What 2014 holds in store for investors? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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What 2014 holds in store for investors? 

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In this issue:
» Outlook for gold
» New incumbents in Indian banking in 2014
» Bitcoin's future as a medium of exchange
» Recovery on cards for Indian economy?
» Will FIIs continue their love for Indian stocks
» ...and more!


00:00  Chart of the day
 
The year 2013 is past us now and it's time for new beginnings. But we can hardly start on a right note without a review of what happened last year.

2013 was a year that India Inc wished had never come. It was a testing year for India Inc with the country facing macroeconomic challenges on multiple fronts. Weak growth, high inflation, slowdown in the investment cycle and rupee volatility gave little space to India Inc to grow. And as General Elections take centrestage in the coming year, it is unlikely that the year 2014 will be remarkably different.

One of the biggest headaches for India Inc was the rise in bad debts. The hangover of the same is likely to continue in 2014. The firms went overboard with borrowing and investment plans when the money was cheap. And now with the slowdown in demand, they are stuck with overleveraged balance sheets coupled with low capacity utilization levels and stalled projects.

As per an article in Economic Times, around 3,700 listed companies had debt worth Rs 24 trillion at the end of third quarter of 2013. That amounts to around a quarter of India's GDP. What is even more alarming is that one third of this debt is with companies that are not earning enough operating profits to cover their interest expenses. With huge capacities built on borrowed money and slowdown in the growth, companies are stuck in a debt trap. The problem is so deep that steps like cost cutting, refinancing and restructuring are unlikely to help.

Interest Cover For Corporates In 2012-13

Already, the indiscreet use of CDR is reflecting in the performance of CDR cell. More and more accounts post restructuring are slipping back to NPA category. As RBI tightens rules for restructured loans and goes tough on bad debts, is there a way for companies to get out of the debt trap in a low growth phase?

As lenders become aggressive in recovery, the firms have little choice but to monetize the assets. Hence, the firms that can find the way out will be the ones willing and able to sell their assets. Infact, some of the firms, despite not being under distress are already exiting non core businesses for a better capital structure. Going forward, chances are that only the deserving companies with good quality assets will be allowed to use the lifeline of CDR.

We just hope that this consolidation out of desperation will lead to higher efficiencies in the business, improved capital structure and survival of the fittest. That said; such steps will not solve problems overnight. While the companies may find a way out of debt trap, unless investment cycle and demand in the economy revives, the businesses are unlikely to grow. To get out of low growth trap, we will need to speed up reforms, get rid of the bureaucratic delays and make India more investor friendly. It is not going to be easy for the Government to deliver, especially with elections scheduled in the first half of 2014. However, unless these steps are taken with strong political will, one can hardly hope for any recovery in the economy or better future for India Inc

Do you think that the year 2014 will see India Inc come out of debt and low growth trap? Let us know your comments or share your views in the Equitymaster Club.

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2:15
 
All streaks, good or bad, eventually have to come to an end. And so it was with gold we reckon. The year 2013 is officially over now and so is gold's uninterrupted 12-year bull run. In dollar terms, gold closed the year some 30% down. But investors should take heart from the fact that it's still up massively since the year 2000 with overall returns still positive in real terms. What sounded the yellow metal's death knell was the recovery in global economy and the total virtual absence of any inflation of any kind. The fact that the US Fed would embark on its taper also reduced the allure for the metal. However, investors would be making a big mistake if they are taking things at face value we believe. The world is still floating on a gigantic ocean of debt and hence, all the threats imaginable that could bring gold back in the spotlight are very much existent. Consequently, the current low prices could be a good opportunity to stock up on the yellow metal so that it forms at least 5%-10% of one's overall portfolio. Whether the prices could spike up again in 2014 or 2015 is anybody's guess. But over the long term we are pretty much confident that it's still the best insurance for a currency system that's as fragile as ever.

02:50
 
Some of the most favoured names have withdrawn from the race. Yet the issue of new bank licenses remains the most awaited event in Indian financial space in 2014. The applicants too are all geared up to put their best foot forward once the license comes their way. Some have even gone to the extent of hiring retired PSU bank chiefs and ex-officers of SEBI and RBI on their boards. All this in an attempt to present themselves as the most suitable candidates for the licenses. The non banking finance companies are supposed to have an edge over the banks in term of winning the license. Their experience in lending in semi urban and rural areas will earn more brownie points. Plus it will be an easier effort to convert the NBFC into a bank with a ready customer base as against starting a greenfield bank. However the license hopefuls believe that entry barriers such as capital requirement etc will not be a hindrance.

The likes of L&T Finance, Bajaj Finserv and Aditya Birla Nuvo are the most well known names in the race. But besides them, several brokerages, gold loan companies and microfinance companies are also hoping to convert themselves into banks. While winning the license may add a feather to their cap, the challenge will be in operating in a fiercely competitive market. Keeping the banking model profitable after adhereing with the RBI's strict capital and financial inclusion norms will be the litmus test for the new incumbents in Indian banking in 2014.

03:20
 
As far as currencies go, the virtual currency Bitcoin turned out to be a star performer in 2013. Indeed, as the value of paper currencies came into question because of the massive money printing exercise by central bankers, the world turned its attention to Bitcoins. The other feature of Bitcoins that probably made it popular is that as a currency it is not backed by any government. Will this dream run of Bitcoins continue in 2014? It is hard to say. However, given so many uncertainties that surround this virtual currency, it would be foolhardy to assume that such a meteoric rise would continue forever. We would not be surprised if the use of this virtual currency gets regulated as time goes by. Moreover, like any asset class, the current exuberance in Bitcoins seems more of a fad. And that is why, the possibility of a plunge in Bitcoin prices going forward cannot be entirely discounted.

04:00
 
2013 was a tough year for the Indian economy. Several areas of the economy witnessed severe stress. Economic growth slowed down to decade-low levels. Inflation continued to remain at alarming levels. India's vulnerability on the current account front was exposed. The Indian rupee depreciated sharply against the US dollar. Everything that could possibly go wrong for India did go wrong.

A question that would be on everyone's mind is: What's in store for the Indian economy in 2014? Is the worst behind us? Or is there a likely recovery on the cards?

If you look at the share markets aka Mr Market, there seems to be a sudden change of sentiment. The general elections are just a few months away now. Public sentiments seem to indicate the prospects of a new government taking charge at the Centre. Many believe that the new government will restore investor confidence.

But this is a very dicey premise. It does seem that the run up to the elections may boost investor sentiment and drive stock prices higher. But can a change of government alone be construed as change in economics? We certainly don't think so. The economy is still struggling. Bad loans are on the rise. And with inflation hardly showing any signs of abating, interest rates are unlikely to be relaxed. So all in all, a true economic recovery is still some time away. And unless the new government takes some bold policy initiatives, India's economic prospects may remain subdued for much longer.

04:30
 
Think of yourself as a foreign investor. Businesses across the world are the universe for you to participate in. And just like investors invest in growing businesses, you would like to invest in growing economies. And within those, the best quality businesses- companies that are well managed, and doing well in their respective segments. This is essentially what has been happening over the past few years; if one views the holding patterns in the top Indian companies. This was highlighted many a time throughout the year gone by. If one looks at shareholding patterns - and their trends in recent times - in the NSE-Nifty companies, the bluest of blue chips in India, one would get a sense of what we are talking about. As of September 2013, FIIs held more than 18.1% of stake in these companies. The same figure a year earlier stood at 16.5%.

But a key question is whether the love for Indian stocks will continue. Well, for investors that are in for the long haul, India is definitely a good place to be in, we believe. But with largecaps being seemingly expensive at the moment, it would not be surprising if institutions start moving lower the order to pick smaller sized businesses, which do seem relatively cheap at the moment. Key events that will drive the sentiments in 2014 would be the events leading up to the outcome of the general elections (in India) and the actions taken by major global central banks.

04:46
 
In the meanwhile, Indian stock markets were trading on a flat note. At the time of writing, the benchmark BSE-Sensex was marginally down by 6 points (0.03%). Information Technology and oil and gas stocks were leading the losses. However, Realty and Consumer durables stocks were trading firm. Major Asian and European stock markets are closed today on account of the New Year.

04:50   Today's investing mantra
"The key to making money in stocks is not to get scared out of them" - Peter Lynch
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3 Responses to "What 2014 holds in store for investors?"

BISWESWAR GHOSH

Jan 1, 2014

SBI the largest PSU Bank is reeling under growing NPA and Loss earning and unable to sell assets of big NPA borrowers' assets due to I.Tax having first right and other legal obstructions. Now SBI has started charging Savings Bank Accounts with Rs.15/- per quarter i.e. Rs.60/- per annum as "service charges".This may improve the bottomline of the B/Sheet but is in bad taste.

Like (1)

v k shah

Jan 1, 2014

Thanks for very good article on Debt of Indian Company.

The story bust the argument of Govt that we are opening economy so that private funding shall come for development.

An independent enquiry is require to find out how private companies are using bank / public / Govt money for meeting their requirement and accumulated massive assets (like free subsidized land, coal mines spectrum, mining, oil and gas assets etc.)in connivance with these institutions. This crony capitalism policy of the Govt.

V K Shah

Like (1)

Naval Anklesaria

Jan 1, 2014

Figures speak for themselves. Companies cannot reduce their debt burden overnight. It may take few years in some cases but others will find it impossible to clear their debts and the interest burden will never be wiped out. Thus for such companies the only alternative is to close down or amalgamate with some group companies and try to reduce their debt burden. Investors should stay away from such companies.

Like (1)
  
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