On your marks...Get set...Compound!
(May 13, 2015)
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In this issue:
» Like real estate? Why not consider this compounding behemoth instead
» Is there no economic recovery happening in India?
» The opposing outlooks on Indian markets by major banks
» ...and more!
"I will be receiving my first salary soon! And I will buy a Gucci bag with it" said a friend of mine recently, with a very wide smile on her face. Having graduated from a B-school not so long ago, she is excited about her entrance into the corporate world. But being her first job, and her desire to buy expensive 'branded' merchandise, she would require some help from her folks to fund the balance amount.
"Instead of taking the money from your parents, why don't you save up now and buy something even better later, when you can afford it?" was my response.
"Itna time kidhar hai. I want the bag now!"
Then I showed her a message that I had received from a friend a while ago.
It goes as follows:
"Hello Long Term Investor,
How Many People are riding ROYAL ENFIELD BIKE ? or wish to ride it ?
Look at the company's growth
Eicher Motors (Makers of Royal Enfield).
Share Price on September 2001 = Rs. 17.50 Price of Royal Enfield bike in 2001 was Rs.55000/-
If anyone would have bought the shares of Eicher Motors instead of a bike then he would have got 3143 shares ((Rs. 55000/ Rs 17.50 (share Price) = 3143 Shares)) Eicher Motor's Share Price as on 23rd January 2015 is Rs. 15,109 (Just for 1 share) Value as on 2nd February 2015 = 3143 x 15,109= 4.75Crores
55000/- is worth 4.75 Crore in 13 Years.
Now he could have bought a Rolls Royce."
That she disposed off this idea is another matter altogether. "Who will wait for so long for the value to rise?" was her response.
Just an update on the above message though - as of noon today, the value of 3,143 shares of the company would have been worth almost Rs 5.7 crores!
We came across an interesting article in the Mint today that was somewhat relevant to the above topic.
As you would know, real estate had become the "go to" asset class over the past decade. The odds would be high of you or many of your acquaintances having indulged or thought of investing in a property (by taking on debt) over the past decade. And why not! After all, India has a shortage of homes. Demand will remain strong for years. Real estate prices never fall! - were the general arguments.
However, take a look at this...
"If real estate was your investment idea between January 2007 and September 2014, there was a smarter investment option: buying shares of India's largest housing finance company, Housing Development Finance Corp. (HDFC)." read the first line of the article.
Today's chart of the day shows the average returns one would have earned from investments made across cities, the Realty Index and in the shares of HDFC Limited.
Is the best proxy play always a better investment?
It goes without saying that if one wants to make a bet on real estate in India, among the many options, a housing finance company could be considered. And when it comes to consistency and stability, it's hard to beat a strong institution such as HDFC.
You may argue that stock of HDFC would have seemed expensive at the time. However, the compounding mammoth that it is would have provided a strong cushion to one's investment - even if one had overpaid for the stock then.
In the words of Albert Einstein "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." a very relevant and apt quote, I believe.
Have you ever benefitted by investing in proxy plays of a particular investment theme or asset class? Let us know your comments or share your views in the Equitymaster Club.
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One of the biggest factors that have led to the correction in stock markets is disappointing earnings reported by India Inc. Does a poor performance suggest that an economic recovery is not underway? Or is that the profit cycle of India Inc. lags growth in the economy? To answer this question, the author of the article published in the Mint, has gone back in history. Consider the year 2003. This was the year when the Indian economy had started growing once again and subsequently contributed to the phenomenal rise in the stock markets. But to understand why this happened, one will have to look at the evidence in the years prior to 2003. The RBI had undertaken strict monetary tightening measures after 1996. This brought down inflation considerably. Indeed, consumer price inflation came all the way down to zero by the end of 1999, despite a recovery in global oil prices. This gave enough headroom to the then RBI governor to cut interest rates.
The rate cuts obviously benefitted India Inc immensely and lowered their borrowing costs. Thus, the key to the boom after 2003 was largely attributed to low inflation in prior years. That is not all. India Inc had also gone in for a lot of restructuring that resulted in better efficiencies and higher return ratios. The government then had also been pushing ahead with reforms.
Come back to the current year. Even if the Indian economy has been gradually recovering, one of the main reasons why India Inc could still be struggling is too much debt on books. And the slow process of paring debt could be one of the reasons why pace of earnings growth could get hampered. Further, the generous rate cuts that were seen in 2003 cannot be repeated in the current context as inflation has not been as low as it was then. Till such time, there could be a lag between an economic recovery and corporate profit growth.
As far as outlook for Indian stock markets go, we came across two very divergent views. For instance, HSBC has downgraded Indian stocks to 'underweight' from 'overweight'. The reasons cited for this have been slow earnings growth, little headroom for rate cuts and a potential negative impact due to El Nino. Given the kind of rally one has seen in the stock markets in the past one year, HSBC is of the view that India is the most overbought market in Asia. But is has maintained its 'overweight' rating in China.
Morgan Stanley on the other hand has downgraded China and is bullish on India. China has been downgraded because of declining profitability and the fact that it is technically overbought. Bullish stance on India has been attributed to pick up in growth, better valuations (possibly after the recent correction) and the possibility of RBI cutting interest rates.
We remain confident about India's growth prospects in the long run. However, the medium term could see quite a few headwinds. The key here really is how successfully the government is able to implement reforms. Because once that gets underway and growth picks up, it will give sufficient room to the RBI to cut interest rates as well.
After the 600 plus point fall yesterday, Indian stock markets regained ground in today's trading session on the back of sustained buying activity across index heavyweights. At the time of writing, the Sensex was trading higher by about 320 points or 1.2%. Stocks across the board were trading in the green with banking, auto and healthcare stocks being the top gainers. The midcap and smallcap indices gained around 1.7% and 1% respectively.
"Owning stocks is like having children; don't get involved with more than you can handle." - Peter Lynch
|| Today's investing mantra
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|This edition of The 5 Minute WrapUp is authored by Devanshu Sampat and Radhika Pandit.
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