Markets likely to turn up before business

Jul 25, 2009

In this issue:
» The No.1 reason for infrastructure project delays
» Investing in a cyclical business - an opportunity for recurring profits
» The China opportunity for Indian pharma cos.
» Mutual funds' rush for gold
» ...and more!!
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"Business is flat" said Warren Buffett in a recent interview, but added that despite that he would much rather own stocks at these levels on the Dow than have a long investment in government bonds. Says the emphatic Buffett "You can't wait for business to turn up and be very clear about the fact that it's turned up... the market is very likely to turn up before business." That's the reason why Buffett doesn't try to time the market, but rather tries to 'price' them instead. He's just one of the legions of value investors who have made their fortunes by buying great companies when things are not looking all that hunky-dory. We suggest you do the same.

 Chart of the day
Today's chart of the day takes a look at an overview of how valuations have moved for the various sectors in the economy. It compares the current price to earnings ratio of some key BSE sectoral indices to what they were at the start of the year. It is interesting to note the spurt in valuations of the auto and realty indices - two sectors that had been beaten down significantly when markets were at their lows a few months back.

Source: CMIE Prowess

There is an old saying in investing. If an asset class is suddenly finding itself a hot property and if scores of mutual funds are planning to launch schemes revolving around the same, it may well be the time to come out of the asset. Memories of the recent crash in commodities just when every mutual fund worth its name in the country had plenty of commodities centric NFOs in the pipeline is still fresh in our memories. Go further back and you will find the same trend emerge again and again. Want to know what's on the mind of mutual fund houses across the country these days? If a leading daily is to be believed, it's the yellow metal Gold. Yes, that's right. Sensing a huge demand for the lustrous commodity, several fund houses are believed to have approached capital market watchdog SEBI for permission to commence gold funds.

So, is this is the right time to sell gold? Well, we believe that based on fundamentals, they may be just right this time around. The global economy isn't surely past its problems yet. There is plenty that could still go wrong and hence, in such uncertain times, gold might be the best bet there is. Furthermore, even if global economy recovers, we could bet our bottom dollars there could be a huge surge in inflation, making gold one of the best bets again as historically, it has proven to be the best hedge against inflation. Either ways, investing in gold could indeed come handy. So, if you haven't already, make gold a small part of your portfolio. The odds that you would regret your decision are indeed on the lower side.

Even though we keep hearing of core infrastructure projects time and again, it never ceases to amaze us. Just how we manage to consistently keep slipping on the execution of our infrastructure projects continues to remain unfathomable.

An official review by the government has found that one of the biggest culprits of this problem is land acquisition delays. According to the review, perennial delays in acquiring land for the purpose of setting up infrastructure projects are the cause of almost 70% of the 190 large sized infrastructure projects like highways. The root cause of the problem? Land acquisition in India is governed by archaic laws that were framed by the British in 1894 and haven't undergone any meaningful revision since then.

Now, as per highways minister Kamal Nath, a draft legislation Bill on rehabilitation and resettlement has been through consultations with a group of ministers and would be introduced in Parliament soon and would seek to make land acquisition easier. Mr. Nath has been quick to announce 'plans' of ambitious highway projects that seek to put India's growth on the fast track. But it is such fundamental problems that need to be addressed first before any 'real' development takes place.

Legendary fund manager Peter Lynch advises that investors should classify their stock picks in categories such as laggards (slow growers), stalwarts (medium growers), fast growers, cyclicals, turnarounds and asset plays.

Of these, the cyclicals are an interesting lot. The great thing about them is that they provide the opportunity to make decent returns on a recurring basis although predicting the swings of their underlying business is no cakewalk. Matters are further complicated if the business is subject to many cycles simultaneously! These cycles could interact and need not move in tandem.

Take Reliance Industries for example. Its business is subject to cyclical movements in crude oil, differentials between light and heavy crude, natural gas, refining margins of various oil products and petrochemical margins. Of these, light & heavy crude differential, gas prices and refining margins of middle distillates were weak in 1QFY10. On the other hand, crude oil prices in general, refining margins of petrol, and petrochemical margins are on an upswing. Clearly, investing in cyclicals does require more homework than usual.

Over the last many years, China has emerged as a huge market with immense potential for a variety of industries. So it comes as no surprise that a very large opportunity exists in the Chinese pharmaceutical market as well. The big booster is the country's ambitious US$ 124 bn effort to provide basic health coverage for the vast majority of its 1.3 bn citizens by 2011. What is more, as growth in the developed markets of the US and Europe continues to remain subdued, the expected 22% annual growth in the Chinese market in the next five years has propelled many large pharma companies to make a beeline for the Chinese shores. This means expanding sales forces, distribution channels and research operations.

However, the going for Big Pharma may not be that easy given that Chinese companies have a clout and also due to generics being favoured over branded drugs. But the interesting thing is, that is exactly where Indian pharma companies could stand to benefit given their superior skills in manufacturing generic drugs. Infact, many of the top Indian players have forayed into the Chinese market. Thus, we believe that China's commitment to provide for healthcare certainly comes as a huge positive both for both innovators and generic companies, including Indian ones.

The Indian markets ended the week on a strong note with its benchmark index, BSE-Sensex rising by about 4% and in the process touching its highest level in over a month. A key reason for this performance during the week is the announcement of June quarter results by industry heavyweights, which seem to have beaten market expectations. In addition, positive cues from global markets also added to the cheer. Key global indices ended the week higher by about 4% to 6%. Asian markets such as Hong Kong, Japan and China led the pack of gainers recording weekly gains of about 6% each. European markets, Germany and France followed suit, recording gains of about 5% each. The US, Singapore and UK markets were amongst the lowest gainers this week, recording gains of about 4% each.

Source: Yahoo Finance

 Weekend investing mantra
"Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or give way to hope, fear and greed." - Benjamin Graham

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3 Responses to "Markets likely to turn up before business"


Jul 27, 2009

"...growth in the Chinese market in the next five years has propelled many large pharma companies to make a beeline for the Chinese shores..."

"But the interesting thing is, that is exactly where Indian pharma companies could stand to benefit given their superior skills in manufacturing generic drugs."

and a few posts earlier, 5 min wrapup had mentioned the US pharma frenzy in acquiring Indian pharma companies.

Do you make the connection?? :)



Jul 26, 2009

Dear Team,
your concept of 5 min wrapup is shocking bcoz in this busy world really it works in 5 mins, thats a great job keep it up,
congrats to entire team in just 5 min


ashok kumar malhotra

Jul 25, 2009

i agree to the points made infavour of investment in gold.secondly investment goes up earlier than the actual buisiness a fair point. there are news of imf selling gold in open market in coming days, iwould rather wait for the sale to happen before entering or adding to my investment in gold. thanks and regards.

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