Risks that no policy change can get around! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Risks that no policy change can get around! 

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In this issue:
» The recent rate cut is not without its downsides!
» Swiss move supports the case of investment in gold
» A round up of world markets
» and more...


00:00   Chart of the day
After a long wait, the Reserve Bank of India has finally taken the plunge. In response, markets have reacted positively. While Sensex gained 700 points yesterday; stock prices of around 192 stocks have hit 52 week high!

What is most interesting is the reaction of stock prices of debt ridden companies to this news. As you can see in the Chart of the Day, as compared to one day price gain of high debt companies, the Sensex gain of 2.7% looks small. What is interesting is that all of these companies operate in the infrastructure space.

We have already expressed our reservations when it comes to taking investing decisions based on such policy moves. But going by the way markets are behaving, few seem to agree with us. Some may quote the logic of lower interest costs and easing debt burden for these companies in favor of investing in them. There is no denying that the financials may not remain as bad, if not improve for such firms.

However, before you get convinced by such reasons, here are some facts to consider!

If there is no real revival in the economic cycle, there is no reason for investors to be optimistic. But assuming a revival does happen, with the rate cuts finally happening, will the fundamentals of high debt companies change enough to justify these gains? We do not think so.

One must note that these firms have been in distress not just because of poor policies and the economic slowdown, but the bad management decisions as well. Those betting on these companies on the basis of monetary policies and economic turn around should not forget that much of the problems for these companies started in high growth years before 2008 when promoters got over enthusiastic and reckless about the associated risks. It was rosy projections about future and bad capital allocation decisions by the management that led to high debt for most of these companies , the impact of which can still be seen . And no broader policy change can support company fundamentals for long if the management is not smart and discreet enough.

As mentioned in an article in Business Standard, for any economic and infrastructure revival, issues such as land acquisition, coal and gas shortage etc need to be taken care of . Unfortunately, these have only worsened with the time. Betting on a turn around any time soon could be another mistake. Last but not the least, companies looking at measures like asset sales are unlikely to be the best bets on improving macro story. Instead, the real beneficiaries from any revival here will be the companies that have been managing their assets and allocating their capital well. Hence, as Mr. Buffett suggests - 'Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.' Instead, focus on the productivity of assets, management efficiency and most importantly, the valuations.

Do you think rate cut alone supports the case of investment in debt ridden infrastructure firms? Let us know your comments or share your views in the Equitymaster Club.

Policy changes unlikely to lead to better management decisions
Note : D/E ratio at the end of FY14


02:30
With the recent rate cut, hopes have gone up for the infrastructure firms as cost of funds will go down. However, amidst the cheer that rate cut has brought in the markets, there is downside that not many are warning about. First, is the premise itself that lower inflation and hence financial stability is here to stay. With food and fuel prices determining inflation levels, and both at the mercy of nature and global developments respectively, one cannot be so sure of the financial stability. Secondly, unless the supply side constraints are taken care of, a rate cut will not do much to boost the economy. Further, while rate cut is here, fiscal consolidation is yet to happen. With Government already reaching 99% of the fiscal deficit target in November 14, things do not seem very assuring in this regard.

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03:30
After RBI, it is the Swiss National Bank (SNB) that has stunned the markets. By scrapping its three-year-old peg of 1.20 Swiss francs per euro and cutting benchmark interest rate to -0.75%, SNB has rattled the global stock and currency markets. Swiss Franc has moved up by 30% against the Euro. And Swiss stocks have witnessed their biggest daily fall in 26 years. The other global stock markets have not been untouched either.

This is just another evidence of the influence of the Central banks of the World on the currencies and stock markets. And another reminder to investors, of the uncertainties and the volatile times we are living in. With currency wars escalating and their wider influences on stock markets, what should investors do? Staying away from these asset classes can hardly be a solution. However, one can limit the downside risks and manage volatilities with some portfolio allocation to gold.

04:30
Meanwhile, Indian stock markets moved into the positive territory after opening the day on a negative note. At the time of writing, the benchmark BSE Sensex was up by 46 points (0.2%). Barring banking and software sectors, the sectoral indices were trading in the green with the stocks in the healthcare and consumer durables space leading the gains. Barring China, the Asian equity markets were trading mainly in the red with markets in S.Korea and Japan leading the losses. The major European markets have opened on a weak note as well.

04:55  Today's investing mantra
"I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections, but we care very much about, and look very deeply at, track records. If a company has a lousy track record, but a very bright future, we will miss the opportunity."- Warren Buffett
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This edition of The 5 Minute WrapUp is authored by Richa Agarwal and Ankit Shah.

Equitymaster requests your view! Post a comment on "Risks that no policy change can get around!". Click here!

2 Responses to "Risks that no policy change can get around!"

niky kotian

Jan 16, 2015

If rate cut was a solution to sluggish ecomomy, economies of Japan & other European countries who have very low or even negative interest rates would have been booming. Unfortunately it is not so & with reducing interest rates, senior citizens who live on interest (except for those fortunate ones who get linked pension, would drastically go down-thus affecting their purchasing power&ability to invest in shares, bonds etc...

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niky kotian

Jan 16, 2015

If rate cut was a solution to sluggish ecomomy, economies of Japan & other European countries who have very low or even negative interest rates would have been booming. Unfortunately it is not so & with reducing interest rates, senior citizens who live on interest (except for those fortunate ones who get linked pension, would drastically go down-thus affecting their purchasing power&ability to invest in shares, bonds etc...

Like 
  
Equitymaster requests your view! Post a comment on "Risks that no policy change can get around!". Click here!

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