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Will your stocks live up to 'Acche Din' expectations?

May 19, 2015

In this issue:
» The biggest challenge in achieving higher GDP
» Beware of investing in bonds of this loss making company!
» Why we agree with RBI on capital account convertibility
» ...and more!


00:00
How often do you hear rickshaw drivers, petrol pump attendants, roadside fruit vendors and your fellow commuters in trains and buses wondering aloud as to when will the promised 'acche din' arrive?

Per capita income remains low, fuel and food prices have gone up and basic infrastructure remains at the brink of collapse. The promised acche din is nowhere in sight to the common man despite the new government having completed 12 months in office. They do not follow the latest inflation numbers or speculate on RBI's rate cuts for lower EMIs. Neither the IIP number nor the GDP number makes enough sense to them. All they are worried about are higher income levels, affordable livelihood and better standard of living. And they have hardly noticed much of a change in these over the past 12 months.

Needless to say, the widening gap between the government's deliveries and expectations, can have not just economic but also political repercussions. And since commenting on political standpoint is not the Equitymaster research team's forte, we reached out to our colleague and noted columnist Vivek Kaul. Most of you know Vivek as one of the editors of The Daily Reckoning, who has always aired his frank views on politics and its impact on economics. More recently, he has been writing on the 'acche din' syndrome. And since many of our readers like you wanted to get scores of questions answered by Vivek Kaul, we are scheduled to have a one-on-one with him about his perspective on the promised 'acche din'. So make sure you do not miss out on this conversation

Now those of you who have had investments in the stock markets prior to May 2014 and have stayed invested, the acche din has more than adequately reflected in your stock portfolios. Whether or not the situation at the ground level has improved, the valuations of the stock markets have factored in all the happy days to come and more! And while the FY15 earnings numbers, in many cases, are not encouraging enough to support the valuations, investors are latching on to hopes of acche din. The rationale that there is no alternative investment destination for FIIs and that India is better off than China in growth prospects are being cited as the excuses for stocks retaining abnormal valuation multiples.

It is anybody's guess when and whether at all the acche din expectations from the government will be met. But as investors you should remain grounded and tuned to the reality of corporate earnings. While poor performance for a quarter or two may not be a reason to worry, faulty business models certainly should be weeded out of your portfolio. Unless you ensure that your stocks are well managed and resilient enough to overcome the challenges that will present themselves before the acche din arrive, you could very well become an investor with no hopes of happy days ahead.

Do you assess the valuations of your stocks versus their performance expectations? Let us know your comments or share your views in the Equitymaster Club.

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02:15
 Chart of the day
Speaking of acche din, one of the factors that could possibly undo all the economic potential that India has, is the rising unemployment amongst the youth. As per data published by Mint, the world's most populous countries, India and China have reported higher youth unemployment levels over the past decade. The ratio is certainly lower than those for developed economies like the US and UK. But given the size of population and demographic profiles of India and China, youth unemployment could potentially give rise to social unrest. Hence improving employability and creating jobs should be the government's top most priority.

Most importantly, the 9% GDP target relies heavily on job creation. It expects the economy to create 10 to 12 million jobs every year. Given that the country currently produces 5 million graduates every year, 50% of which are found unemployable, the target seems ridiculously steep! The fact that the share of unemployment is highest amongst the more qualified population in India is most worrisome. And without enough efforts to adequately skill India's educated youth and make it employable, the higher GDP growth is never going to come.

Rising youth unemployment - one of the biggest challenges

03:00
Here's an interesting question for you. Would you invest in bonds of a loss making company? What if we also told you that the company has negative free cash flow? If your answer is no, rest assured you would be right. You would even wonder how such a company would be able to make regular interest payments. We might find the answer, as this bizarre scenario may soon become a reality. The company we are talking about is none other than Flipkart!

That's right, the e-retailer has drawn up preliminary plans for a mega bond issue. The size? Rs 30 bn! Now it's clear that Flipkart relies on a continuous stream of investor money for its growth and survival. These equity investors have entered with an exit option (via an IPO) on their minds. Bond investors will have no such advantage. They will also have to bear the risk of lending to a loss making firm. Thus the bonds, if issued, could be of the convertible kind. We believe it's unlikely that such an issue would be made to retail investors. However, if it is, then retail investors would be well advised to keep their money firmly in their pockets.

04:00
We have repeatedly applauded the Reserve Bank of India (RBI) for its sound policies. While it is common to hear people praising the RBI for safeguarding India's financial system, far fewer folks appreciate its good work in the area of liberalisation. Economic growth isn't the sole preserve of industry or government. The RBI too has played an important part in this regard over the decades. By strengthening financial institutions, controlling inflation, regulating banks and keeping a check on the current account deficit (CAD), the RBI has helped prepare the economy for the next stage of growth. India now has a pro-growth government that is committed to keeping the fiscal deficit in check. The RBI has thus begun to move ahead with the next logical step of liberalisation: full capital account convertibility. We believe in the era of globalisation, the free and unrestricted movement of capital is inevitable if India wants to join the league of developed nations. The move will bring risks with it for sure (like volatile foreign fund flows) but the RBI believes it is well prepared to deal with the same. We certainly agree with the central bank and would like the government to move in tandem with the RBI on this very important economic reform.

04:20
After opening flat, the Indian stock markets climbed above the dotted line by mid-morning. climbed above the dotted line by mid-morning. At the time of writing, the BSE Sensex was trading higher by about 160 points or 0.6%. All sectoral indices were trading in the green with IT and capital goods stocks being the top gainers. The midcap and smallcap indices were up around 0.5% and 0.8% respectively. Most Asian indices closed in the green. European markets too have opened on a positive note.

04:40
 Today's investing mantra
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

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4 Responses to "Will your stocks live up to 'Acche Din' expectations?"

Dharam

May 23, 2015

i had been going through the comments offered by many investors, which invariably pose /reflect problems rather than the solutions. Let us not brain storm on these but on finding solutions as the problems are well evident. For instance one comment above is " control the population " BUT HOW" ? should have pondered upon and possible solutions suggested .

Like 

Sarat Palat

May 20, 2015

Control population growth. This will help reduce unemployment in the long run and better standard of living. The development of technology is reducing job opportunities world wide. For a better tomorrow we have to think and act today.

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RAJENDRA PRASAD

May 20, 2015

NO
1) 'ACHHE DIN' HAS COME FOR POLITICIANS. STILL THERE ARE CORRUPTS AND CRIMINALS IN MINISTRY.A MAN MURDERS , PEOPLE ARE AFRAID&THERE ARE NO 'FIR'-SO, CANNOT BE PROVED HIS GUILT.
2) EVERY THING PRICE FROM TRAIN, BUS, CEREALS,FACTORY GOODS, ETC HAVE RISEN EVENTHOUGH CRUDE HAS FALLEN FROM 120 $ TO NEAR 60$ IN 1 YEAR WHILE PETROL CHANGED FROM 71 TO 66 Rs (AV) NOW.
3) NO ACCOUNT HAS 15 LAKHS IN THEIR ACCOUNT AS POLL PROMISES TO BRING BLACK MONEY.
4) INFLATION IS 30% ON AN AVERAGE. NO 'LOKPAL BILL' IMPLEMENTED SO FAR. MANY STATES HAVE NAMESAKE LOKAYUKTA- MAHARASHTRA , GUJARAT, ETC.

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MURALI

May 19, 2015

Everyone is talking about unemployed youth. Is there any data being tracked, action taken for job losses at experienced person levels?

Like 
  
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