»5 Minute Wrap Up by Equitymaster

On This Day - 18 MARCH 2010
"When that sell-off happens, it'll be a great time to buy"

In this issue:
» Ajit Dayal's advice to retail investors
» China could be the biggest bubble in history
» Grey market premiums for IPOs are back
» Oil intensity is coming down globally
» ...and more!!

"Buy great companies. Buy good managements at good valuations. You'll be doing very well in the future." These are the words of Ajit Dayal, our founder, who recently spoke at the Equitymaster Investment Summit 2010. In his presentation, Ajit discussed where the Indian economy and stockmarkets are headed in the next 10 years.

When asked about his view on the impact of the global recession on the Indian markets, Ajit said, "As long as we have short term hedge fund money coming in, there will be a knee-jerk reaction. The Dow will crack from 10,700 back to 8,000. People will have a selloff of all stocks. And India will get killed and crushed, because the money that's coming in is basically short term money still. So there will be a selloff. When that sell-off happens, it'll be a great time to buy!"

Ajit also said, "People ask - should we wait? Are we too late? My opinion is if you don't have anything invested in the stock markets, start investing. If you have Rs 100 to invest, start with 20 this year. Make it 30 next years...just keep on buying. And when that crack comes, buy a lot more. And if the crack doesn't come up, the 20-30 you have invested will go up in any case."

Our view is no different from Ajit's. We too believe trying to find cheap and good quality stocks and investing in small amounts despite the market conditions is a good way to gradually build a strong long term portfolio. But you have to be very careful in your stock selection. Buying a 'hot stock' just because everyone else around you is buying it can be highly risky.

If you missed out on The Equitymaster Investment Summit 2010, don't lose heart! We're bringing out a special Limited Edition Investment Summit twin CD pack. In it you can listen to investment strategies and insights by Ajit on the world economy, India and the biggest risk it faces, the 'must-haves' in your portfolio, ' the 5 categories of investment to build your wealth'....and so much more. To get your copy, please click here.

 Chart of the day
India's inflation is likely to cool off by the end of 2010. At least that's what a report published by a leading daily and highlighted in today's chart of the day is telling us. Economists seem to be of the view that once the country gets a normal rainfall, spiraling food prices, which were the main cause behind the recent spurt in inflation, could come under control, thus resulting in lower inflation. What is more, a high base effect would also play its part in lowering inflation expectations. However, what could spoil the party are higher prices of commodities, mostly industrial, as governments across the world continue to print money to overcome economic slowdown. And hence, this is where the attention of the Indian central bank would be fixated to in the coming months.

Source: Mint

Have you noticed a change in the IPO market lately? Suddenly, more and more of them are experiencing big bang listings. In other words, a greater percentage of them are giving big listing gains to the subscribing investors. So, is it a case of a bull market excess making a comeback or some better sense prevailing amongst promoters? It seems more a case of the latter than the former to us. Yes, that's right dear reader. Promoters have actually started keeping some money on the table for investors. Atleast that's what it appears to us. We are no fan of IPOs. We believe that most of the time they are either priced too high or come equipped with unproven financial track record. Thus, most of them are not worth subscribing in our books.However, of late, a few of them have slipped through our strict criteria. Not only have the track records been impressive but the pricing has also enthused us. What is more, grey market premiums that were a rage during the last bull market are also making a big comeback.

Looks like the fizz is back in the IPO markets. However, investors subscribe to them at their own peril. Recent issues, we believe, could have been attractively priced so as to lure investors back into the primary market. Thus, after having achieved their objective, the investment bankers could once again resort to unreasonable pricing. Hence, going forward, every IPO should be analyzed even more thoroughly to check whether a track record is in place and that valuations incorporate a sufficient margin of safety.

The demand for crude oil follows one golden rule - it moves in tandem with overall economic activity. Hence a booming economy leads to greater consumption. At least that has been the pattern so far. But it seems that there is a structural shift in this relationship.

According to estimates by global energy think tanks, 1% increase in global economic growth now results in growth in oil consumption of anywhere between 0.31% to 0.51%. In fact, global oil intensity - oil demand growth divided by economic growth - has declined by about 2% every year over the last decade. And now the decline is becoming faster.

The reason behind this change is the crude price spike of 2008, rising efficiency, conservation measures and a greater emphasis on alternate energy. Important to note that despite this relative decline, in absolute terms crude oil consumption will keep growing. From around 85 m barrels per day today, it is set to grow to 110 m barrels per day in the next 10 years. It will continue to be the most important commodity in the world.

If you thought that after the subprime crisis (a result of the housing bubble in the US economy) there won't be another bubble for some time to come, think again! James Rickards, former general counsel of the well known hedge fund, Long-Term Capital Management is of the view that China is in the midst of the greatest bubble in history. The reasons are not hard to find. The nation's massive monetary stimulus has raised the risk of triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects.

What is more, in reference to China's policy of pegging the Yuan to the dollar, Rickards believes that the Chinese central bank's balance sheet resembles that of a hedge fund buying dollars and short-selling the Yuan. Obviously China needs to raise interest rates and curb excess liquidity to prevent rampant inflation. But whether China pays heed to all these concerns remains to be seen given that the dragon nation has sent signals that it has a mind of its own. China also has long term problems in terms of wasteful allocation of resources by state-owned enterprises and the country's human rights record.

As per a leading daily, overweight positions in emerging markets have been steadily coming down. A net 53% of foreign fund managers were overweight emerging markets in November, 47% in January, 35% in February and 33% in March. Further, surprisingly, flows into US equity funds have been positive for four straight weeks. However, the report further highlights that Asia-Pacific investors have very recently again turned overweight on India. This is in sharp contrast to a significant underweight last month. Looks like FII buying is set to make a quick comeback after the recent fall in the markets in February.

With economic growth firmly on track, the priority needs to be ensuring that prices are under control. This is the opinion of the chief of Planning Commission Mr. Montek Singh Ahluwalia. Speaking to a business daily, Mr. Ahluwalia has expressed his confidence over RBI taking the right decision. He believes that the central bank will without doubt utilize its monetary tools (CRR, SLR, repo rate and the like) in the upcoming policy review to rein in the price rises.

As far as statistics go, the annual wholesale price inflation (WPI) accelerated to 9.9% in February 2010. In fact, the finance minister expects it to top 10% by the end of this fiscal. With GDP growth nearing 8% in FY10 and expected to crossover the 9% barrier in the next 2 fiscals, there could be no better time to ensure that India does not fall into a surplus liquidity trap like economies in the West.

Anyways, Indian markets are trading quite lackluster today with the BSE-Sensex down around 30 points at the time of writing. Among sectors though, steel and telecom were seen garnering investor interest whereas auto stocks were trading weak. Weakness was also being observed across most Asian indices and Europe too has opened mostly on a negative note.

 Today's investing mantra
"Fear is the foe of the faddist, but the friend of the fundamentalist." - Warren Buffett

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