Should you 'avoid' Indian stocks till next elections? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you 'avoid' Indian stocks till next elections? 

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In this issue:
» Bankers finally being brought back to earth
» Are consumer stocks in bubble territory?
» HDFC's lending mantra
» Is Cyprus the beginning of a dangerous trend
» ...and more!

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It is not that difficult these days to find experts who've lost hope on the Indian economy. One such gentleman is Mr Martin Feldstein. Feldstein, once a chief economic advisor to the President of United States had only last year stated that Indian growth story was a miracle. However, it hasn't taken long for his admiration to turn into cynicism. When asked by a leading daily about his latest views on the Indian economy, he took no time in remarking it is in a worse shape than before in terms of short-term growth.

Well, we have found hardly any grounds on which to disagree with Mr Feldstein. An economy that has grown at an average of more than 7% over the last decade is certainly in a bad shape if growth slows down to under 5%. Not to forget the record high consumer price inflation of 11%. Thus, the bad news from Mr Feldstein is that he, along with perhaps host of other international investors, has put India on hold. They would like to wait until after the next elections.

However, is this right strategy to have? Certainly not if one is confident that the current growth rate in India is just an aberration and days of higher growth rate of 7%-8% are only a matter of time. In that case, there could be no better to time to invest in Indian stocks than now we believe.

And our belief stems from a study that we have carried out based on historical data. You see, since the year 1992-93, there have been only six financial years (excluding FY13) where the economy has grown below 6%. And investments made during the end of these years have on average yielded returns of 19% over the next 12 months. Even from a three year perspective, returns have averaged in the region of 17%. Thus, as can be seen, a weak economy is not the time to avoid stocks. In fact, investments made at such times are likely to yield the best results over the medium to long term as most stocks are priced poorly given the weak economic environment. Therefore, smart investors who are able to take advantage of this opportunity are the ones that end up creating good deal of wealth for themselves.

Consequently, one's best chance at generating returns does not lie in heeding Mr Feldstein's advice. It instead lies in taking an exposure in Indian equities if one is confident of its long term growth story.

Do you believe that the best time to invest is in a year of weak economic growth? Please share your comments or post them on our Facebook page / Google+ page

01:21  Chart of the day
Problems in the Euro zone are certainly taking a toll on the Euro currency as a medium of transaction. As today's chart highlights, its popularity as a world payments currency has come down by some 4% points between January 12 and January 13. The US on the other hand has continued to maintain its status as safe haven currency by increasing its share in global payments system. The most notable improvement however has been shown by the Chinese Yuan as payments in Yuan terms grew by a whopping 171% during the one year period. Its share however is still very low at 0.6%. This is certainly not in keeping with the dragon nation's economic clout. We believe that once the authorities make the currency more liberal, the Yuan has the potential to increase its share manifold.


Doctors save our lives. Engineers create goods and infrastructure that improve our standards of living. And yet investment bankers are the most highly paid professionals. Why? For creating all the bubbles and crises?

Factors such as the dollar being taken off the gold standard in 1971 and the deregulation wave since the 1980s led the developed economies on to a debt-fuelled consumption boom. This was the reason the investment banking industry flourished. And so did pay check premiums.

The carnival ended with the 2007-08 financial crisis. And now, almost six years after the crisis, the pay premiums for investment bankers are finally declining. Mind you, they are still paid a lot more compared to other professionals. But the gap is now on the decline.

The Financial Times has reported a certain study that says that average pay per head in a sample of nine European and US investment banks has fallen from 9.5 times the private sector average in 2006 to 5.8 times in 2012. In fact, some experts think this is just the beginning. The larger adjustment process may be underway. We concur with the above point of view. All excesses, eventually, have to get corrected.

As the economy was in slowdown mode last year, consumer stocks were seen as safe havens. Consumer stocks returned a huge 46% to investors last year. On the other hand, the broader BSE-Sensex gave 26% returns. But, is this sector now in bubble territory? The sector was trading at peak valuations towards the end of 2012, and now given political and economic uncertainties in 2013, these stocks are moving up once again. But, blindly buying consumer stocks may not be the best strategy. Firstly, their valuations are high. Secondly, with the economy slowing and high inflation, consumption is expected to get affected as well.

People aren't as willing to shell out money. This is already visible in the volume growth number of most large FMCG companies. While penetration in rural areas is still increasing, incremental volume growth is coming at a higher cost. This is both in terms of advertising and promotional expenses and increasing reach in new geographies. With volumes under pressure and no real earnings upside, expectations from the sector need to be realigned. We would suggest caution on consumer stocks for the time being.

The recent crisis of Cyprus has brought to light two things. One is the obvious part that the crisis in Europe has not yet eased off. Second is using the deposit money to bail out the banks. Cyprus has decided to charge a levy on deposits which would help it raise funds required to meet the bailout conditions. This has been a worrisome factor. Till now the bailouts were funded by richer and more stable countries. But with Cyprus there is a new trend that has started. The biggest worry is that deposits are of banks which are in trouble. So if the levy is charged, the country would be saved. But the bank would still go on to become bankrupt. Such things have happened in the past. That banks that have been bailed out have still gone bankrupt. In such an event the depositors would become bankrupt too. First they lose money to bail out the bankrupt bank. And second they would lose whatever deposit they have with the bank.

Unfortunately this is a crisis that seems to be spreading. As per Azizonomics, banks that are capable of charging such levies and which are in terrible financial condition can be found in many other areas of the world as well. Spain is one of the most noteworthy names that the blog has mentioned. Other countries like New Zealand, UK and US are not far behind either. If such a trend of charging a levy on deposits were to take grip of the world, the financial system would come crashing down like a stack of dominoes. And this time around, the smaller depositors would go down along with the big banks.

Financial entities are not strangers to cyclicality in growth and margins. Every macro-economic factor impacts them. Right from GDP growth to inflation to interest rates. Hence of the entities that manage to secure sound fundamentals, very few manage to hold on to the same. Take for instance financial entities that can boast of superior margins and asset quality. There are only a handful of them that have retained their margins and quality for nearly a decade. Housing finance major HDFC tops the list. The entity's margins, asset quality, cost efficiency and return on equity has been uncontested for very long. Though its market share has been threatened and reduced by the likes of State Bank of India and ICICI Bank, it is not worried. In fact, its Vice Chairman and CEO, Mr Keki Mistry, insists that holding on to market share is the last priority for HDFC.

In an interview published by Firstpost, Mr Mistry emphasizes on why HDFC lends to end users and not speculators or investors. That 90% of HDFC's borrowers are first time home owners taking small ticket loans is a key indicator. The average loan size for the company even at the end of 2012 was Rs 21.5 lacs. Which means the average value of the property financed is around Rs 30 lacs. That big investors and speculators tend to stay away from smaller properties acts to HDFC's advantage. Hence, while HDFC may not win in the race for market share, the strategy could certainly help it win investors for the long term.

Meanwhile, indices in Indian equity markets traded strong right from the beginning today with Sensex higher by around 120 points at the time of writing. Stocks from realty and oil and gas sectors were seen attracting the maximum interest. Asian stock markets also closed strong today with Europe trading in the green as well.

04:56  Today's investing mantra
"It is not the profit margins of the past but those of the future that are basically important to the investor." - Philip Fisher
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12 Responses to "Should you 'avoid' Indian stocks till next elections?"


Mar 28, 2013

No body can predict the bottom levels of market. May be around 5500 you may start buying good scrips. Market may move sideways until elections are over. So one has to wait until mid 2014 for a clear bull run.

Like (2)

Devanshu Asher

Mar 26, 2013

Anybody who invested in good dividend paying MF starting from January 2008 (sensex @ 18000) till January 2009 (sensex @ 8000) and still holding it will see that it paid off 30% p.a. for 4 years. Today Sensex is again at 18000. Instead of timing the market, better start investing when we see the downturn. We will surely end up making a portfolio giving good returns.

Like (2)


Mar 26, 2013

do not plan for market after 2014 election market only run by operator/weather repot/romour no one realise market point of view........beware from market only long terms investement done in fundemental proven recod comapny. do not waste time/money .....time & money is presious for middle clas investor.........thanks.......wait/watch before enter in market..

Like (2)

Venkatesan Ganesan

Mar 26, 2013

Buy in dips and sell in peaks are the age old simple logic to be sucesful as an investor. I see a good level of conensus on this from the responses herein. Slow and steady buying at dips is definitely a yes from me. It goes without saying that one has to be slective.

Like (1)


Mar 26, 2013

Investments should not be based on the state of the economy, investments should be based on merit of the stock/instrument you are investing in. Since there is very little you can do about the economy,better to review the track record of the stock and the current earnings status and if confident, invest. The only catch here is that the future is unknown, so you need to be prepared for a worst-case "Satyam scenario"as well. regards

Like (1)

gawai r v

Mar 25, 2013

very good. It is observed in past that best returns are made in equity market if u invest in bad market. Hence if the market correct significantly it is right time to buy.

Like (1)

Narayanan KR

Mar 25, 2013

This is the best time to invest in equities as many good companies for long term, as they are available at 52 week or two year lows.

Like (1)

Suresh Kumar

Mar 25, 2013

Government has to appease rural voters by keeping food inflation high courtsey high MSP, high Direct Cash Transfers. It may be a good idea to avoid till polls are completed in December '13 or March '14 as Nifty may find new lows.

Like (1)

Ramanathan L K

Mar 25, 2013

You are absolutely right. Those who buy when the market is in a selling frenzy and views the future of the market in doom, and sell when there is a euphoria do really make money in the stock market. They have to be selective in determining the scrip to buy and sell

Like (1)

deepak kumar tinjani

Mar 25, 2013

No need to avoid, it is the time to purchase of your choice shares at affordable price. Purchase & forget your shares till market hit back. Only thing to ensure that you buy fundamentally strong shares.

Like (1)
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