FII swings can create opportunities for you

Jul 17, 2010

In this issue:
» The biggest near-term driver of Indian stock markets
» Food prices will remain high
» Indian government goes high tech
» The Gods can't trade in shares
» ...and more!!

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What determines stock prices? This is a question of great importance to people in finance in general and investors in particular. After all, if one could answer it with scientific precision, it would lead to the ultimate money making machine - the ability to predict stock prices. In fact, the various approaches to investing diverge on this very point. At Equitymaster, we believe stock prices in the long term are determined by the performance of the underlying businesses. But in the short term, a whole variety of factors can come into play.

We recently concluded our Investor Survey 2010. We asked our readers what they think will significantly impact the Indian stock markets on a macro level in the near future. Nearly 43% believe that buying and selling by foreign institutional investors (FIIs) will have the most impact. We tend to agree. At the first instance, prices in a free market are determined by the supply and demand. Given the deep pockets of the FIIs relative to the depth of our markets, they can create much of the demand for or supply of shares. But they also create opportunities for the patient retail investors. As Benjamin Graham has famously said, "In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine."

Source: Equitymaster investor survey 2010

 Chart of the day
The chart of the day shows how India has been reeling under food inflation for quite some time now. Inadequate monsoons and the recent increase in diesel prices are not helping the cause either. However, if one were to go by Chief Economic Advisor Kaushik Basu, food inflation is expected to come down substantially in the next two weeks. No, that will not be due to lower prices of fruits and vegetables! Rather it will be due to the high base effect. This means the woes of the common man are not likely to end anytime soon. Given that food inflation is caused by supply-side factors, increased farm output is the best possible way out. So, we are at the mercy of rain gods right now.

Source: PTI

The story of brand launches in India is akin to nature's survival of the fittest. Let us take an example of a frog. A female frog lays thousands of eggs in water. However, only a few survive after being eaten by predators. In the last 18 months, Indian industry managed to launch around 3 brands every day across sectors. But, only 5% survived! This was due to fierce competition in the market place. There is a silver lining though. India, being an emerging market, still has room to absorb more products. In our recent interaction with the top management of an agro based company, we found out that the organised market for even a staple such as rice is only 3%. Moreover, according to research by Technopak, organised retail in India is likely to touch 25% in the next 10 years from the current 5%. So, we should be seeing more product launches soon. But the market being a great leveller, will ensure that only the fittest survive.

The Indian government is going hi-tech. Or so it seems from the initiatives it is taking these days! As per a leading business daily, the government is looking to digitise most citizen services by 2014. This includes, among others, services like issue of passport, land records, and registration of births. In fact, out of target of the 200 services it plans by digitize by 2014, 158 (including passport renewals, income tax payments and pensions) are already online. Further, the government is looking to spend Rs 200-300 bn towards these over the next few years.

We see this as a step in the right direction. This is given that digitisation is likely to bring in more transparency in dealing with the government. It will also make the middlemen redundant, thus speeding up the processing time for the citizens. How well and fast are these plans implement is another question though!

The global economic crisis has sent investors scrambling for bonds, due to the belief that bonds will offer them safety. But bonds have rallied so much that the 10-year US Treasury yield fell to a 14-month low of 2.8%. Little wonder then that legendary investor Jim Rogers does not have a high opinion of bonds at present. He is more bullish on commodities. This is because the recent decline in commodities has only made them more attractive. While he has pointed towards gold, he has also indicated his preference for silver and even platinum and palladium. But more than metals, agricultural commodities are what have caught his fancy. Especially sugar and rice. The rationale for this being that the prices of agricultural commodities tend to be more depressed. Thus, overall Jim Rogers advocates dumping bonds and buying sugar, rice and even silver .

At times of despair, people shift away from advisors and towards the gurus for a path. This is exactly what US President Obama did this week when he met up with Warren Buffett to take stock of the US economy. But the picture presented to him was not too rosy. Buffett stated that while the recovery is underway, the US economy still has a long way to go before it can come back to its pre-crisis status. As per Warren Buffett, the biggest problem being faced by US is excess capacity. This is in the form of high levels of inventory and unemployment. These levels need to be brought down for US to get back on track. And it will take probably few years for this to happen.

Indians as a whole are known for their religious bent of mind and elaborate customs. But a religious trust recently took this to whole new level as it tried to open demat accounts in the name of deities. And it did not stop there. It moved the courts when the National Securities Depositories Ltd did not permit it to open such a demat account. The Bombay High Court was quick to dismiss the petition. "Let gods remain in the temples, let them not come out for commercial trading," remarked the judges. As intriguing as this whole episode is, it just goes to show what an emotional lot we humans can be at times. And emotions are always better kept out of the stock market. If your goal is to make money that is.

The past week was a largely negative one for the world markets as most of the major indices closed the week in the red. The mood across the world was bleak as the US consumer sentiment index fell for a third straight week and results of Bank of America and Citigroup were lower than expectations. The biggest loser of the week was China down 1.9%. In Europe, only UK (up 0.5%) closed the week in the positive, while Germany (down 0.4%) and France (down 1.5%) closed the week in the red.

The Indian markets closed the week up 0.7%. While Singapore (up 1.4%) was the biggest gainer of the week, Japan and Hong Kong closed lower by 1.8% and 0.6% respectively. In the Americas, US was down by 1% while Brazil was down 1.8%.

Source: Kitco, CNN Money, Yahoo Finance

 Weekend investing mantra
"There seems to be some perverse human characteristic that likes to make easy things difficult." - Warren Buffett

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2 Responses to "FII swings can create opportunities for you"

dhiraj lal

Jul 18, 2010

how I will get oppotunities please send more information.


G Shringi

Jul 17, 2010

There seems to be some perverse human characteristic that likes to make easy things difficult." - Warren Buffett

Well said, just move with the herd and make sure you are in the middle of it.

Equitymaster requests your view! Post a comment on "FII swings can create opportunities for you". Click here!