Would Buffett sell Indian stocks right now?

Mar 26, 2014

In this issue:
» China's currency plans are just getting started
» The IMF seconds RBI's views on inflation
» More trouble for listed MNC's in India?
» Is India's lust for gold due to high inflation?
» and more....

The Indian equities have performed well in CY14 year-to-date. This is despite an adverse economic environment and a reasonably good year in CY13. BSE-Sensex during the period reached its all time high levels. Despite India's economic growth at a ten year low, industrial production de-growing, surfacing of multiple scams and ongoing slump in investment cycle, Indian equity markets are continuing to hit record highs.

So what should an investor do in this situation? Should he buy or sell Indian stocks? To answer this question, let us take the help of Warren Buffett. Buffett once said that "Be Fearful When Others Are Greedy And Greedy When Others Are Fearful". So according to Buffett, since Indian indices are hitting record highs, it could well be time to be fearful.

However, bulls like to point out to two key factors: The first, that combined market cap of the BSE and NSE to overall India's GDP remains well below the previous record highs hit in 2007. The second argument is a simple look at price-to-earnings, which shows the MSCI India trading at 14.3 times forward earnings, well below the 23 times in 2007. So is greed present in the Indian markets? Not really. Investors are not borrowing to buy stocks. The IPO market is quite dry and companies and promoters are busy engaging in buy-backs. All of this suggests that greed is missing.

However, the father of value investing Benjamin Graham has taught us that there is something called hope which mediates between fear and greed. The main reason for the rally is the money put in by the FIIs on the hope of a stable and pro-business government. While foreign institutional investors (FIIs) have boosted the Indian stock markets, they have also added to the volatility in the markets and made them highly risky.

Today, despite markets being at record highs, the excitement is still non-existent among retail investors. Investors still lack confidence and faith in equities. As of 2013, the retail participation in Indian stock markets has come down to 34%, which is a 10-year low. And this lack of interest by retail investors also suggests that greed is not present.

The bottom line is that while the poll verdict cannot be ignored, global liquidity and other economic factors are also important. All said and done, what eventually works from a long term perspective is investing in fundamentally strong stocks when they are available at attractive valuations. To that extent, correction in markets will be a good thing as it would result in a lower entry point for stock investments.

So while the near term environment looks uncertain for stocks, there could be ample of opportunities elsewhere to build wealth. We are happy to announce that Mark Ford, who is a very successful American publisher, entrepreneur and real estate investor, will soon be giving us a peek into his best wealth building ideas, thrice a week through The Daily Reckoning.

Do you think Indian stocks are currently overvalued? Let us know in the Equitymaster Club or share your comments below.

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 Chart of the day
The Indian economy is in the middle of an economic slowdown. But you would hardly know it if you judged the county's economic strength by the state of business aviation. Over the past 6 years, the number of private business jets has nearly doubled. However, red flags have been raised against India's aviation safety rating. Especially post the downgrade by the US Federal Aviation Administration. Therefore, the Directorate General of Civil Aviation (DGCA) has taken some tough measures. Regulations for business jets have come under scrutiny. The Indian operators have failed to conform to operational procedures. Time and again they have been found violating the instructions. Instances of accidents and incidents pertaining to small aircrafts and jets have heightened. Not just that! The business jets used by politicians during elections also tend to breach safety norms. And this cannot be dismissed as a case of oversight. The business jet operators therefore need to tighten their belts. Otherwise the risk of hard landing could be higher!

Despite slowdown, number of private business jets rise

It is no secret that China is trying to ensure that the Yuan fetches the status of a reserve currency. Defeating the US dollar and the Yuan becoming an international reserve currency will offer many benefits to China. This includes increased geopolitical power and ability to borrow cheap in international markets. However that will require China to give up currency controls and loosen its capital controls. As per CNN Money, China has already set on the path of achieving its reserve currency ambitions. The People's Bank of China (China's central bank) announced last week that it would allow its currency to trade in a wider daily band of 2% rather than 1%. This was meant to not just help exports but also allow the central bank to liberalize its economic policy. Whether China succeeds in getting Yuan the reserve currency status will also depend on the fate of the US economy and the dollar. However, the world's second largest economy is certainly moving away from its efforts to undervalue its currency. And eventually may take steps for assuming a larger role in the global economy.

Plenty of reasons have been cited for the current slowdown of the Indian economy. But a working paper by the International Monetary Fund (IMF) has stated the primary culprit has been the slump in infrastructure and corporate investment. The paper has highlighted that increased uncertainty with respect to how the broader economic policies will shape up as well as the dip in business confidence has cast a pall of gloom on the investment climate. The current government has largely displayed considerable apathy in terms of implementing key reforms. Various projects have also stalled. All of this has diminished the appetite for investments. Thus, while there are perceptions that rate cuts by the RBI will help in terms of bolstering growth, that may not necessarily be the case. Certainly there will be some relief for companies burdened by too much debt. But overall the benefits of rate cuts would not really be much. That is why as has been cited by the RBI in the past and which has also now been vetted by the IMF, the only way out for the Indian economy is to step up the pace of economic reforms and get the infrastructure projects going.

Multinational companies are generally known to be better shareholder wealth creators than domestic companies. They have more robust financials, better expertise and management, and higher dividend payouts. But in recent times there have been growing tensions between listed MNCs in India and the minority shareholders. As you would know, the global economy has been in a bad shape post the financial crisis of 2008. As a result, the global operations of many MNCs have suffered. At the same time, India subsidiaries have been contributing significantly to their profits. In a bid to draw a greater share of profits from their Indian subsidiaries, many MNCs have been resorting to means that may not be aligned with the interests of minority shareholders.

But minority shareholders may find some relief in the new Companies Act 2013. Under this Act, all related party transactions will need to be passed through a special resolution. This means that such transactions will require 75% consent from the minority shareholders. Moreover, decisions on mergers, royalty and other such transactions will also need to be passed through a special resolution where the multinational parent will not be allowed to vote. We believe these new rules will go a long way in protecting the interests of minority shareholders.

India is among the largest consumers of gold in the world. Voracious appetite for the yellow metal saw gold imports surge by 42% annually between 2008 and 2012. Inflation has played a major part in this. Strong income growth coupled with runaway inflation levels at close to 10% for most of this period, led to a shift in savings from bank deposits towards gold. The global liquidity unleashed by stimulus measures of developed economies along with weak rupee have further fueled the demand for gold. Gold prices have corrected globally after partial withdrawal of stimulus measures by the US. However, India will have to employ both monetary as well as fiscal measures to keep gold demand under check.

In the meanwhile, after starting the day on a positive note, the Indian stock markets curbed their morning gains as profit booking took its toll on the markets during the post noon trading session. At the time of writing, the BSE-Sensex was trading higher by about 20 points or 0.1%. Stocks from the metals and oil and gas spaces were amongst the top gainers, while those from the pharmaceuticals and FMCG spaces were witnessing selling pressure. Stock markets in other Asian countries ended the day largely on a firm note with Japan and Hong Kong up by about 0.4% and 0.7% respectively. China, however ended lower by 0.2%. European stocks started the day on a firm note.

 Today's investing mantra
"The bottom line is to have a responsible plan for your investments and know what you own and why you own it. There's too much at stake not to." - Peter Lynch

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1 Responses to "Would Buffett sell Indian stocks right now?"

Kamal Garg

Mar 27, 2014

It is alright that FII is pouring money in Indian bourses and the problem is how do they get out. They can get out only when there is some one to 'buy' the stocks. Every time earlier, they had off loaded their stocks to gullible Indian retail and MF investors, but this is not happening right now. FIIs are waiting for the retail investors to start investing, because only then, they can off load their investment and take their money back. They have no choice as of now.
So Indian investors become alert to this game.

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