|»5 Minute Wrap Up by Equitymaster|
On This Day - 26 APRIL 2012
Is S&P threat a jackpot for value investors?
In this issue:
------------------ Most Profitable Investment Lesson we could learn from our Past.... ------------------
We have reasons to believe why long term equity investors have very little to worry about the announcement. The biggest amongst these is the success of the simple strategy of betting against the S&P ratings. Studies have shown that over the long term, a portfolio of stocks rated lower by S&P tends to beat the higher rated portfolio. In other words, stocks with an A+ rating have tended to underperform those with B+ or even C rated stocks over a long term horizon. The outperformance of poorly rated stocks has to do with expectations perhaps. On account of their poor financials and profitability, they happen to be valued so low that even a small improvement tends to lead to a big jump in their prices.
There is no reason why the same analogy cannot be applied to India's ratings. Agreed that India's near term outlook is poor. But with certain degree of reforms, India could easily solve deficit problems and also take its growth significantly higher. Stocks in India though do not seem to be factoring this into their valuations currently. This thus puts the risk reward ratio firmly in favour of a patient long term investor. Any more correction from the current levels and that would be the added icing on the cake we believe.
Thus, a possible downgrade of India by S&P and the resultant reaction of short term investors could actually turn out to be a bonanza in the long term for patient investors.
Take the US economy for instance. It is suffering from a severe debt burden, an ailing economy and widening gaps between the haves and the have-nots. When the crisis reaches its zenith, it is likely to trigger massive policy changes. The economy has to prepare itself for more taxes and spending cuts. The future of the US and several unscrupulous developed economies is going to be marked with a lot of rude shocks.
The truth is that the government is in dire need of funds. It was able to make up a large part of its fiscal targets in FY11 mainly from the funds it received from the 3G auction. So why should it lose an opportunity to repeat history with the 2G auction as well. In reality, the price being asked for the 2G spectrum is ridiculously high. One should not forget that the 3G spectrum is premium to the 2G spectrum. Therefore the price of the latter should ideally be below that of 3G and not higher. But our dear regulator or government fails to understand basic common sense.
If the Fed actually stops worrying about inflation, it could do the country a world of good. For three years economists have been worrying about runaway inflation. But, even now inflation remains below the Fed's 2% target. The USA is under a huge mountain of debt which was accumulated during the bubble years. Higher inflation levels will help erode the real value of debt and help speed up the recovery. Inflation would also render idle cash unattractive, spurring on more productive investments. So is QE3 in the offing? Well, if things take a turn for the worse it is definitely on the cards.
Obviously, there are voices from various quarters questioning the extent of austerity measures that the British government has imposed. One thing is certain. Taking on more debt to solve the problem of debt is not going to do the British economy any favours in the long term. Thus, it will be interesting to see what the Cameron government chooses to do. Will it stick to its stance? Or will it succumb to public pressure given that it has been sliding in recent polls? Only time will tell.
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.
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407