Not every blue chip can be the 'apple' of your eye

Apr 18, 2012

In this issue:
» Why China's fall in manufacturing is causing jitters in Australia?
» RBI hints at rise in oil prices
» Japan offers IMF US$ 60 bn boost
» What does the dip in FDI into China mean?
» ...and more!

---------------------------- Yet Another Bailout... Speak out before it's too late! ---------------------------

When millions don't even have food to eat, our government is busy bailing out companies...

And this time, again, it's Air India.

This PSU gets a Rs 4,000 crore equity infusion... funded by the taxes we pay.

Not to mention the huge debt restructuring is basically a bailout in a different garb. And this runs into tens of thousands of crores.

Is this government really made up of our representatives or is it on the payroll of those corporate giants?

We at Equitymaster feel strongly about this cause, and thus have started an Urgent Poll where you can read all about this and cast your vote to make your voice be heard!

We strongly recommend every Indian, who wants to make a change, to take a look at this.

Click Here to read more and cast your Vote... Before it's too late!


There are growth stocks. There are dividend stocks. And there are blue chip stocks. Investors often find the last variety irresistible irrespective of the price. That the blue chips not only have a reliable track record and sufficient information dissemination but also enough liquidity helps. To top that if you get a rock solid balance sheet and visionary management, what else can investors ask for? Probably the only other thing that one would look for is economic moat. Established brands and pricing power bring on the table this aspect too. What follow is sustainable high growth rates in profits and above average return ratios. Hence little wonder that some FMCG and IT blue chips have commanded the most coveted places in investor portfolios in India.

However, not every blue chip, even with all the above mentioned traits, suits your portfolio at all times. That valuation analysis is indispensible even for the most sought after stocks cannot be emphasized enough. Hence we borrow from the wisdom of one the most renowned gurus of investment valuation. New York University's Professor Aswath Damodaran recently offered some interesting views on the stock of Apple. Not surprisingly, he spotted the potential of the company at an early stage. Having bought Apple's stock since 1997 at US$ 5 per share, he has undoubtedly done well for himself. But now, when the euphoria regarding the stock is at its peak, Damodaran has chosen to offload his entire stake in the software to smart phone blue chip. The reasons given by him are convincing enough.

Damodaran, as we know is a disciple of intrinsic value investing. Hence, he exits stocks when he thinks that there are other forces driving the stock prices. Few amongst them being investor euphoria and market expectations. Apple's decision to give in to investor demand by announcing dividend payouts was disappointing to him. Again the pressure to meet market expectations about profit growth quarter on quarter can be perilous even for the strongest companies. Hence Damodaran believes that a lot can go wrong even for such blue chip stocks if investors lose sight of value. We cannot agree more with his logic. For this reason we advocate investing in safe blue chip stocks only when their valuations warrant it.

Do you think all blue chip stocks are worth investing into? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
The average daily turnover in India's corporate bond markets has a long way to go before it can attract more investors. Data from the Reserve Bank of India (RBI) shows that the average trading volumes in corporate bonds and inter-bank forex was less than a third of the turnover in stock markets over the past 12 months. The G-Sec (Government Securities) volumes were however, healthy, given the participation of banks due to the statutory liquidity ratio (SLR) investment mandate.

Data source: RBI Macroeconomic review
Stock market volumes mean average daily turnover of the BSE and the NSE.

The fact that we live in a far more integrated world than imagined really shows up in strange places. Take this column from Business Standard for example. It shows how fears about the end of China's reign as the workshop of the world is causing jitters not just in China but in down under Australia as well. Simply because the Chinese boom of the past few years has been nothing but a Godsend for Australia. Its resource rich economy blended in perfectly with China's voracious appetite to guzzle commodities of all kinds. The end result being vast improvement in Australia's trade balance. However, all good things come to end and Australia knows this all too well. It is thus banking on India to fill in the huge void that will be created once China starts to slow down. But is India capable of picking up the slack? Certainly not if the current scenario is any indication. The moment India tries to grow any faster than its historical trend, the demons of inflation come in and spoil the party. Thus, a lot of structural changes are required before it can come anywhere close to China like demand. Looks like Australia will have to wait for some time before it can start uncorking the bubbly all over again.

Indian oil and gas sector currently seems to be a perfect example of the notorious Murphy's Law. Be it high oil prices, rising fiscal deficit, low provision towards fuel subsidies, strong demand coupled with supply issues for oil, falling rupee or high inflation; there is a not a single odd in favor of the sector. As per global agency IMF, geo political risk in Iran, high oil demand and global economic recovery are all likely to send oil prices as high as 10%. For India, this will mean higher fuel subsidies. End result - ballooning fiscal deficit, not to mention the current account deficit. What makes the things worse for us is 80% reliance on oil imports and controlled fuel prices (barring petrol). The RBI suggests raising retail selling prices of oil to ease fiscal deficit and hence inflation concerns. However, we doubt it is going to work either. That is because a rise in fuel price in any case will raise price levels leaving RBI little room to cut the policy rates. Something that is going to slow down the economic growth rate.

Can China overtake US to become the next political and economic superpower? This is a question that must be reigning supreme in nearly every mind. If the track record of the past few years is anything to go by, then China appears to be shifting every gear to overtake US. Its economy has been growing at brazen pace. At the same time US has been going through a major slowdown. At this rate many experts feel that China will overtake US for sure. But there is another side to this story. US has started to show signs of recovery albeit at a slow pace. At the same time China has started exhibiting signs of slowdown. The export dependent economy reported a trade deficit for the first time in many years. Hence, another set of experts feel that China that has grown primarily due to low labour costs and consequent export advantage will not be able to sustain the stellar growth for too long. Wages have started to rise and exports have started to slow down. And domestic consumption has not really picked up pace to offset this decline.

But there is another argument to this. The Chinese policymakers could very well turn the situation around be making policy changes in the country to boost domestic demand. But will they ever do it? Well if they do wish to become the next super power they had better. However, will US allow China to overtake them so easily? The rest of the world can only wait and watch how the saga of the two economic powers unfolds.

At a time when the Europe debt crisis refuses to blow over, the International Monetary Fund (IMF) has been looking to shore up its capital. The IMF acts as a lender of last resort for governments. It had announced earlier this year that it would need around US$ 600 bn in new resources. This is to help 'innocent bystanders' who might be affected by economic and financial spillovers from Europe. Increasing reluctance has been shown by countries such as the US and Canada and emerging countries such as India and China. But Japan has decided to take a step forward. Thus, the country has stated that it would provide US$ 60 bn in loans to the IMF. This in effect has made it the first non-European nation to commit money to boost the fund's financial firepower with the aim of containing the Europe crisis. Interestingly, US has refused to commit any additional resources. This is not surprising considering that it is grappling with a massive deficit and also because elections are just around the corner. Emerging countries are also cautious and are not willing to commit provided they get some more voting power in return. In such a scenario, it would be interesting to see how Japan manages to commit resources. It is not that Japan does not have its share of problems. After all, it also has a crippling recession to deal with. Plus the devastation wrought by the earthquake and tsunami had only added to its woes.

Foreign Direct Investment (FDI) has been a pillar to China's growth. Over years the dragon nation has attracted considerable foreign capital from abroad. However, the situation has reversed in the recent past. FDI into China in March was down 6.1% YoY to US$ 11.7 bn. And for the first quarter as a whole it was down 2.8% YoY to US$ 29.5 bn. There are manifold reasons for the said decline. Debt crisis in Europe has meant that capital inflow from that region has declined. Rising labor costs in China and competition from other emerging markets has been another challenge. Further, steps taken to tighten the overheated property market in China have also weakened the investments in real estate.

Going forward, attracting capital will continue to remain a formidable challenge as the risk appetite of investors has declined. Global slowdown and lack of business confidence may also impact future inflows. Growth in other emerging markets which leads to distribution of capital is another area of concern. Overall, it appears that the poster boy of Asia's growth is in for a tough challenge to attract capital.

Continuing with the positive reaction to the RBI's rate cut yesterday, the indices in Indian stock markets opened in the positive today and gathered momentum from buying interest in auto and commodity stocks. At the time of writing, the BSE Sensex was trading 94 points above the dotted line. The indices in most other Asian markets closed higher in today's trade. Those in Europe have opened lower.

 Today's Investing mantra
"We find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding." - Warren Buffett

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    2 Responses to "Not every blue chip can be the 'apple' of your eye"

    sunilkumar tejwani

    Apr 18, 2012

    you are right. investment in any stock weather a blue chip or an emerging leader should be based on current valuations, if the valuation is right then one can go ahead, otherwise it is foolhardy to invest even in a blue chip at sky high valuations.



    Apr 18, 2012

    "The RBI suggests raising retail selling prices of oil to ease fiscal deficit and hence inflation concerns."

    Truly absurd (irrational?) thinking by the RBI.

    Want to reduce inflation? Increase production. Simple as that. Don't mess around with interest rates. Remove usurious taxation and all subsidies on petroleum products. Also get rid of the 80% government employees who don't work. That should take care of the fiscal deficit.

    Equitymaster requests your view! Post a comment on "Not every blue chip can be the 'apple' of your eye". Click here!