Investing for 'listing gains' could be dangerous

Sep 28, 2010

In this issue:
» Gold could rise above US$ 1,500 an ounce
» Silver is at its 3 decade high
» FIIs continue to pour money into Indian stocks
» Japan is a time-bomb that is waiting to explode
» ...and more!!

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IPOs have become the 'buzzword' in the Indian markets in recent times. With FIIs pouring money in droves, the euphoria on the bourses has swelled. And this has encouraged companies to announce IPOs by the dozen. Investors, too, seemed to have got carried away by the notion that markets are set to rise further. After all, the economies of the US and Europe are down in the dumps. China is also looking a tad shaky. Where will the FIIs invest but in India? And so, many investors appear to have given a thumbs-up to quite a few of these IPOs that have come out. This is apparent from the oversubscriptions that some of these IPOs have received. Not just that, investors are taking a shot at the ongoing IPOs in the hope of some easy money on the day of listing.

This practice is risky as the possibility of investors getting caught on the wrong foot is quite high. Look at what happened to the Reliance Power IPO. After all, the investment process whether in IPOs or in already listed stocks remains the same. The management has to be sound, the financials strong, the future growth prospects bright and the valuations attractive. In effect, the idea is to generate long term sustainable returns from the business that you are investing in. And so, investing in IPOs to cash in on 'listing gains' is not a practice that is likely to build shareholder wealth. Moreover, one cannot rest easy on the notion that FIIs will keep pouring money into the markets. This in some sense could be dangerous. Because if an untoward event happens, FIIs will pull money out faster than you can blink an eye. And one need look no further than 2008 to know the repercussions of the same.

 Chart of the day
Power shortages and lack of electricity are the bane of the people of India. As today's chart of the day shows, India accounts for more than half of the people in developing Asia that had no access to electricity in 2009. What is more, according to the International Energy Agency (IEA) and published in the Economist, around 1.4 bn people had no access to electricity in 2009, the majority of which was in the villages.

Data Source: The Economist

If you thought that the yellow metal gold has already rallied too much and is now ripe for a correction, you may have to listen to this view. And it comes from no other than the world's largest miner of the precious metal, Barrick Gold. As per Reuters, Barrick Gold is of the view that gold prices could 'easily' outperform recent record highs to rise above US$ 1500 an ounce in the next year. "Given all the factors that are there to support gold -- macroeconomic factors, supply and demand factors, geopolitical tensions, a still-simmering sovereign debt crisis -- I think the ledger has so many more reasons to buy gold than to sell," the company's CFO is believed to have said. He also said that we are still far off from the inflation adjusted high of 1980s, which is in the range of US$ 2,300 an ounce. Hence, significant upside from here is still very much possible.

It should be noted that Barrick is the same company that spent close to US$ 6 bn last year and completely eliminated its fixed price hedge book. This allowed it to take full advantage of rising gold prices. Given how gold's prices have risen since, it indeed turned out to be a very wise decision.

The yellow metal has been north bound for quite a while now. Being a store of value gold has found its way into investment portfolios as well as jewellery shops. But its poorer cousin, silver, has after all not stayed way behind either. Infact silver is currently at its 3 decade high. However, the similarity ends here. While the rally in gold prices may continue until the uncertainty over global economy eases, silver may take a backseat. The precious white metal essentially has been riding on the fortunes of industrial productivity in emerging markets. This too may continue for sometime. But in the case of a slowdown in economic activity, particularly in China, the impact may be severe on silver. While investors will seek to find a safe haven in gold, silver may bear the brunt of lesser industrial usage. As they say, not everything that shines is gold.

FIIs continue to pour money into Indian stocks. In fact, fund flows into the Indian markets are nearing their three year highs, and there seems to be no stopping them. These flows are largely driven by two factors. One is the absence of high return opportunities in the developed world. And two, money is available cheap, and in plenty. But India is not the sole beneficiary of the FIIs' largesse. Other emerging markets in the Asian region have also seen huge inflows over the past few weeks.

So, does this vindicate the long term Indian growth story? Yes, but only to a certain extent. This is given that FIIs are generally fair weather friends. A whiff of problems in the developed world or a tightening of liquidity can turn the tables on them.

The next potential bad news could come from Far East that is from Japan. Japan is like a time bomb that is just waiting to explode sometime in the future. It has the oldest population in the world. A population that needs to be taken care of through pensions that are to be funded by the younger working population. But the ratio of the old to the young is increasing day by day. To top this, the savings rate in the country is declining as older people tend to consumer more rather than save. This does not bear well for a Government which looks upon retail investors to fund its debt programmes. Debt that is badly needed to curb the soaring budget deficits in the country. All in all, it seems that Japan will be the next epicenter of crisis unless remedial actions are taken. Unfortunately, with the unique problem like this, the only solution Japan may have would be to turn to international monetary associations for rescue. We hope its government is able to find a better way out of this mess.

It a fact that seemed more and more apparent since the turn of the new millennium. Whatever doubts remained, were dispelled after the global financial meltdown. The world economic order is changing. Gone are the days of the absolute domination of the West. In fact, as per the World Bank, the developing countries have come to the global economy's rescue. What's more, the emerging nations will account for a bigger portion of the global economy than developed countries by 2015. The financial institutional terms developing economies as "the new locomotives of growth which will move global growth forward while high-income countries remain stagnant." In terms of fundamental the strength of the emerging nations is the relatively unlevered balance sheets and the technological catch-up they have to do. Simply put, the same challenges that these countries were once thought to be cursed with can now become boons.

After opening on a volatile note, markets slumped deep into the red towards the afternoon session. The BSE-Sensex was trading 93 points lower at the time of writing this. Some gains were seen in the power and consumer goods space. The rest of the indices all shed points, with FMCG down on profit booking. The rest of the Asian majors were trading weak, with both Nikkei and Hang Seng down 1%.

 Today's investing mantra
"I'm sure a crash like 1929 will happen again. The only thing is that one doesn't know when. All it takes for another collapse is for the memories of the last insanity to dull." - John K. Galbraith

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6 Responses to "Investing for 'listing gains' could be dangerous"

sunilkumar tejwani

Sep 29, 2010

Although investing in IPO for listing gains is a bit trocky, coz' the bet on some ipo may or may not click. However, considering recent listings, majority have given decent to astronomical returns barring a few. Take the case of SKS Microfinance & Jubilant food, well they returned a lot in a very short time. Investors, while anticipating listing gains should carefully study various factors/fundamentals of the issuer company, & after that take a call wether something is left on the table for investors.



Sep 28, 2010

I would like to believe some solution will be found by the coutries globally to avert such a tragedy. This letter gives a reminder to all, to be cautious n prepared



Sep 28, 2010

It is simply crazy..most of the issues are overpriced by the so called INVESTMENT Bankers...It does not make any sense to invest in IPOs at current times..i completely keep away from IPOs ..I had earlier burnt my fingers by investing in IPOs..



Sep 28, 2010




Sep 28, 2010

The guide i think help me a lot.


Agnel Pereira

Sep 28, 2010

As always, I love to read your five minute notes. In an article written in Jan 2010, I had stated that the impact of the 2008 economic downturn would not have been felt as much, if China and India had another 5 years of economic progress. In other words, if the problems had come 5 years later, world would not have felt the impact so much. Already there a signs that world authorities admitting the fact.
The fact that developed economies will fall and falter further can be justified from famous forecaster of Trends World International, Gerald Celente's forecasts that there will be food revolution in the US in 2012. perhaps the process has started, US funds are all over the world, especially in the emerging economies. Japan is dying too, as per your report. EU countries will survive for a while as they have a better infrastructure for survival.
Lastly, it is in the best interest of the world if the so called finance or banking professionals who are not required in the industry, should take up farming and the governments that are trying to bail out financial institutions, should rather support such farming ventures so that more food can be generated. There is enough land everywhere around the world, its only a problem that there are not enough people to work in the farms. This day will soon come, since the Necessity is the mother of all Inventions!

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