Is the Indian bull market back?

Aug 24, 2012

In this issue:
» Low interest alone will not boost investment, feels RBI
» Unsold goods pile up in China
» SBI's Chairman wants CRR to be scrapped
» Hedge funds holding record levels of cash
» ....and more!

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While things may have gone from bad to worse in New Delhi, they seem to be suddenly looking up on Dalal Street. As you would know, the benchmark indices just scaled their highs of the past few months. And as a leading daily points out, the gains were aided by none other than heavyweights like Reliance and Infosys. Yes, the very same stocks that until a few months back, were the proverbial spanner in the index's wheel. This is not all. There are other reasons as well for one to feel optimistic. The IPO market seems to be getting back on its feet what with the Rs 2.5 bn float by an online directory service back on the agenda. Then there's the issue of FDI in retail that looks set to sneak through and also the possible postponement of contentious measures like GAAR and retro taxes. Finally, with monsoons having picked up across the country, the rain gods also seem to be in an obliging mood.

For some, these seemingly large albeit disconnected events are nothing but pointers to the start of a new bull market. They argue that if liquidity continues to remain strong, an extended period of gains cannot be ruled out. As usual though, not everybody agrees with this point of view. There are others who believe that the fundamentals continue to remain uninspiring. The deficits that are staring the Indian economy in the face are far from being in the comfortable zone. Then there's the inflation and exchange rates that continue to remain stubborn. Thus, in view of these negative factors, the current period of euphoria does not have strong legs to it and may soon fizzle out.

Clearly, making investments based on macroeconomic forecasts is not for the faint hearted. There seem to be so many factors at play that picking the few that would decide the course of the markets is next to impossible. Fortunately, there is an easy solution at hand. And it answers to the name of bottom up stock picking. The process is simple. It involves buying fundamentally strong companies. Ones that have a proven track record of consistent financial performance and strong management skills. Once such companies are found, all one has to do is wait for their valuations to reach levels that incorporate sufficient margin of safety. If history is any indication, a portfolio of stocks that emerge out of such an approach has a much better chance of outperforming the one that is based on trying to time the market. Thus, it doesn't matter whether a bull market is around the corner or may be it isn't it. As long as the stock under consideration satisfies the criteria just highlighted, it should be bought irrespective of the environment.

Do you think good stocks should be bought at all times or only at the start of a bull market? Share your views with us or you can also comment on Facebook page / Google+ page.

 Chart of the day
Today's chart highlights how India's exports to European countries have increased over the years. However, if the situation in Europe is any indication, the chance of exports continuing to grow in the near to medium term are slim at best. With Europe being an important export destination, a slowdown here would also mean that the target of US$ 350 bn worth of exports this fiscal has also come under serious doubt. Already, the month of July has seen the sharpest fall in exports in almost three years.

Source: Financial Express

Pratip Chaudhuri, Chairman of India's largest bank SBI, has called for change in norms relating to NPAs. He believes that a ghost should not be seen in everything, where the account would need to get completely written off. As of now, most of State Bank of India (SBI)'s NPAs are in the mid-corporate and SME segments. With some consideration and stretching the repayment period, most of these accounts can be upgraded. The bank has also been working with borrowers in order to increase recoveries. The bank is advising the firms to either sell non-core assets or improve their capital structure.

Plus, Chaudhari believes that the Reserve Bank of India (RBI) should phase out the cash reserve ratio (CRR). Since the central bank doesn't pay interest on these reserves it acts as a tax to the entire system. In a way, having this reserve prevents lenders from reducing interest rates and thus stimulating the economy. Currently, around Rs 3 trillion in bank funds are parked as CRR. This is more than the aggregate loans of large lenders such as ICICI Bank and Punjab National Bank. Well, this could be a novel way to stimulate the flagging Indian economy.

After being named, the new Finance Minister Mr Chidambaram was quick to voice his support for lowering interest rates. His argument is that cutting interest rates could stimulate investments. The Reserve Bank of India (RBI), however, doesn't see much merit in this view. The central bank believes that lowering interest rates alone cannot prop up the investment cycle. Rather, an expenditure-switching policy is more important. What does that mean? It means reducing revenue expenditure by cutting down subsidies. The resources thus freed up can be utilised for public capital expenditure.

It is worth noting that investment in infrastructure has dropped by 52% to Rs 1 trillion from Rs 2.2 trillion a year ago. The worst hit sectors have been telecom and power. Moreover, corporate investments in large projects have declined significantly. The reason for this is not high interest rates alone. There are a slew of concerns in the business environment that are hindering investments. So it goes without saying that playing with monetary policy alone can be no quick-fix solution for the Indian economy. We completely agree with the RBI's view. It is high time the government fixes its finances while also initiating long pending reforms.

After years of stupendous growth, the Chinese economy is beginning to stutter. Nowhere is this more apparent than in the stock of unsold inventory that has piled up across shop floors, factory warehouses and car dealerships. Expectations that demand would revive and push up sales have not really amounted to much. Obviously, with an inventory overhang and slump in demand, production has taken a back seat and price wars have only escalated.

Efforts are being made to export these surplus goods. But whether there will be buyers overseas as well is questionable given that the developed markets are mired in recession. There are more problems. Jobs are becoming hard to find. Imports, especially of key raw materials, have also taken a hit. China has been the growth engine for the global economy since the crisis first deepened in 2008. But whether it will be able to maintain this role is quite suspect given the slowdown there. Indeed, a collapse in the Chinese economy will have deeper repercussions across the world especially the US and Europe.

The metal may have added a shine or two to even the smallest investor's portfolio in the past few years. Nevertheless, the RBI, government and economists see it as the prime culprit in India's deteriorating trade balance. Gold has assumed an indispensable place in an Indian investor's portfolio. Now that is nothing new. Indians have been investing in gold since time immemorial. But with paper currency losing value, the safe haven status of gold has attracted even the younger generation of investors. Add to that the increased presence of the precious metal in Indian commodity trading market.

Gold imports have therefore increased by leaps and bounds. Its prices too have shown no signs of softening. And since India imports most of the gold, its impact on our currency rates and trade balances has been substantial. The RBI sees this as a major reason for the country's lopsided trade balance. No wonder, the government and the RBI are the only parties cheering the recent spurt in gold prices. This they believe we reduce Indians' appetite for gold. But with the global economy showing no signs of stability, we think the RBI's optimism will be short lived.

As reported by CNN Money, global hedge fund managers are sitting on historic high levels of cash. The reason - they are waiting for the debacle and will use this cash at that time. The interesting part is that they expect this to happen within the next few quarters. They expect financial markets to crash and crash badly. This would be caused by a combination of worsening Euro crisis, US fiscal problems and a slowdown in China. The last is probably the worst since a large part of the world depends on China for its own economic growth.

The thing is that these things are not new. Europe has been in crisis for quite some time. The problems of US and China are not new either. So what is it that will trigger the selloff in such a short time? In our opinion the real reason is uncertainty. Even the largest of the institutions do not know what will happen and when it will happen. The thing is that the entire global economy is on tenterhooks. It will collapse at any time. But the exact time of it is not known. And large institutions like hedge funds are increasingly becoming cautious that when such an event does happen, they are not caught off guard.

Meanwhile, indices in the equity market in india have been trading weak right from the beginning today with the Sensex lower by around 85 points at the time of writing. Realty and Capital goods stocks were seen facing the maximum brunt. Almost all major Asian indices closed weak today with Europe too trading in the negative currently.

 Today's investing mantra
"We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Is the Indian bull market back?". Click here!

    1 Responses to "Is the Indian bull market back?"

    Prof. N K Jain

    Aug 24, 2012

    It is not advisable to buy good stocks at all the times at any price. The bad markets are perfect time to enter the well established companies at a discounted price.

    Like (1)
    Equitymaster requests your view! Post a comment on "Is the Indian bull market back?". Click here!