Have you considered these 'Budget stocks' for your portfolio yet?
(Feb 24, 2015)
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In this issue:
» Govt. not spending enough on education
» Is corporate India improving profitability
» Buffett goes shopping in Europe
» ...and more!
Theme based investing seems to be a favourite investing idea when it comes to the Indian stock markets. We had written last year on the 'debt repayment' theme and how certain companies with high debt on their books had seen their stock prices soar. The reason? These companies were making attempts to bring this debt down. So investors had jumped in on the bandwagon on the idea that once this debt is down, stock prices would only rise further.
That's not all. Ever since the Modi government has come into power, most stocks have seen prices soar on the expectation that introduction of reforms would lead to higher economic growth and consequently higher profitability for corporates. So far this has proven to be an anomaly. Indeed, while indices have been reaching highs, corporate earnings have been struggling to catch up.
The latest theme that seems to be doing the rounds is 'budget related' investing. So stocks that are expected to benefit from the upcoming Budget has seen a substantial rally in the past couple of months. Specifically stocks from the railways, defence and infrastructure space have seen stocks gain by anywhere between 25-70% since the start of 2015, while the Sensex has only gained around 5% during this period.
Typically stocks from the sectors mentioned above have tended to rise before the Union Budget on expectations of measures announced by the FM that are likely to benefit them. But investors have also been latching on to these stocks in the hope of longer term reforms.
As far as railways is concerned, there are expectations that this industry would report an improvement in finances, announce new sources of funding and make some headway in taking public-private partnership schemes forward.
Defence has also caught the fancy of investors especially since PM Narendra Modi emphasized India's need to increase its defence preparedness. He has especially asked the Indian industry and armed forces to develop own capabilities in defence manufacturing and stop reliance on imports. Thus, those companies that are into defence equipment manufacturing have seen their stock prices on an upward trend.
The noises made by the government with respect to ramping up railways, defence and even manufacturing and infrastructure for that matter are a step in the right direction. But whether these will eventually fructify depends on how adept the government is in executing these projects.
Thus, investing in these stocks solely to capitalise on a 'budget related' rally or even for that matter on likely announcements that the FM will make in the Budget does not make sense. In other words, theme based investing is fraught with risks we believe.
In our view, the focus has to always be on good quality businesses that have the ability to take advantage of economic Megatrends and invest in them when they are trading at a discount to intrinsic value.
Are you investing in stocks solely based on the likely announcements in the upcoming Union Budget? Let us know your comments or share your views in the Equitymaster Club.
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In yesterday's edition of The 5 Minute WrapUp, we wrote about how an increase in youth population and a consequent rise in workforce is set to be a key contributor to India's long term growth going forward. However, for that job creation also has to be on track. This is where the importance of education also comes into play as only those with the requisite skills would be termed employable.
So it comes as a bit of a disappointment to learn that the Indian government so far has not done much in terms of spending more on education. As reported in a leading business daily, The Ministry of Human Resource Development (MHRD), which handles school/higher education and adult literacy, has funds allocated to it every year, but it still accounts for only 5% of the government's expenditure. This is behind funds allocated towards finance, defence, food and rural development.
In terms of global comparisons too, India lags considerably behind. Take the US for instance. The country spends on an average 5.6% of GDP on education (as per World Bank 2010 data) and has achieved a literacy rate of 99%. Even India's BRIC peers such as Brazil and Russia have spent an average of around 5.8% and 4.1% respective with literacy rates above 90% for both. India, on the other hand, has spent hardly 3.3% of GDP on education and its literacy rate is quite low at 74%.
The BJP government in its election manifesto talked about increasing education spend to around 6% of GDP. But whether this actually sees the light of day remains to be seen.
Now that we have seen how important education is to India's economic future, let us look at another aspect: corporate profits. Ideally, in a growing economy, corporate profitability should be strong. With the government revising GDP growth upwards, economists are at a loss to reconcile this with the poor earnings results. As the chart below clearly shows, that corporates have been cutting costs and working assets harder. Thus, while revenue growth has slowed down, operating margins and return ratios have improved.
Corporate India improving profitability?
But is this enough to explain the recently revised GDP growth estimate of 7.4% for FY15? We believe that the government may be hard pressed to meet its own growth targets. It is true that corporate India has tightened its belt over the last few years. However, without fresh investments being made, we do not see a big jump in revenues going forward. All the more reason the budget should lay out a clear roadmap for reforms which will kick start the capex cycle we reckon.
Our readers will be aware that we track Warren Buffett's moves in the investing world, and try to replicate his principles through ValuePro. His move to dump his stake in Exxon-Mobil while simultaneously increasing his stake in his other energy holdings was widely debated. However, his recent buy in Europe came as a bit of a surprise. The legendary investor has purchased a niche apparel retailer in Germany for about US$ 452 m. Clearly, he is not concerned with all the talk of doom and gloom about Europe.
We believe investors can learn two lessons from the latest acquisition by Buffett. One is to stick to your circle of competence (Buffet understands retailers very well). The second is to buy stocks available with a good margin of safety (bad economic conditions tend to produce low stock prices). These two lessons in themselves can help to set you apart from the rest of the investing crowd.
The Indian stock markets had a rather volatile trading session today as they oscillated to either side of yesterday's close. At the time of writing, the BSE-Sensex was trading up by around 37 points. Gains were largely seen in FMCG and IT stocks. As far as global markets are concerned, while most Asian indices were trading firm at the time of writing, the European indices were trading mixed.
If calculus or algebra were required to be a great investor, I'd have to go back to delivering newspapers." - Warren Buffett
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|This edition of The 5 Minute WrapUp is authored by Radhika Pandit.
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