»5 Minute Wrap Up by Equitymaster

On This Day - 20 JULY 2009
Hot money is leaving India...but only for now!

In this issue:
» Beware of P-Note backed 'hot money'
» India Inc's results...so far so good
» Hillary Clinton's balancing act
» TCS's chief on the future of Indian IT
» ...and more!!
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As per numbers released by the SEBI (Securities & Exchange Board of India), net FII inflows into Indian stockmarkets have crossed US$ 6 bn (approx Rs 299 bn) in 2009 so far. This is good news for those who believe that greater FII investments always act like a virtuous circle - more FII investments pull in more FII investments and so on.

Now, here's another FII-related number that might be 'bad news' for punters - the total value of Indian shares held via participatory notes (P-Notes), after touching Rs 1 trillion at the end of May 2009, has declined by around 21% YoY in June 2009. For starters, participatory notes (P-Notes) are instruments used by foreign investors or hedge funds that are not registered with the SEBI to invest in Indian securities. In short, P-Notes remain an 'unidentified' source of foreign money.

Source: Business Standard, SEBI

And while P-Note holders might be selling their investments in Indian stocks (as data would have us believe), we remain unsure of their motive behind this i.e., moving out of Indian stocks. After all, we have always been unsure about their real motive behind investing in India in the first place.

So, while public data might make us and you believe that the role of P-Notes in FII investments is on a decline (as the above chart also shows), we should not count out a sudden strike that these 'unidentified' source of hot money can have on Indian markets. At least this is what history teaches us.

 Chart of the day
FIIs continue to wield their clout on Indian stockmarkets, as they have done for the past many years. This chart depicts it better.

Source: SEBI, Trend

A few days back, just before IT bellwether Infosys was to announce its 1QFY10 numbers we had mentioned how operating margins could turn out to be the swing factor in India Inc's first quarter performance. Now, around ten days down the line, everything seems to be going according to the script. Out of the results of 14 companies (excl. banks and financials) that we have analyzed in detail so far, as many as 10 have reported better than expected performance at the operating level. And the biggest game changer in most cases has been the raw material costs, what with prices of various commodities ruling at half of where they were a year back.

However, it is important to add that companies that operate in cyclical sectors or are producers of commodities have still not announced their numbers in a big way. Thus, a clearer picture will emerge only when these companies do the needful. For the time being though, the trend indeed appears to be heartening.

After being credited as the fastest growing economy in recent times, China is set to add another feather in its cap in the next 3 years. And what is it this time you may ask? Well, leading emerging market fund manager Mark Mobius is of the opinion that China's stock market may overtake the US as the world's largest by value in 3 years as state-owned companies sell new shares and the country's 1.4 bn people put more of their money into equities.

Equity as an asset class is holding a lot of allure for the Chinese as they are increasingly looking to increase their exposure to the stockmarkets. Also, state-owned companies are showing a new keenness in coming up with IPOs and ushering in some more private participation. As reported on Bloomberg, at present, China's market is valued at US$ 3.2 trillion as compared to US$ 11.2 trillion in the US. As far as the performance of the indices is concerned, while the S&P 500 has gained 4.1% in 2009, China's Shanghai Composite Index soared 75% this year.

Having said that, what needs to be noted is that with the brouhaha surrounding investments in emerging markets, stocks have run up considerably in China. This means that while China's stock markets may surpass the US in the future, it will definitely not be a smooth road going forward.

Source: World Federation of Exchanges

US Secretary of State Hillary Clinton is busy doing the balancing act on her visit to India. First, she had to urge India to become responsible in matters of climate change. That is a difficult thing to do given that US has been one of the worst polluters in its own path to economic development.

Now, she also has the unenviable task of balancing her stance on the outsourcing - an emotive- issue both in India and the US. Although she says that the US will not become more protectionist, it is easier said than done given the public resentment in the US over job losses.

In fact, US President Obama himself speaks out against outsourcing from time to time. We are not surprised. At the end of the day it is politics and not economics that is supreme in a democracy - be it India or America. We must take Clinton's assurances with that in mind.

TCS's chief Mr. S. Ramadorai anticipates critical changes in the overall industry structure in the future. As per him, the gigantic monoliths like TCS, Infosys and Wipro cannot survive in the same form. They will have to give way to smaller, nimbler and manageable entities. Investing in R&D for the long-term is the guru-mantra according to him. We could not have agreed more with the visionary.

At the time of writing, stocks in India were trading strong. The BSE-Sensex was trading higher by around 400 points (2.7%). Stocks from the IT sector lead the gains today, as seen from the 7% gain in the BSE-IT index. Strong results from Infosys and TCS and anticipations of similar performances from other IT companies seem to have propelled stocks from the sector into a higher orbit.

Other Asian markets also closed strong today, led by gains in Hong Kong (up 3.7%) and China (up 2.4%). Stocks in Europe have also opened the week in the positive.

 Today's investing mantra
"There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss, we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process" - Philip A. Fisher

P.S.: With an aim to serve our audience better, we have initiated a new series directed to women investors. The series is titled - Women's Weekly - and will be a conduit through which we will provide our views and recommendations on how should women go about managing their finances and invest for a better financial future. Click here to read the fifth article of this series.

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