Are company promoters seeing something that we aren't?
(Feb 6, 2015)
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In this issue:
» The many OFSs lined up by the government
» Cyclical stocks become the favourites of mutual funds
» China readying itself to be the next cheap money factory
» ...and more!
They were there in hordes when the markets touched a new high in 2008. And were promptly back in 2010 when the markets began to get frothy again.
But this time around, despite the successive new highs that the indices have been making over the last few months and all the surrounding cheer, they remain strangely and conspicuously absent.
What are we talking about? The deluge of IPOs of course!
As they say, strike when the iron is hot. And with the markets 'hot' and investor excitement high, these are exactly the kind of times that promoters of companies patiently wait for to raise capital through IPOs. But curiously enough, they don't seem be this time.
Somehow, while investors seems to quite excited about the stock market right now, company promoters are in no hurry to sell equity in their companies yet. This begs the question - are the promoters seeing something that investors aren't?
One plausible reason may be that many companies don't need the fresh equity right now. With RBI data pointing towards industry wide capacity utilization being close to 70%, many companies may not be looking to make fresh investments just yet.
However, even a brief look at the past stock market cycles shows that a reason such as this has never really stopped the promoters of Indian companies from raising capital. They're quite adept instead at making the most hay while the sun still shines bright.
So, what gives then?
Perhaps it's just plain and simple greed. Maybe many promoters are holding back only because they're waiting for the markets to rise higher? So that they can get even better valuations while selling their equity.
Well, one can never really be sure about what is driving this trend. However, one thing is certain. If the latter is indeed the reason they are holding back, investors have much to be wary about. That's because if the market keeps rising, it's only a matter of time before the IPO deluge starts. And as and when it does start, valuations will likely be far far away from investor friendly!
Why do you think company promoters are holding back from coming out with IPOs? Let us know your comments or share your views in the Equitymaster Club.
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And while the promoters of private companies may have been holding back, the government has not. It recently sold a large 10% stake in Coal India for Rs 226 bn through an offer for sale (OFS). Reports suggest that the government is now looking to offload stakes in ONGC, Hindustan Zinc, Power Finance Corporation (PFC), Rural Electrification (REC), NHPC and Balco.
Traditionally the government, unlike its private sector peers, has not been the one to squeeze out the last nickel from its equity stake sales. In fact, it even offers discounts to retail investors. However, it is worth remembering that this in itself should not be the reason for you to invest in these PSU share sales. As always, you need to independently evaluate both the company and its valuations before you decide to put your hard earned money into these companies.
At Equitymaster we certainly base our growth assumptions for stocks on broad macro economic factors like GDP, currency rates and inflation. But what we don't like to do is tweak these variables every now and then based on near term expectations. Instead our assumptions are based on very long term trends that have sustained across several economic cycles. Yes, this does mean that our assumptions could go wrong over temporary periods when the macro economic variables show sudden change. But we would rather keep our bets on businesses that can flourish across cycles rather than those that can benefit from a near term trend in the cycle. Hence we do not find much merit in the manner in which most mutual funds are positioning their portfolios.
As data from SEBI, published by Mint shows, cyclical stocks have become the favourites of mutual funds in 2014. Most of the funds in India have allocated a disproportionately high proportion of their AUM to cyclical stocks last year. The obvious reason being expectation of higher GDP growth, fall in inflation and lower interest rates. The fact that banking and financial stocks comprised nearly a fourth of the AUM also shows them being overweight on the interest rate cycle. Well, if you ask us we are not terribly excited about the quality of loans in Indian banks. And therefore such a high allocation to one sector is definitely risky. Also we would not hesitate to remind you once again that the last time funds had such a high allocation to financial sector stocks was before the bubble burst in 2008.
Hence investors would do well to study the portfolio allocation of funds they have invested in to take the precautionary measures warranted.
Higher concentration in cyclical stocks
If you thought that the end of the near zero interest rate regime in the US will be a game changer for global markets, think again. For China is readying itself to be the next cheap money factory! So far China has taken baby steps in assuring the global market about its GDP trajectory. But the fact of the matter is that the economy is set for a hard landing. The economy is currently grappling with its slowest growth in 24 years. And the policy makers are under pressure to stimulate the economy. Without that their pledges to curb runaway debt which increased by US$ 20 trillion in last 5 years, remain undone. Loose monetary policies is one of the best alternatives for China to sharply weaken the exchange rate. And as per Wall Street Journal, if global conditions worsen, China's one-year lending rate, could head from 5.6% to zero!
A cheaper yuan would boost exports and recalibrate growth engines away from excessive investment and debt. Thus even if the US Fed decides to curtail the liquidity tap, we will have new money printing factories in Japan and China make up for it. Needless to say the impact of the excess liquidity on asset prices is bound to be meaningful. And hence all the more importance for investors to be wary of asset bubbles.
Meanwhile, the Indian stock markets are trading below the dotted line today. At the time of writing, the BSE-Sensex was trading lower by around 15 points, while the NSE-Nifty was down by 5 points. Auto, capital goods and pharma stocks were amongst the key losers. Also, most Asian markets except China were trading in the red at the time of writing. European stock markets, however, opened in the positive today.
"The investor's chief problem - and even his worst enemy is likely to be himself." - Benjamin Graham
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