What will it be like for investors to revisit 1991?

Aug 20, 2014

In this issue:
» Equities: The least preferred financial asset class of Indian households
» Will discounts help improve the realty inventory situation?
» Another scam in the Indian PSU banking space!
» China puts a cap on how much a CEO of a state owned firm can earn
» ...and more!

Apart from the fact that most investors today were not even aware of an asset class called 'stocks', way back in 1991, the Indian equity market itself was nascent. By the end of 1991 the BSE Sensex was near 2,000. Since then it has multiplied 13 times or 1300%. Over this period, India's nominal GDP has grown about 5.4 times or 540%. Hence for investors today the idea of riding such a huge rally in stocks seems surreal. Most believe that since the markets itself were nascent in 1991, any and every stock was bound to grow multiple times and become a multibagger. That the economy or the fundamentals of the stocks then had anything to do with the mind boggling returns is completely discounted.

Now over this time, companies like L&T, Nestle, Voltas and ACC that were part of the Sensex way back in 1991 went on to create unimaginable wealth. The L&T share price and Nestle share price, for instance, gained 65 times and 47 times respectively since 1991. Now, as we know, it is not as if the Indian stock markets were on a secular uptrend during the past two decades. In fact thanks to several domestic and external factors, stocks markets have seen several bull as well as bear phases during this period. However, the fact that helped each of these stocks come out unscathed from each market cycle, was that they were the key beneficiaries of what we call 'Mega trends'.

The Mega Trends have diverse meanings and impact for different industries and companies. As the economic dynamics globally are changing rapidly, new competencies are coming into play at half the lifecycle speed of the past decade. The Mega Trends are therefore a vital cog in a company's future strategy, development and innovation process. Especially since it influences product and technology planning. Mega Trends can be used as a base for strategic decision-making in organizational functions such as marketing, R&D budget spending, product planning and development, human resource management, technology planning and innovation scouting.

According to us, several such Mega Trends are set to play out over the next decade or so. Ones that could create so much wealth that by 2025, investors will find the stock prices of today as puny as we find the ones in 1991.

Those who believe that investing based on such Mega Trends can hardly yield results should not forget that India's outsourcing opportunity was nothing but a Mega Trend way back in 1991. One that led to the creation of IT behemoths like Infosys, Wipro and TCS, as we know them today.

So the key is to accurately identify such Mega Trends that could play out over the next decade, irrespective of geo-political, economic and social headwinds. Having done that, one needs to zero in on companies that have rock solid managements and balance sheets to capitalize on the trend, come what may.

And for investors who never had the chance to invest in stocks in 1991, this could be a once-in a lifetime opportunity to revisit 1991. A chance to witness what it is like to invest in companies that will be the biggest game changers over the next decade and more.

Which Mega Trends according to you will drive the Indian stock markets over the next decade? Let us know in the Equitymaster Club or share your comments below.

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 Chart of the day
The past few months have seen domestic investors express interest in the Indian markets. That explains why domestic money is finding its way into mutual funds which appear to have pumped in thrice as much as FIIs in the past one month. However, if you look at the trend over the last five years, retail participation in equities has been abysmally low. Indeed, as can be seen from today's chart of the day, equities accounted for just 8% of the total financial savings of Indian households. The favourite continued to be bank deposits which formed a massive 48% of the pie. This is despite the fact that an 8 to 9% return from FDs is hardly anything considering the high inflationary environment in the country

Indian households: Minimal exposure to equities
P&PF - Provident and pension fund, NBD - non-banking deposits, Ins. - Insurance

The reasons why participation in equities has remained low is largely a matter of perception. Many retail investors have burnt their fingers during the 2008-2009 meltdown and many consider investing in equities akin to gambling. But nothing could be further from the truth. Equity investing is all about following a disciplined approach. It means buying when prices are low and selling when they are high. The period post the 2008 crisis was the perfect time for retail investors to get into the market. But many had done so during the peak in early 2008 before the bubble burst and suffered losses. Now stock markets have once again begun to rise and this has seen more and more investors getting invested. But the point is that retail investors will need to remain selective about the kind of stocks they want to invest in and not rely solely on tips provided by brokers and friends.

Over the last couple of years, property developers in India have been in a fix. They've been facing a severe cash-crunch against a backdrop of declining sales and very high inventory levels. Ideally, an inventory of eight months is considered good in the property market. But if you look at the inventory levels of major Indian property markets, they almost ring an alarm bell. As per an article in Business Standard, the Mumbai Metropolitan Region had an inventory of 53 months at the end of June 2014. The National Capital Region is sitting on an inventory of 45 months. The scenario in other markets is not too encouraging.

It is little wonder then that property developers are preparing to dole out discounts of up to 15% during the festival season later during the year. Will property sales improve this year given these discounts and the improving economic sentiment? Well, industry participants expect the festival season (Oct to Dec) to fetch sales of at least 60,000 units across the seven major cities. It is worth noting that this would be double of what was achieved during the same period in 2012 and 2013.

While we do not doubt that there is positive sentiment owing to the business-friendly government coming to power at the Centre, we are not too convinced about the overly optimistic property sales projections. If there was indeed so much demand for property, why would developers be compelled to offer discounts?

The latest news coming out of China pertains to how its President is targeting executive pay at state owned firms. Apparently, he wants to set right the rich-poor disparity in the country and therefore wants to put a cap on how much a CEO of a state owned firm can earn. Please note that when compared to say its American counterparts, a Chinese state owned CEO could well be earning a pittance. Somewhat similar disparity exists in India too. A CEO of a large private sector firm could well be taking home a salary which is a multiple of what his public sector counterpart could be earning. And mind you, this does not even include stock options. So, is this arrangement a fair one? Well, we don't think there is any one definite answer to this. Despite being aware of the disparity, there are a lot of takers for PSU jobs even today. What may not be acceptable though is PSU CEOs trying to make up the difference by indulging in corrupt practices like taking kickbacks and bribes. These incidences should be dealt with in the sternest manner possible we believe.

Talking about corrupt practices, public sector banks are under the scanner now. We recently highlighted the corruption and mismanagement in state-owned banks in one of our 5 Minute Wrapup issues. The Syndicate bank scandal to the tune of Rs 80 bn is still running fresh in our minds. And here comes another. This time, names of Oriental Bank of Commerce (OBC) and Dena Bank are making rounds in news dailies. These banks have been found guilty of misappropriation of funds. A Dena Bank manager is accused of mobilizing fixed deposits (FDs) worth Rs 2.6 bn using middlemen. These deposits were further used to disburse loans in third party accounts. And in the process fake fixed deposit receipts (FDRs) were issued to the original depositor. On similar lines, OBC officials were indicted for misappropriation of funds of Rs 1.8 bn. Scams pertaining to banking transactions have gathered much steam in recent periods. The Union Ministry has already made the necessary moves to rectify the issues. However, it is quite shocking to know that the guardians of public money are themselves found guilty. With the depositors and the stakeholders at risk, banks will now have to deal with the loss of public confidence in the financial system.

The Indian stock markets continued to trade weak in the afternoon trading session. At the time of writing, the BSE-Sensex was trading up by 86 points (-0.3%). Barring IT sector and healthcare sector, all the sectoral indices were trading in the red. Oil & gas sector and auto stocks were the biggest losers. Barring China, all the Asian markets were trading in the green led by Taiwan and Singapore. European markets opened the day on a weak note.

 Today's investing mantra
"The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage." - Charlie Munger

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3 Responses to "What will it be like for investors to revisit 1991?"

Nirmal Kumar Mishra

Sep 14, 2014

Although banking sector has been slurred a bit because of some corrupt practices; this sector holds promise considering the amount of money people pour in them. The present system must have a devise to plug loopholes in this sector. Pharma, IT, and auto sectors will also hold the sway. But there are other areas where the growth potential is very high. It is imperative that investors are illuminated and encouraged to invest in them and for this experts in this field have to throw some light on.


Ashok Kumar Sethi

Aug 20, 2014

The corrupt practice prevailing in PSU Banks and its highlighting is opening he sixth sense of people of the country and in particular the investors who have purchased shares of these PSUs. In one of my comments, I tweeted that the people who are involved in such corrupt practices are the real Financial Murderers of our Nation and the strict IPC like 302 should be imposed on them. We first were astonished about the role of Mr Jain of Syndicate bank and now the instances of Dena Bank and OBC have once again opened the line of discussions. I don't understand, how the UPA Govt. was not aware of such loopholes. Now, it is high time for Modi Govt. to take stern action and ensure that this does not happen again, failing which the credibility of Modi era will be fading away.


Ramchandra Naik

Aug 20, 2014

I think the one of the next mega trend will be in the Engineering sector. Over a period of time, India has become well known for Information Technology and Pharmaceutical Industries.

The next trend will be in Engineering Goods. Increasingly, more and more Fortune 500 companies are setting up their R&D centres in India and this will lead to innovation and development of products that will be 'Made in India' and sold across the world.

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