Buy or Sell? India's best fund manager speaks

Aug 11, 2011

In this issue:
» There's a deeper, sadder lesson to take home from London riots
» J P Morgan CEO still bullish on the US
» Apple over takes Exxon Mobil to become the most valued company
» Gold rally is far from over yet
» ...and more!
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 Chart of the day
While it could be true of practically all the disciplines, investing, we believe, is all about employing the right process. Of course, on occasions, the process may not produce the right outcome. But over the long term, the right process is bound to give desired results if one doggedly sticks to it. One such person who seems to have hit on the right formula for long term investing and is also doing a good job sticking to it is the HDFC fund manager, Prashant Jain. His long term track record is indeed a testimony to the whole idea of process based investing. Thus, if one gets to listen to the opinions of such stalwarts, the opportunity cannot be passed away. Especially when the opinion comes at such an uncertain time as the current one.

So, what is on the mind of one of India's most successful fund managers? Not a great deal we believe. But very important nevertheless. Mr Jain has argued that now could be one of the better times for investing in Indian stocks as the recent correction has brought the Sensex levels to an attractive one year forward P/E of 13 times. In other words, markets are attractively valued from a 3-year to 5-year perspective. As per him, the last time such valuations were present, indices went on to give staggering returns over the next 3 and 5 years. And he sees no reason why should it be different this time around. Infact, as per him and also shown in the chart below, India's GDP growth rates have been moving up higher with every passing decade, right from 3.5% per annum during the 60s to 7.2% per annum in the decade gone by. And he believes that this acceleration could further continue, taking returns from stocks even higher.

We believe that he couldn't be more on the ball on this one. Indeed, just as in shopping for groceries and clothes, the best time to go out and invest is when stocks are on sale. The current time is one such occasion from a long term perspective as far as we are concerned. Of course, there could be temporary setbacks in some companies from a short term perspective, but we see most blue chips and fundamentally strong companies creating new profit records from a 3 to 5 year perspective. Hence, going along with Mr Jain may well work wonders for your long term stock portfolio.

Do you agree with Mr Jain? Do you think Indian stocks will give strong returns from a long term perspective from current levels? Share your views with us or you can also comment on our Facebook page.

Source: HDFC Mutual Fund

Thousands of young people rioting in the streets... Homes, businesses and vehicles set on fire, shops looted... A city in complete chaos and disorder... Can you guess which place we're talking about? It's neither the Middle East, nor Africa, nor any third world country. The massive riots we're talking about have occurred in none other place than London.

We all know that most of the developed world is faced with the twin problems of slow economic growth and high sovereign debts. Sagging economic growth leads to high unemployment rates. On the other hand, high levels of debt have forced governments to cut budgets and thus, welfare expenditure, subsidies and so on. That's the recipe for creating violent mobs of angry young men. And that's the story of the London riots in a nutshell.

But there's more to these riots. They are not just impulsive reactions against joblessness and cuts in government spending. There's a much more deep seated problem at the centre of this chaos- inequality. Yes, we're talking about the wide disparities of income between the rich and the poor. According to a 2008 report, the rich-poor divide in Britain is wider than 75% of the OECD (Organisation for Economic Cooperation and Development) nations.

We have ample lessons to take home from these events. India's economic growth has been characterized by wide income disparities. The sailing may be relatively smooth as long as our economy continues to grow at a rapid pace. But it is difficult to dodge the 'day of reckoning' for too long unless we take corrective measures.

In whatever bad shape the US economy finds itself in, Jamie Dimon (CEO of JP Morgan) still has a very optimistic outlook on the US. Indeed, he brushed aside S&P's credit ratings downgrade citing that market leaders do not base their decisions on what credit rating agencies choose to do. The US currently lacks fiscal discipline and a coherent, consistent policy from the government. Although Dimon acknowledges this fact, he still believes that the current phase will pass and the US economy will blow your socks off.

We are not sure that we share Dimon's enthusiasm. One can pile heaps and heaps of criticism on S&P's for its recent action. But even its detractors will have to confront the fact that the US is in a precarious state as its debt keeps mounting. The politics at the top do not help matters either. In the meanwhile, the US economy seems nowhere near displaying considerable economic recovery. So even if the US economy does come out of top, it seems like it will take a very long time with a lot of pain in the interim.

Except for some near term aberrations, commodity prices typically move in cycles. And with gold prices scaling new highs every day, one might feel that this is yet another anomaly in response to the US debt crisis. In fact, the recent rise has been so prominent that one might feel a correction is just around the corner. However, believing that the gold rally has lost its legs could well prove to be dangerous. We know that gold is a safe haven. And with the US debt crisis unfolding, prices rallied as there was a flight to safety. However, the current rally could well sustain and in fact further gain momentum from here on. The reasons are manifold. Loose monetary policy by US means that interest rates would remain close to zero in the near future as well. This would keep gold demand buoyant as investing in paper currencies is expected to fetch miniscule return. Further, the ongoing money printing exercise by US could lead to an inflationary scenario where the dollar could lose its purchasing power. In such an environment, one needs a substitute that can retain value. This may again draw you to gold. Thus, instability in the US dollar and weak global environment gives us an indication that the yellow metal may not lose its sheen. So, for investors who have missed the current bus may be Rs 25,000-26,000 per 10 grams of gold is not that a high price to pay.

It is time for some reality check. And it is heartening to note that the Indian government has realized that there is no point of building castles in the air! Having failed miserably in meeting its 11th 5 year plan targets, the authorities are treading with caution this time. It is not just the ineffective execution of policies and reforms, but the global economic scenario that is being blamed. To start with, the broad GDP growth estimates have been revised lower from 9.5% to 8.5%. Benchmarked against this, even the investment in infrastructure and other capital outlays will be downsized.

The much touted trillion dollar spending on infrastructure during the 12th plan will be the first to take a hit. Not that the 11th plan infrastructure spending has had much success in sticking to deadlines. But with Indian banks too shying away from funding these projects, the execution will get tougher. Raising capital overseas is also expected to get tougher. With such a timid start we only hope that the 12th plan (2012-17) does go on to achieve results that are at least better than that in the last 5 years.

The recent global meltdown following the US debt downgrade has shaken investors' confidence. But it has also led to a change in investor mindset. They appear to prefer high technology companies over the traditional ones. We say this because Apple has become the most valued company. It has overtaken Exxon Mobil to take this crown. Investors are happier with the shares of the cutting edge technology leader. Apple has surpassed all its peers with its innovative product range that seems to get better as the years go by. On the other hand, investors have turned skeptical of companies like Exxon whose fortunes are driven by oil prices. With the recent correction in the latter, there are fears that profits for the oil major would come down. In the race of innovation over tradition, innovation seems to have the upper hand for the time being.

Meanwhile, after opening the day in the negative, indices in the Indian stock market have moved in the positive territory with the Sensex trading higher by around 30 points at the time of writing. Heavyweights like HDFC and RIL were seen driving most of the gains. While indices in Asia closed largely in the red, Europe is witnessing a positive trend currently

 Today's investing mantra
"There are 10^11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers." - Richard Feynman

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8 Responses to "Buy or Sell? India's best fund manager speaks"


Aug 14, 2011

For a retail investor, holding or buying into MF's or stocks makes sense 99% of the time when there is a relatively consistent upword or downward movement of stocks. But in the event of that 1% scenario where probability of drastic correction is imminent, it will be prudent to exit the stock market completely and park in bonds / fixed deposits.


T J Raghu Veeran

Aug 12, 2011

The only known way of making money in stock market is to buy cheap and sell dear. You have to start buying only when the market crashes. This is yet another opportunity for real investors



Aug 11, 2011

Well, Stocks have always given better returns than any other assets (except in present times Gold - which your other newsletter "Daily reckoning" has been recommending since it was Rs. 8000/-. I have followed them and yes did buy at that price. but it had said to buy for 2014 /15 to get great returns - but the target is achieved in 2011 itself. Thanks a lot)

Regarding Stocks ; Great multi baggers: Fortis Health, Cummins India, Titan, Advanta India and sure shot Lovable Lingerie - its products will never go out of market - cannot be replaced by any other product.)These stocks should give three to five time returns in next five years. disclosure - have bought all.

Further on Gold: recently in June read an article: 15 good reasons to buy / invest in Gold. Two yrs target $ 2500/- - Rs. 36500/-. Remember China has yet to start buying Gold in a big way. What it will do with the trillions of dollars ??

Yes India Can do much much more. Lots of thoughts - for some other time.
Damani SK


Tamal Dasgupta

Aug 11, 2011

i agree with the fund manager. However i am astonished at equitymaster role. On one hand you publish such writings encouraging the longterm investor to invest. On the other hand you vigorously fan the fire of fear to induce people to sell. There is no contribution towards fundamental growth analysis or formation of opinion around fundametals, eg. the govt paralysis on infra investment but its eagerness to dish out money to the poor for subsistence living.This approach of equitymaster has led me to believe that i should not take equitymaster seriously any more. You may be in the class that recommends stocks and short sells the same recommendations.



Aug 11, 2011

Depends upon stock chosen and one has to be stock specific .


Adi Daruwalla

Aug 11, 2011

What Mr. Jain is saying that in the near short term that is till 2012, this could occur. I dont agree with his foresightedness from the 3 to 5 year perspective. What is different is that 3 QE's were not introduced the last time this occured, neither had Europe failed. China is trying to rebalnce its own economy. The circumstances like the gurus say is never the same, then why is Mr.Jain comparing events and situations. Everyday is a new day at the market and its differnt, circumstances and events are different. Statistically there is some logic but practically none.


R S Nambi

Aug 11, 2011

Any prudent investor looks at mid to long terms returns only. The Indian Mid caps are still the best bet and blue chips may not be blue chips anymore. The latter ones require careful watching more particularly steel, IT, Banks and FMCG cos. But in a .long run one can make good money in capital markets given the current valuation which is not bad in my view.


R S Nambi
Consultant-World Bank


anupam garg

Aug 11, 2011

I wonder what kind of corrective action is the newsletter talking about...& is there any scope for correction now? i personally don't feel so

Even with all the reservation policies, PDS, discouted rations, subsidies etc, the rich poor divide doesn't seem to diminish much...moreover, it leads to discrimination etc.

any corrections, if necessary should have been checked while implementing such schemes...its far too late me pessimistic but thr's nothing tht can b done to avoid day of reckoning

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