|»5 Minute Wrap Up by Equitymaster|
On This Day - 27 AUGUST 2010
India shining but only foreigners buying
In this issue:
---------------------------- Exclusively for Serious Investors... ----------------------------
Blame it on the FIIs. As per a leading daily, overseas funds have poured in a record US$ 12.4 bn into Indian equities in the first eight months of 2010. And they seem to be in no mood to slow down. Total inflows could rise to as much as US$ 16 bn by the year-end. Surprisingly though, domestic institutions do not seem to be so gung-ho about Indian equities. Their investment during the same period has amounted to just 5% of the money put in by FIIs. What more, they have turned out be net sellers in the past three months.
This then presents the biggest dilemma for a retail investor. Should he listen to the FIIs or side with the domestic institutions? We believe that both the FIIs and domestic institutions have their own sets of reasons for doing whatever they are doing. And so should an individual investor. According to us, there is just one way in which long term wealth in equities can be created. And it is to invest in companies that have a long track record of generating far more cash than they can consume internally. Buy into such companies at reasonable valuations and you can forever ignore what FIIs or other institutional investors are doing.
Note: the countries are representative of their respective benchmark indices
They continued to do so in the June 2010 quarter as well. In fact, in the June quarter, large caps managed to grow their sales and operating profits by 20% and 35% respectively. This compares to a less than 20% growth for their smaller counterparts. For the moment at least, it seems like larger companies have been able to better manage their operating efficiencies and capitalize on their economies of scale.
The revised Direct Tax Code suggests exactly this. Lower effective tax rates, exemptions on pension schemes and fiscal sops on housing loans are expected to help the tax payer retain higher income. This is turn is expected to drive higher consumption and savings rate. Both of these are necessary for India to sustain GDP growth rates close to the double digit mark. While this move is in the right direction, the government will need to ensure that it cuts down on subsidies and keeps its balance sheet healthy.
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