Markets between the devil and the deep sea?

Dec 3, 2011

In this issue:
» Why high food prices remain sticky?
» FM rules out stimuli and QEs for India
» Insurance companies may soon debut on the bourses
» MFIs assume a new avatar
» ...and more!
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For those who have not tracked markets for more than a decade, things have hardly ever been as uncertain as they are now. It is no longer select sectors or fundamentally weak companies where the insecurities lie. But the risk of going belly up is associated with some of the biggest banks, powerful currencies and fastest growing economies. At such times one wonders if the best place to keep monetary assets is under the carpet.

True, not just investors, but even company promoters, managements, central bankers and policymakers can predict 12 month numbers with little certainty these days. The Reserve Bank Of India (RBI) is still not sure whether inflation will cool off in 6 months. Infosys prefers giving a muted guidance rather than an optimistic one despite the rupee depreciation. The Indian government is unsure of making the Parliament function leave alone passing reforms. And when it comes to economic bodies like the World Bank and the IMF, the focus is on safeguarding the Euro currency rather than boosting global economy. But even then keeping the steep inflationary prospects and devaluation of currencies in mind, investors have to look for assets that can offer safe and reasonable returns over the longer term.

Over the next 12 to 24 months, the crisis in the Euro zone may assume bigger proportions. The likes of Marc Faber are predicting an economic crash in China that may take the global demand for commodities to new lows. Even the economies of Australia, Africa, the Middle-East and Latin America will not be spared an economic gloom. In fact the Chinese economic downturn is expected to be far scarier than the recession in Europe or the US. Thus investors need to keep their portfolio guarded against imminent shocks in the near to medium term. However, we believe that the principle of reversal to the mean will ensure that companies and economies that are geared for long term benefits will bounce back. And investors will be better off entrusting some of their wealth to such entities with a long term horizon. Fortunately for us, the Indian economy and select companies here do offer some enticing prospects. As long as you do not worry about quarterly earnings, uncertainty and volatility in markets should be a boon in disguise.

Should one stay away from stock markets fearing uncertainty and volatility in the near term? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
Even as spiraling food prices threaten to keep the RBI's inflation targets well beyond its comfort levels, data from the RBI shows that the reason for price stiffness is not just inadequate supplies. If one looks at the data on food consumption over the past two decades, the per capita expenditure on food products has gone up nearly 10 times. At the same time however, the proportion of expenses on food products as a percentage of total consumption has consistently fallen. This is not just the case in urban areas but amongst the rural population as well. That explains why food consumption has become relatively inelastic to hike in prices.

Data source: RBI

Indian economic growth seems to be pulling back. As per the recent data, the country's GDP grew at a mere 6.9% during the quarter ended September 2011. But the Finance Minister has ruled out any economic stimulus to boost the growth this time around. In the past, the government had announced several stimuli measures to boost the growth whenever there was any hint of a slowdown. However, this time things are different. The fiscal deficit has swelled thanks to the enormous subsidy bill. At the same time, revenues have remained muted. As a result, there is very little that the government can do in terms of stimulus. But the finance minister is hopeful that policy action like the approval of FDI in retail can help bring back foreign capital to the country. This would be able to drive growth. But the way political parties and people alike have reacted to the FDI issue, it is unlikely to boost the confidence of the foreign investors. The government has to do much more to be able to attract them to the country. We feel that policy reforms maybe a good area to start with.

Last year we saw how the microfinance institutions (MFIs) went from being hailed as an emerging star to a fallen angel after being hit by some adverse state legislation in Andhra Pradesh, its biggest market. In order to sort out the concerns relating to the MFI sector and to chalk out its future course, the RBI announced yesterday that it was introducing MFI as a new category of non-banking finance companies (NBFCs). The NBFC-MFI will have to be a non-deposit taking NBFC with minimum net owned funds of Rs 50 m. An NBFC which does not qualify as an NBFC-MFI will not be allowed to extend loans in excess of 10% of its total assets to the microfinance sector. All fresh NBFC-MFIs will have to maintain a capital adequacy ratio consisting not be less than 15% of its aggregate risk weighted assets. They will have to maintain an aggregate margin cap of not more than 12% and interest on individual loans will not exceed 26% per annum; calculated on a reducing balance basis. We believe that this move for the sector can certainly have far-reaching social consequences. However, investors in micro finance companies need to adopt a wait and watch policy before getting optimistic about long term prospects.

The government has not toed the line as far as its disinvestment targets go this year. However, after much deliberation, it has given the go ahead to insurance companies to get themselves listed on the bourses. The approval comes with some conditions like completion of 10 years in business, an embedded value twice the paid up capital and a certain solvency margins.

Interestingly, healthy profit generation is not something that can be associated with most life insurance companies. While the industry has hailed the decision, we wonder how many of the life insurers will jump to participate in capital markets. This is because the permission to do so comes at a time when markets are choppy and volatile, investors are wary and insurance companies dragging their feet to generate volumes and decent premiums. This in turn imply unattractive valuations. However, the good part is that now we will be able to demand and see greater transparency in the operations of these companies.

After witnessing bloodbath last week, the world stock markets registered a sharp bounce back in this week's trade. Except for China all the markets registered healthy gains. The US stock markets were up 7.0% during the week, largest weekly gain recorded since July 2009. Surprise drop in the US unemployment rate and general improvement in market sentiments after German Chancellor advocated for tighter rules on government spending boosted markets.

The Indian stock markets were up 7.3% during the week taking cues from the global stock markets. Revival in foreign fund flows and bargain hunting at lower levels drove markets higher. It would be interesting to see how the next week pans out for world markets considering investors are keenly eyeing the outcome of European Summit to be held on 9th December.

Data source: Yahoo finance, Kitco

 Weekend Investing Mantra
"Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least." - Warren Buffett

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2 Responses to "Markets between the devil and the deep sea?"

shome suvra

Dec 5, 2011

It is to be ascertained that how much of the Euro-zone crisis has already been priced in the Indian share market because throughout November Market has fallen a lot and Re depreciation added a lot to the adverse impact. With U.S. doing well and euro zone policy is stabilized market has a chance of extended recovery if policy reforms in India come in place.



Dec 4, 2011

In these times, Capital Protection is critical with clear Stop Losses defined and executed.

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