Is S&P threat a jackpot for value investors? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Is S&P threat a jackpot for value investors? 

A  A  A
In this issue:
» British economy witnesses another recession
» Bernanke should ease more, feels Krugman
» Dangerous times ahead for the US
» Huge jump in loans referred for restructuring
» ...and more!


------------------ Most Profitable Investment Lesson we could learn from our Past.... ------------------

Investments have certainly come a long way... Today we invest in commodities, stocks, real estate and so on.

Yet, we have discovered an extremely profitable investment strategy that has been used for over centuries now.

It's how our forefathers used to invest.... and their forefathers... It has been tested over time and even today, it could be extremely profitable for all of us.

But you need to act fast as the opportunity is available Only till 11:59 PM today!

Just click here to know all about it and why it could be the Best Inheritance we have received.

------------------------------------------------------------------------------------------------------------


00:00
 
The most popular opinion, it is said, is not always the correct opinion. Nowhere else is this truer than in finance we believe. In fact, you will do a lot better in investing if you develop a constant suspicion about the most popular opinions in the field. Take S&P's recent opinion on India for example. The ratings agency believes that India is off to hell in a hand basket. It has thus cut its outlook on India's long term debt and has also warned the emerging Asian giant of a possible downgrade.

We have reasons to believe why long term equity investors have very little to worry about the announcement. The biggest amongst these is the success of the simple strategy of betting against the S&P ratings. Studies have shown that over the long term, a portfolio of stocks rated lower by S&P tends to beat the higher rated portfolio. In other words, stocks with an A+ rating have tended to underperform those with B+ or even C rated stocks over a long term horizon. The outperformance of poorly rated stocks has to do with expectations perhaps. On account of their poor financials and profitability, they happen to be valued so low that even a small improvement tends to lead to a big jump in their prices.

There is no reason why the same analogy cannot be applied to India's ratings. Agreed that India's near term outlook is poor. But with certain degree of reforms, India could easily solve deficit problems and also take its growth significantly higher. Stocks in India though do not seem to be factoring this into their valuations currently. This thus puts the risk reward ratio firmly in favour of a patient long term investor. Any more correction from the current levels and that would be the added icing on the cake we believe.

Thus, a possible downgrade of India by S&P and the resultant reaction of short term investors could actually turn out to be a bonanza in the long term for patient investors.

Do you think events like S&P downgrade should be seen as an opportunity for value investors? Share your comments with us or post your views on our Facebook page / Google+ page.

01:10  Chart of the day
 
India may lag most countries in internet penetration but it has still managed to earn the dubious distinction of being the spam capital of the world. A report from SophosLabs, a software security firm states that more than 9% of all spam messages transmitted in the first quarter of 2012 were relayed through India before coming into people's inboxes. The US was close on India's heels, accounting for more than 8% of all spam mails. Countries like South Korea, Indonesia and Russia helped round off the top five.

Source: Sophos.com

01:37
 
Which is one of the deadliest things that the world economy has piled up in the last 3 decades? In case you haven't guessed yet, we're referring to the massive amount of debt that the world is sitting on. What scares the daylights out of us is the way politicians across the world are dealing with the problem. Can you stop a fire by dumping fuel into it? Even a 5 year old would laugh at such a foolish suggestion. But believe it or not, politicians are doing something quite similar. They're injecting more debt in a pretentious effort to deal with it. They tweak economics to grind their own political axes. But you cannot postpone doom by trying to hide the symptoms.

Take the US economy for instance. It is suffering from a severe debt burden, an ailing economy and widening gaps between the haves and the have-nots. When the crisis reaches its zenith, it is likely to trigger massive policy changes. The economy has to prepare itself for more taxes and spending cuts. The future of the US and several unscrupulous developed economies is going to be marked with a lot of rude shocks.

02:15
 
Telecom operators have been fretting and fuming over the price set for 2G license auctions. They have termed the prices are sky high and unreasonable. But the Chairman of TRAI (Telecom Regulatory Authority of India) stands firmly behind the math in his pricing. In his opinion, spectrum is a scarce commodity. Therefore the pricing that the TRAI has proposed is justified. He has also stated that the operators can look at increasing the lucrative data revenues rather than promoting voice over the new spectrum. This would help them recover the high spectrum prices.

The truth is that the government is in dire need of funds. It was able to make up a large part of its fiscal targets in FY11 mainly from the funds it received from the 3G auction. So why should it lose an opportunity to repeat history with the 2G auction as well. In reality, the price being asked for the 2G spectrum is ridiculously high. One should not forget that the 3G spectrum is premium to the 2G spectrum. Therefore the price of the latter should ideally be below that of 3G and not higher. But our dear regulator or government fails to understand basic common sense.

02:53
 
Is the Fed Chairman, Mr Ben Bernanke actually doing the right thing for America? Is criticism of his actions unjustified? Well, this is exactly what economist Paul Krugman thinks. Critics of the Fed's policy action want the central bank to choke off the recovery, while it should actually be doing more to accelerate the same. Bernanke should actually focus less on inflation and more on curbing unemployment. After all the basic duties of the central bank is to focus both on full employment and price stability. Not one versus the other.

If the Fed actually stops worrying about inflation, it could do the country a world of good. For three years economists have been worrying about runaway inflation. But, even now inflation remains below the Fed's 2% target. The USA is under a huge mountain of debt which was accumulated during the bubble years. Higher inflation levels will help erode the real value of debt and help speed up the recovery. Inflation would also render idle cash unattractive, spurring on more productive investments. So is QE3 in the offing? Well, if things take a turn for the worse it is definitely on the cards.

03:30
 
Britain is in a tough situation. The Cameron government is serious about sticking to its austerity plan with the aim of eliminating most of the budget deficit by 2017. But this has led to the economy tripping. The British economy shrank 0.2% in the first quarter after contracting 0.3% in the fourth quarter of last year. As a result, Britain has slid back into recession. This has also put the Bank of England in a spot. Expecting the economy to post some growth, the bank had almost decided to halt more stimulus measures and focus more on inflation. But with the economy contracting, it may be compelled to rethink its position.

Obviously, there are voices from various quarters questioning the extent of austerity measures that the British government has imposed. One thing is certain. Taking on more debt to solve the problem of debt is not going to do the British economy any favours in the long term. Thus, it will be interesting to see what the Cameron government chooses to do. Will it stick to its stance? Or will it succumb to public pressure given that it has been sliding in recent polls? Only time will tell.

04:08
 
The recent cut down in the key lending rate by Reserve Bank of India (RBI) hardly brought any relief to the banking sector. Coerced into reducing lending rates, many PSU banks are already set to face pressure on margins. To top that, every now and then there are reports of jump in the loan restructuring. The latest numbers published in a financial daily peg the loans referred for recast at Rs 2.05 trillion. This is 48% higher than last year! What is more worrying is that the number is three times the total profit of the listed banks in the country in FY11 i.e Rs 669 bn. Agreed that all the restructured loans are not to be written off. However even if a third of them are to become delinquent, it would wipe off an entire year's profits for the sector. Needless to say that the statistics are worrying indeed. Moreover, the reporting for such restructured assets is still very opaque. Hence it is time the RBI should come out with some guidelines to better reflect the same. Until then, investors in the sector will have to tread very cautiously in terms of valuations.

04:45
 
Meanwhile, indices in the Indian stock markets have been hovering around the dotted line since the beginning. The Sensex was trading higher by around 20 points at the time of writing. Heavyweights like ITC and Infosys were the main drivers. Most Asian indices closed strong today with Europe too opening on a positive note.

04:56  Today's Investing mantra
"If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes." - Peter Lynch
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

Equitymaster requests your view! Post a comment on "Is S&P threat a jackpot for value investors?". Click here!

5 Responses to "Is S&P threat a jackpot for value investors?"

Harleen Kaur Sethi

Apr 26, 2012

For US, it might be better to focus on reducing slowdown rather than inflation. But if we talk about India, ignoring inflation and concentrating only on reducing the slowdown might not serve the purpose. How will the initial damages caused by rise in prices be counteracted?

Like 

S.K.Damani

Apr 26, 2012

Yes, this downgrade would have been an oppurtunity to buy quality stocks at a lower rates, but for the counter rating given by Moodys'. The mrkts were poised for a fall, and by coincidence(?????) after the S&Ps' warning, immediately within an hour the stable rating of Moodys'was flashed. If it is coincidence, it is really perfectly timed. Anyhow, we do not expect the mrkts to move much at least till the next elections, which are almost 2 yrs away, till than mkrts will be ranged bound, and give ample oppurtunity to buy stock for the year 2017-18. If selected with very good care, we can get many multi-baggers.
Secondly, regarding the Chairman of TRAI, sometimes one feels, since the call rates in India are extremely low, it is only natural that the Govt. gets full value for the scarce spectrum. Remember 1980, prior to Mobile days, local call use to be Re.1 for 3 min. Urgent calls, and Lighting calls, just recollect those days. Technology does bring down the prices, but for a cash strapped Govt., if it sells the national spectrum at reasonable price (rather than at throw away rates) what is wrong. Seven lakh crores could be really handy for the Congress. And for that if public has to pay say 50ps. per minute or a rupee per minute, it should be tolerable. Think positive.
Damani

Like 

Albert

Apr 26, 2012

"But the Chairman of TRAI (Telecom Regulatory Authority of India) stands firmly behind the math in his pricing."

Eventually the higher 2G spectrum prices will be passed on by the telecom operators to the consumers. This is an indirect form of taxation because the govt is filling its kitty and then wasting it on some silly scheme or the other to garner votes in the next election.

Like 

Sundar Rangan

Apr 26, 2012

You may be right. Fact is, S&P itself has very little credibility, considering the role it played in accelerating the sub-prime crisis in US during 2007. I wonder who would rate S&P itself and if someone were to rate it, it would most certainly get the most further-undowngradably low rating that one would ever get.

Like 

anm83

Apr 26, 2012

S&P ratings are comments on debt and not equity markets. Moreover, they consider the fundamental aspects, rather than valuation aspects. Therefore, to draw conclusions on share price movements of S&P rated entities (positively or negatively) is naive.

Like 
  
Equitymaster requests your view! Post a comment on "Is S&P threat a jackpot for value investors?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407