Beyond uncertainty - What it means for you?

Feb 3, 2014

In this issue:
» Is optimism about emerging markets correct?
» More election sops on their way?
» Why we need PSU bank reforms
» Youth should think beyond advertising, banking
» and more....

On 1st February, 2014, a bright sunny Saturday morning, guests from all over India descended upon the magnificent Taj Mahal Palace Hotel in Mumbai to attend the Equitymaster conference. The main theme of the conference was "Beyond Uncertainty". A wide range of topics ranging from stocks, commodities, real estate and other asset classes were discussed. Here are the key takeaways from the conference.

The day began with Keynote Speaker of the Conference Mr. Ajit Dayal giving the big picture view on the Indian Economy and the Indian stock market. He started with the Lehman crisis and how post 2008 crisis retail investors in India have pulled out money from the stock markets while foreign investors have pumped money into India. In the BSE 500, FII stake jumped to 20% by September 2013, up from 15% in 2008. In the Sensex and Nifty, FII holding is even higher at 22%. While at the same time, retail investors holding stood unchanged at 8% over the past 5 years.

The biggest uncertainty in India is no doubt the upcoming general elections and the political uncertainty around it. Who will form the next government? Whether we will have single party rule or a coalition? Whether Mr. Modi will become the next Prime Minister? Well only time will tell. But here is an interesting fact. GDP growth under a coalition government has been much better than a single-party government albeit with strong alliances. Therefore, like we did at the conference we urge all the readers to go out and vote in the coming elections because a strong and able government actually affects the stock market movements as well.

The next biggest uncertainly is obviously the global factors affecting India. The biggest threat to the global economy is not from China, not from Eurozone, not from emerging markets but from the US. America could soon become a large-scale Spain or Greece. The US has been borrowing from China, Japan and others and will soon have government debt in excess of US $16 trillion. Inability to service this debt will certainly expose the US to risk of ratings downgrade.

The next hot topic of discussion was what strategy to follow in picking stocks? The first step entails looking out for stocks that have proven track records that go back a long way. Second is to find a strong valuation approach that has applicability across sectors. This makes valuations more comparative. Third is to determine what price to pay. And that's where the concept of margin of safety comes into play. Last but not the least, is to have patience. One needs to have a long term view while investing in stocks.

The one thing that we at Equitymaster always stress upon is the importance of asset allocation. And that was the closing discussion of the day. How should one allocate their money across different asset classes? Whether one should invest in stocks, gold, silver, fixed deposits or real estate?

Many investors are hesitant to put their savings in the stock market due to volatility. But, you see, in the long term, equities as an asset class will largely help you to create the corpus required to meet the financial goals - even after adjusting for the rising cost of living in the form of inflation. India is a young country and hence the earning potential of Indians is higher. They also have a longer time horizon to achieve their goals. Therefore, if you are many years (10 years or more) away from a said financial goal, then you may take a greater exposure to risky asset classes such as equities. This is because you have greater flexibility and opportunity to grow your wealth.

Gold versus silver and gold versus bitcoins were some of the most interesting discussions. Gold has been a long term performer and with the amount of paper money floating in the system, it is bound to debase currencies. As such, gold would act as a good insurance agent in the long run. Also, the fact that a lot of central banks - people who understand paper currencies the best - have been taking advantage of the lower prices is a sign in favour of gold. People could also buy small quantities of silver. Apart from being a precious metal, silver is also used for industrial activity and hence when industrial demand picks up, prices of silver will rise.

Real estate was one theme covered very aptly by an astute and experienced realty investor Mr Ashwin Ramesh. He explained how due to lack of transparency and tight regulations means buyers are making investment decisions with limited understanding of the risks involved in parking their hard-earned money in real estate. Hence one should buy real estate only if they need it. And it should not be bought for speculative reasons and it should not be financed with debt.

The main idea behind the conference for 2014 was that we live in uncertain times and each investor should have a better understanding of the current investment environment and have enough ideas to create a concrete actionable investment plan for 2014, and beyond. Hope we were able to give you some clarity in these uncertain times.

Now, just in case you missed attending it, or even if you were a part of it and would want to refer back to the sessions from the comfort of your home, we have some great news for you. We have just released an Exclusive 4 DVD Set with the complete Conference recording. All the talks PLUS all the Q&A Sessions and Every Discussion! Everything recorded in this Exclusive 4 DVDs Set. So, why delay... Just Click Here to Claim Your Copy!

Did the Equitymaster conference help you to understand the uncertain times we live in? Let us know your comments or share your views in the Equitymaster Club.

Equitymaster conference 2014
Data Source=Equitymaster

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In the race between the attractiveness of developed markets and the emerging world, a clear consensus is perhaps emerging. The views seem to be heavily loaded in favour of the emerging markets. And now Dr Doom Nouriel Roubini has thrown his hat in the ring. He had recently argued that the ongoing turmoil in some emerging markets did constitute what he thought as a 'mini' perfect storm. However, he believes that investors should stress the word 'mini'. In other words, he does not expect the situation to turn into a full blown crisis. And he cites the strong fundamentals of emerging market nations as the key reason for this.

Most of the emerging market nations, he believes, have the fundamentals and the balance sheet strength to withstand any hiccups that accompany strong growth. Therefore, if these countries don't mess up big time, the long term outlook is generally bright for emerging markets as per him. Well, we can't help but agree with him. India is a prime example of what Dr Roubini is talking about. We have the potential to log in strong growth rates for a long time to come. All we need is a conducive business environment and policies which do not favour a select few at the expense of the larger section of the society.

Riddled with scams, corruption and general ineffectiveness when it comes to implementing policies, the UPA has lost considerable popularity in the run up to the general elections. Indeed, there are not too many months left before the elections take place. Thus, the UPA government is desperate to implement measures that would bolster its overall chances and give it a shot at retaining power. The latest in this regard is with respect to worker compensation. As per an article in the Economic Times, the UPA is thinking of including a new minimum wage as well as an assured minimum pension. Higher salary ceilings for several employment benefits such as gratuity, provident fund, bonus and healthcare also seem to be on the cards. Most of these were issues during the tenure of the current government. And yet it did not do much in terms of addressing these issues during that time. Thus, introducing these measures now only give a sense of political gimmickry rather than to really resolve the issue at hand.

They account for 70% of the Rs 82 trillion Indian banking sector. However when it comes to consistency in margins and asset quality, PSU banks more often than not fade against private sector peers. And why not? After all the managerial decisions on spreads and quality of lending is dictated by the largest shareholder, the government. Needless to say unlike in the case of private sector lenders, the government hardly has the interest of shareholders in mind!

However, it is not just the poor performance in terms of shareholder returns that is a worry for PSU banks. Given that they account for a mammoth proportion of Indian financial sector, their health is critical for India's economic well being. And their stressed asset quality over the past few months has questioned India's economic future. Now, it is not just the ownership but also regulatory oversight over the board composition of PSU banks that is to blame. The RBI governor, Dr Raghuram Rajan, has set up a committee headed by veteran banker PJ Nayak to look into the issue. Independence in board and a proactive management could help PSU banks narrow the performance gap with their private sector peers.

The Indian economy has been facing the twin challenges of high inflation and slowing growth. Ever since he took charge as the Chairman of the RBI, Dr Raghuram Rajan has been under pressure to ease interest rates to boost economic growth. But the persistently high inflation has, on the contrary, forced the central banker to tighten monetary policy. He has clearly sent across the message that bringing inflation under control is the first priority.

But it would be wrong to assume that any easy monetary policy alone can revive growth. The real problems are regulatory roadblocks. In a recent address, the central banker said that India needed a better business environment for entrepreneurs. Several large projects have been delayed because of lack of environmental clearances. He emphasised that while it was important to protect the environment and the natural habitat of tribals, India needed a reasonable trade-off between growth and environment. Unless India learns to find a proper balance, its long term economic prospects may be compromised.

After opening in the red, the Indian stock markets have widened losses in the post-noon trading session. At the time of writing, the benchmark BSE Sensex was down by 207 points (1%). Barring pharma and consumer durables, all sectoral indices were trading in the red with metal, realty and auto stocks being the biggest losers. Most of the Asian stock markets were also trading weak led by Japan and Singapore.

 Today's investing mantra
"You have to know when you're wrong. Then you sell. Most stocks I buy are a mistake."- Peter Lynch

Today's Premium Edition.

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