»5 Minute Wrap Up by Equitymaster

On This Day - 31 AUGUST 2012
Are you waiting for the perfect time to invest?

In this issue:
» Are natural resources a blessing or a curse?
» The Chinese steel industry is bleeding
» Will India become an electronics hub?
» Disinvestment ETF: Govt's novel idea to raise funds
» ...and more!

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Where do you think the Indian share markets are headed? Are you anticipating some negative triggers from the Eurozone as well as the domestic economy? Are you awaiting that market crash that will give you the once-in-a-lifetime opportunity to riches? Or do you think the worse is over and the markets are gearing towards a solid bull run in the next 6 to 8 months? Are you closely tracking foreign institutional investors (FIIs) data to predict the direction of the market? Or are you monitoring inflation data and waiting for the RBI to cut interest rates?

In short, are you waiting for the perfect time to make your investments? If your answer is yes, then you are probably making one of the most common investing mistakes.

Let us explain. Every investor hopes to buy stocks close to the bottom and sell them around the top. Yet, why is it that a majority investors end up buying high and selling low? The problem is that when you're trying to outwit other investors, you are most likely doing what they are doing too. In other words, you become a part of the herd that's trying to guess the market direction. The history of the financial markets is replete with instances of how following the herd can be disastrous to your investments.

The other problem with timing the market is that you are only looking at the price movement of the stocks and not their intrinsic value. It is no coincidence that the world's most successful investors have always focussed on the later. So, instead of the assuming the tedious task of predicting macroeconomic events and market movements, take the bottom-up approach and focus on individuals stocks. If you find a stock with robust fundamentals, solid past track record and sufficient future growth visibility at a price that offers sufficient margin of safety, then simply invest in it.

Have you made money by predicting market movements? You can also share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Debt restructuring indicates the deterioration in the quality of loans given by lenders, mostly banks. If the quantum of restructured loans rises at a rapid pace, it is indeed a matter of worry. As per credit rating agency Crisil, corporate debt restructuring is likely to surge to Rs 3,250 bn in financial year 2012-13 (FY13), an estimated rise of 49% over the previous year. While restructured debt accounted for about 4.7% of total advances in FY12, the same is expected to increase to 5.7% in FY13. The main reason for this is the increasing financial stress on account of the prevailing slowdown in the economy. State utility boards, construction and infrastructure companies will account for a significant chunk of the restructured loans. Public sector lenders are expected to be the worst hit, accounting for about 80% of the total restructured debt.

Data source: Business Standard
*Crisil estimates

Nobel Laureate Joseph Stiglitz has written a rather well timed article in one of India's leading dailies. It concerns the all important question of whether natural resources are a curse or a blessing for a nation. Well, his views tend to lean towards the former option. He argues that on average, resource-rich countries have done even more poorly than countries without resources. We may not have to go any further in the article to know the reason behind it. A real life example of why this is the case is being played out right before our eyes.

We are alluding to none other than the recent coal-gate scam. Now, it is obvious that for a country to get full value out of any natural resource, it should be sold at the maximum possible price. But did this happen with the allocation of coal blocks in the country? Certainly not! Instead, the blocks were sold off for virtually a pittance. And the parties that came out winners were a handful of private firms at the expense of the citizens of this country. Even scarier is the fact that this is not an isolated incident. There are examples galore where corruption and back room dealings have led to massive squandering of our precious and limited natural resource. And in the process deprive us of money that may have well gone towards nation building. Little wonder we are a country with such extreme contradictions where abject poverty goes hand in hand with ostentatious display of wealth.

After a decade of explosive growth, China's steelmakers are now grappling with developmental bottlenecks and decreased profits. The Chinese steel industry lost US$ 299 m in the month of July 2012. It is expected to perform even worse in August. Most private steel mills are short of capital now, as prices of steel products keep declining and sales keep shrinking. The current situation is even worse than the economic crisis in 2008, and many private Chinese steel mills may go bankrupt in half a year if the industry gloom continues. Adding to the gloom, many steel trading companies were also deemed to be on the verge of collapse. The reason being high raw material costs, which is hammering margins of steel companies. China is the largest consumer of steel in the world. The slowing pace of China's economic expansion, compounded by the government's plan to move from investment-dependent growth to consumption-driven growth, is credit negative for China's steel manufacturers and for the world steel industry in general.

India is setting aside an amount of Rs 200 bn. This huge amount would be dedicated to lure global electronics makers to set up establishments in India. With this, India hopes to improve its image as an electronics hub globally. It would be offering incentives like tax breaks, etc. to these countries and companies. The plan is to send trade delegations to the large electronics hubs like Japan, Korea, Taiwan, Germany and US with these proposals. But interestingly there is one country which has been excluded from this plan. And that is none other than our neighbour China.

China, which is one of the largest destinations for contract electronics manufacturing, will not be invited to set up shop in India. It is a known fact that most of the Chinese electronics manufacturers face regulatory issues in India. A big reason for this is the huge price differential that exists between Chinese goods and those manufactured within India. Therefore, one school of thought suggests that the reason behind not including China is that it would hurt the domestic industry. Another school of thought states that China itself would not be interested in the proposal because the cost of manufacturing electronics in India is higher than that in China. In either which ways the bottom line remains the same. While other countries would hopefully set up their hubs in India soon, the absence of China is for certain.

Trust the Indian government to get innovative. Especially, in situations where it is starved of funds. Innovative taxes from retrospective effect, levies, and auctions. They have done it all. However, the most tried and tested method of divesting stake in PSUs has been in the back burner. Market volatility has not allowed the government to capitalise on its PSU holding to raise funds. Plus, there are legal obstacles. As per Securities and Exchange Board of India (SEBI) statutes, all listed companies are required to have at least 25% public holding by June 2013. PSUs will have to meet it by August, 2013. There are over a dozen PSUs which have to meet the minimum public holding guidelines. If disinvestment is done individually, the government may have to reduce stake below 51% in some cases. Hence it has come up with the novel idea of 'disinvestment ETF'. An exchange traded fund (ETF) is created on a basket of securities and involves a diverse mix of major companies that are present in the listed space.

The ETF will not only raise the much-needed funds to bridge national deficits, it will also help several listed PSU companies to reduce promoter shareholding. Oil & gas producer Oil and Natural Gas Corporation Ltd (ONGC), mining major Coal India, power generator National Thermal Power Corporation (NTPC) and power equipment maker Bharat Heavy Electricals Ltd (BHEL) could be among the state-run companies that are expected to constitute the much-awaited 'disinvestment ETF'.

After opening the day in the red, the Indian equity markets continued to trade below the dotted line. At the time of writing, the BSE-Sensex was down by 111 points (0.6%). The key Asian stock markets have closed the day on a negative note with Japan and Hong Kong leading the losses in the region.

 Today's investing mantra
"I have no idea where the market is going to go. I prefer it going down. But my preferences have nothing to do with it. The market knows nothing about my feelings. That is one of the first things you have to learn about a stock." - Warren Buffett

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