Only serious investors will now invest in India

Jul 6, 2010

In this issue:
» US still has the world's largest banks
» Inflation to come down by end of FY11
» Equity investors in China are jittery
» India Inc.'s capex slowed in FY10
» ...and more!!

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There is no denying that FIIs have a major bearing on where Indian stockmarkets are headed. This was more than amply displayed at the height of the global financial crisis. Prior to the crisis, FIIs poured huge doses of money into Indian equities. This then pushed the Indian indices to dizzying heights. Equally forceful was the impact when these very FIIs withdrew large amounts of money. This was when the global financial crisis escalated. The stockmarkets plunged even when the fundamentals supporting the India growth story had not changed.

But an interesting phenomenon has been witnessed in the year so far. The number of FIIs registered with SEBI has gone up by just seven in the first six months of the current year. In contrast, the number went up by 38 in the previous six months ending December 31, 2009. This would then mean that fewer FIIs are keen on investing in the Indian stockmarkets. This at a time when the Indian economy has been growing at a strong pace and having recovered much faster than the developed world. We believe there is another factor at play here. What could be dampening FIIs registering in India are stringent declarations, complex disclosures and increased compliance requirements. SEBI has decided to be more vigilant when it comes to FII registrations.

If indeed the growth in registrations has slowed down due to changes in level of disclosures among other things, we think this is a positive development. After all who wants gamblers and punters to wreak havoc in the domestic markets every now and then. To put it another way, India will attract only the really serious investors... and that's great news! These would be the ones who invest with a long term horizon in mind. Of course, whether this trend would continue in subsequent periods remains to be seen. But SEBI's move to be stricter when it comes to FII registrations certainly seems like a step in the right direction.

 Chart of the day
They may have been the architects of the global financial crisis, but they have not lost their position as the world's largest banks. We are talking about the infamous US banks. As today's chart of the day shows, the top 3 largest banks in the world in 2009 in terms of Tier 1 capital were all from the US. And 2 of the 3 namely Bank of America and Citigroup needed huge doses of liquidity from the US government at the height of the crisis. While China's ICBC was ranked seventh, India's SBI has yet to break into the top 12.

Data Source: The Economist

The politicians did their best yesterday when it came to holding the nation to ransom on the pretext of inflation. What needs to be seen is what would be their reaction if inflation were to actually taper down on the back of good monsoon. Yes, the latest food inflation number at 12.9% is an enthusing 4% lower than the previous record. But that is not something to celebrate. For the lower number is purely due to a higher base in 2009. On a week on week basis, food prices continue to scale up. Having said that, as per the Finance Secretary and the Planning Commission, it is only a matter of time. The government officials seem confident that better food supplies this year will certainly ease pressure on prices. In fact they see inflation coming down to 5%-6% by the end of this fiscal. This hopefully is after taking into account the impact of higher fuel prices. We are keeping our fingers crossed.

Money news reports that China has grown faster in 2009 than previously reported. The dragon nation has raised its estimate of 2009 growth to an eye popping 9.1% from an earlier reported figure of 8.7%. The problem with GDP growth though is that it does not reveal the entire picture. It is akin to reporting just the revenues of a company. No thought goes into the profitability and the investments made to achieve the reported growth. Thus, looking beneath the surface is quite important.

And this is where we could potentially see a lot of red flags go up. For starters, the impressive GDP growth was made possible on account of the enormous stimulus package approved by the Chinese government. Thus, growth could slow down considerably if the package is not there in the future. Furthermore, the quality of investments made possible by the package has also been brought under question. Experts reckon that there is a lot of mal-investment that has happened. This could potentially give rise to problem of bad loans few years down the line. Industries like steel and textiles seem the most vulnerable. Overcapacity is also likely to affect industries like cement, glass and wind power equipment. Not a good sign indeed. No wonder the equity investors in China are getting jittery. Chinese stocks are down 27% since the start of the year and unless some clarity emerges on whether the growth was onetime or sustainable, investors will continue to be cautious.

It is well known that India and Indian corporates fared much better in the financial crisis than their global counterparts. But it is not as if they didn't feel the heat at all. They faced both topline and bottomline pressure. They responded with a focus on productivity gains and expansion of existing units as opposed to setting up new ones. Hence it doesn't come as a surprise that India Inc's capital expenditure YoY growth in FY10 was only 12%. In the previous years, the growth was in the region of 30% YoY. What's more, a large chunk of the capex in FY10 was done by one sector - oil & gas. However, with the economy now bouncing back, capex growth is likely to reach old levels, if not more.

Cash is most definitely king. At least that's what senior executives across the globe now think. A recent study by Economist Intelligence Unit suggests that only 38% of the executives polled plan to raise fresh capital in the next two years. This is despite a slight uptick in M&A activity, PE deals, project finance activity and IPOs, as the crisis has faded. Even though they believe that growth will resume in the next two years, they are reluctant to raise fresh cash due to economic and political uncertainty. Currency volatility has also been added to the mix.

Companies with a large treasure trove of cash are highly valued today. They are able to mitigate risks of doubtful market conditions. And in case they spot good buying opportunities, they can part fund the transactions. Thus reducing dependence on expensive bank loans and keeping their balance sheets clean. We seem to have entered a new age of conservatism. Definitely a positive sign for the global economy.

Japan had the misfortune of dealing with what is now termed as 'the lost decade'. But even now, things are not looking hunky dory for the world's second largest economy. Japan's broadest indicator of economic health dropped for the first time in 14 months. This has signaled that the Japanese economic recovery is losing momentum after rebounding from its worst postwar recession. The Japanese economy posted a healthy 5% growth in the first quarter of the year. However, given that production has slowed down, it seems unlikely that this kind of growth is likely to be sustainable in the coming quarters. Indeed, the recovery in Japan, just like US and Europe, is certain to be very gradual going forward.

In the meanwhile, Indian markets opened on a positive note and continued to gain ground in the ensuing hours on the back of sustained buying activity across index heavyweights. At the time of writing, the BSE-Sensex was trading higher by around 180 points (up 1.3%). Gains were largely seen in IT, metals and banking stocks.

 Today's investing mantra
"Bargains are the holy grail of the true stockpicker. The fact that 10 to 30 percent of our net worth is lost in a market sell-off is of little consequence. We see the latest correction not as a disaster but as an opportunity to acquire more shares at low prices. This is how great fortunes are made over time." - Peter Lynch

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3 Responses to "Only serious investors will now invest in India"

mrs garg

Jul 7, 2010

sir i want to join u
but i want trust on u for free consultation


dinesh singh

Jul 6, 2010

it is quite interesting and worth stuff to read and update the knowledge with international economical statistics.thanks


Jul 6, 2010

Its time we stopped measuring everything in terms of percentage!!

Arey bhai kya muze daal firse chalis rupiye me milegi! Mahangai 12% nahi 250% ho gayi hai!!! Baat karte ho saari % me nahak!!

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