few days, it's time for the government to take a stock of situation as well. The Indian Prime Minister Mr. Manmohan Singh, who also heads the Indian Planning Commission, looks a confident man these days. The Cambridge and Oxford educated economist believes that his country will grow by 8.5% in FY11, accelerating to clock a GDP growth of 9% in FY12. Despite global slowdown which left other countries writhing in recession, India posted a decent 6.7% GDP growth rate in FY09. What is more! Its GDP is estimated to grow by 7.2% in current fiscal. A lot of impressive numbers we must say. However, the veteran economist highlighted that government's success in creating new jobs for the Indian youth and removing poverty will largely define India's future. To this end, his government has pegged a mid-term GDP target of 10% per annum. As usual, the intentions are the best, how far they fructify, only time will tell.

The Healthcare Reforms Bill passed in the US recently is slated to boost generic drug sales in the country. However, the opportunity for Indian pharma companies looking to tap the US market on a large scale seems limited. Among other things, the provisions in the legislation to allow a 12 year exclusivity period to new biologics or patented biotech drugs would delay plans of Indian biotech companies to launch their generic biologics in the US market.

As per a Business Standard report, there are also other preferences in the Bill for domestic companies in the US, which will again cause impediments for Indian pharma companies. Nonetheless, considering that the overall objective of the Bill is to lower health care costs, all low-cost generics manufacturers, which includes Indian companies, should benefit over the longer term. For now, 'wait and watch' seems to be the buzzword.

Meanwhile, after opening the day on a positive note, the benchmark indices have been all downhill since then and are currently circling around the breakeven mark. Currently, while stocks from the infra and energy spaces are providing the upward momentum, telecom heavyweights are proving to be a drag. Among other regional indices, while most Asian stocks closed strong today, Europe is also showing positive momentum currently.

 Today's investing mantra
"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." - John Maynard Keynes

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 "'We are advising our clients to buy India long-term'". Click here!

9 Responses to "'We are advising our clients to buy India long-term'"


Mar 25, 2010

Warren Buffet is better tnan Uncle Sam is just excellent and also true. Definitely a new piece of information to me.


madhavi sawant.

Mar 25, 2010

which shares are good and not expensive to buy at current price ?



Mar 24, 2010

You should project atleast 2 to 3 shares of great


Kiran Kinar

Mar 24, 2010

It is the fool's prerogative in maintaining his status that makes the wise man wise.


Jagadeshwer Rao

Mar 23, 2010

Quite enthused by what Mr Bill Bonner had to say on buying India for long-term!



Mar 23, 2010

You have told only the half truth about stock split. Whereas it does nothing to the underlying value of the business, it does improve the liquidity of the stock, which reduces the impact cost for the investors. Take a look at the companies like walchandnagar, IPCA, KRBL, Jindal saw and you will see a large jump in volumes after stock splits.



Mar 23, 2010

One can say without the least hesitation that the well-considered views earnestly conveyed to the investors through the short but sweet day-to-day wrapups, will certainly boost their morale and increase their level of self-confidence. Planned long-term investments are always better than speculative short-term investments.

Stock-splits and the pit-falls associated with them have been made abundantly clear for the benefit of the vulnerable among the investors who tend to fall an easy prey to them.



Mar 23, 2010

When tax to gdp ratio is quite high in U.S and U.K and Europe why these countries are in trouble ? I find only reason spent money on wars, is there any meaningful reason else ?



Mar 23, 2010

The million dollar question is whethwer inflation ushers inclusive growth. Inflation is a malady with which an economy must learn to grow. Story of rigid close economy is no longer in the centre place of discussion. If Cross border hurdles are compromised, monster of inflation may be kept under control.Efficiency of capital mostly depends on use of technology.If effective forward and backward linkages can be made seamless inclusive growth is warranted.Inclusive growth can only increase purchasing power which in turn can make 'Buy India Long'successfull.

Equitymaster requests your view! Post a comment on "'We are advising our clients to buy India long-term'". Click here!