»5 Minute Wrap Up by Equitymaster

On This Day - 11 MARCH 2013
'Insider trading is rampant in India'

In this issue:
» India's rating saved but India Inc pays the price
» Will RBI cut rates further?
» FIIs are exiting these stocks
» Fed's QE responsible for Dow hitting new highs
» and more....

----------------------------------- Why Do You Still Rely On Tips From Your Broker? -----------------------------------

Is your stock portfolio making you money?

More importantly, is it better off now compared to 5 years ago?

A lot of people today have completely given up on stocks... And if you are one of them, I don't blame you.

But the fact is that if you follow a certain approach to investing, we believe there is a lot of potential to make money in the years to come.

In fact this same approach has already delivered exciting returns in recent years!

What's more is that it's extremely easy to follow...

And that's why we are extending to you this no risk opportunity that we have designed exclusively for you.

So you see there's every reason for you to try this approach.

Go ahead, click here for the full details...


Insider trading is a phrase that has landed many global fund managers into trouble. It is defined by Investopedia as the buying and selling of stocks by someone who has access to material non public information. Naturally such trades are unethical and potentially damaging to the integrity of capital markets. This is because someone has an advantageous position because of the information. And this someone misuses his position to exploit the markets for his or her personal interest. Therefore regulators around the world pay a lot of attention to this aspect. To the extent it is possible; insider trading is controlled and punished.

But as Mr Narain, the current Managing Director of National Stock Exchange (NSE) opines, insider trading is rampant in India. And this is in the smaller companies at what he calls 'chillar level'. The insider trading is fuelled by the Indian investors' interest in 'tip based' investing. Naturally to generate tips, brokers can and do resort to insider trading. In many cases, the managements of the companies are party to such tips. The idea is to try and boost prices of these stocks. And in many cases this is done through tips based on insider information.

It is not that India does not have adequate controls and mechanisms to detect and prevent insider trading. Unfortunately most of these systems are in place to capture the larger fish in the market. Therefore if there are instances of insider trading in the case of larger companies, these events are cracked down and individuals are taken to task. But at the grass root levels the systems fall short.

As Mr Narain points out the insider trading can be controlled in two ways. First is the use of technology to tap into the networks. This would throw up all cases with ease and minimal cost implications. The second and more important is to change the attitude of the regulators. Currently the attitude is to chase the big guys and ignore the smaller stuff. Unfortunately it is this attitude that fuels the idea that the perpetrators can always get away with their crimes. Once the attitude is changed or forced to change, all instances of insider trading can and will be controlled.

For investors there is a huge takeaway in what Mr Narain has said. Investors need to keep in mind that the 'tips' they receive could just be an offshoot of insider trading. Such tips usually jack up the prices in the short term. But unless fundamentals follow, such momentary price spikes will correct just as quickly as they came about. And when this happens investors will lose their hard earned money. This is why it is always better to do your own homework when buying stocks rather than relying on a 'reliable' tip.

Do you agree with Mr Narain that insider trading is rampant in Indian share markets? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
The engineering sector in India has taken a hard hit with the slowdown. Persistently high inflation rates combined with the hawkish stance of the Reserve Bank of India (RBI) has hurt capex plans of most companies. This in turn has led to a slowdown in demand for engineering sector. As shown in the graph, things are not too good on the export front either. There has been a decline in demand in nearly every export market in the period April 2012 to January 2013 as compared to the year before numbers. The reason for this is the recession brought about by the crisis that has gripped the global economy since 2008. Unless the global climate turns favorable demand from export markets is unlikely to revive. Therefore the only hope for the sector is the domestic market. For this there is a need for policy reforms that will boost the investment climate. Unless that happens, the woes of the engineering sector will not end.

Data Source: Financial Express

India's slowing growth and rising fiscal deficit has been a matter of great worry. It has been a big headache for the Finance Minister. Rating agencies have been threatening of downgrading India's rating to junk status if the financial condition deteriorated further. If this happens, attracting foreign capital would become even more difficult and expensive. Keeping these risks in mind, the FM has launched an austerity drive. But this is taking a toll on highly indebted corporates. Tight liquidity has resulted in a torrent of corporate rating downgrades. During the first half of FY13, rating agency CRISIL downgraded 484 companies. This went up to 530 downgrades during the October-February period. This means over 1,000 downgrades this fiscal. It must be noted that there were just 492 downgrades during the whole of FY12. Banks have been facing the risk of rising bad loans. As such, they have shut the doors on small and medium enterprises. This has been the worst affected segment. It will take a while before these companies escape from the debt trap.

The RBI had its job cut out over last few Monetary Policy reviews. To turn down the government's appeal for aggressive rate cut. After all, it saw little sense in cutting rates when inflation was nowhere near its comfort zone. More so because the government did little to assuage its fiscal deficit and inflation worries. Hence review after review the RBI stuck to its dovish stance. Rate cuts though few and far between, hardly offered enough growth stimulation to the economy. However, the Union Budget and several other economic indicators seem to suggest that the RBI might have to explain itself more. Especially if it chooses to stick to the current interest rate levels much longer. For one, the government reiterated its commitment to fiscal consolidation. The FM is targeting fiscal deficit below 5.2% for FY13. FIIs and foreign investors will continue to be welcomed. The risks of government's massive borrowing programme may also be mitigated if the proposed inflation linked bonds find wide acceptance. Fall in oil prices could be lower inflation in the days to come. Rise in Chinese exports gives cues of global economic recovery. Thus the RBI will have to articulate the next Monetary Policy review carefully to justify its stance. Having said that, we believe, as in the past, Dr Subbarao and his colleagues should not give in to undue pressure.

One would not be entirely wrong in saying that retail investors tend to have a love-hate relationship with foreign institutional investors (FIIs) . They love it when FIIs buy into stocks that are owned by them. And would of course dislike it when FIIs exit such stocks! After seeing an outflow of Rs 27 bn in CY11, FIIs' inflow into equities stood at whopping Rs 1.3 trillion during CY12. According to the Economic Times, FIIs have significantly reduced stakes in companies whose financial performance has not been up to the mark. Instead, they seem to have favored large caps. Given the overall uncertainty that has been surrounding the economy and broader markets over the past year, this seems like a good strategy. However, we believe that one must also keep a close eye on the broader valuations. Currently, good quality stocks are not cheap. And they haven't been for a while now! With FIIs favoring such stocks, the overall expectations also would have risen. This could possibly make large caps volatile especially in cases of the financial performances failing to meet expectations.

Somewhere in April 2007, there was an interesting story doing the rounds. It had to do with the troubled economy of the nation of Zimbabwe. And how its stock market was up nearly 7 fold since the start of the year. Cleary, the news left anyone who had some idea of the state of Zimbabwean economy , in a state of shock. With the entire economic machinery on the verge of a collapse and with inflation running amok, how could Zimbabwe possibly have the best performing stock exchange in the world?

Well, the answer can be summed up in two words 'money printing'. You know, with the Government running huge deficits, it had no other option but to print money. And most of this money went straight to where people thought was the best destination to beat inflation. So, up went the country's stock markets, rising more than the jump in the country's consumer price inflation. But did this money lead to real wealth creation? Certainly not. There was no investment happening on the ground as entrepreneurs were scared to put their capital at risk. Thus, it was clear that no sooner would the money printing stop, stock prices could again collapse.

Now, are you finding any parallels to this story in the current environment? How about the US Dow Jones index? It made a new high recently despite the economy not being out of the woods yet. So, is the new found spring in Dow's step also a result of cheap money printing? Quite possible we believe. For had the US policymakers not spent close to some US$ 8 trillion between deficit spending and money printing, we wouldn't have seen the highs in the stock markets we are seeing right now. And just like the Zimbabwean stocks, a collapse if not in the short term can certainly not be ruled out over the course of the medium term we believe.

In the meanwhile after opening the day on a positive note, Indian equity markets have slipped into the negative territory albeit in a small way. At the time of writing, the Sensex was down by 3 points (0.02%). The other major Asian stock markets have closed the day on a mixed note with Japan and Taiwan closing in the green while China and Indonesia have closed the day in the red. Europe too has opened the day on a subdued note.

 Today's investing mantra
"The risk of an investment is described by both the probability and the potential amount of loss. The risk of an investment-the probability of an adverse outcome-is partly inherent in its very nature. A dollar spent on biotechnology research is a riskier investment than a dollar used to purchase utility equipment. The former has both a greater probability of loss and a greater percentage of the investment at stake." - Seth Klarman

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407