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Do Modi and his Ministers Hate Stocks?

May 25, 2016

In this issue:
» Uncertain times making car makers jittery
» Modi Government's solution to India's banking woes
» ....and more!
0:00
Rahul Shah, Co-Head of Research

In 2009, we ran a promotion that claimed:

  • When the CEO of a company chooses to increase his stake in the company...at a price that is 55% above the market price...one dare not doubt the medium-term outlook for that company.

The promo generated a good buzz.

There's no better expert on a company than the CEO. So if he substantially increases his stake, investors are guaranteed to queue up for the stock.

Robert Cialdini, in his path-breaking book, Influence, calls this phenomenon the 'authority effect'.

If your decision has the approval of a leading authority, it does wonders for your confidence. You are far more likely to do something if it has the backing of an authority figure.

That's why celebrities can charge crores to endorse a brand. They're aware of the magic of their authoritative push. Authoritative endorsements can literally change the fortunes of a product overnight.

Our aim in this short lecture on authority is simple...

We want to get the point across to the 'CEOs of the Indian economy': If their investment decisions bear any authority effect, people may soon lose interest in stocks.

Yesterday, The Economic Times shared the portfolio details of Prime Minister Narendra Modi and his Navratnas - i.e. his top nine ministers. Given that this group is burning the midnight oil to spur growth in India, one would expect a high allocation to stocks in their portfolios.

However, equities are but a rounding error in almost all of their portfolios. Guess which asset class holds a pride of a place? Real estate, of course.

From the article:

  • Total assets of Modi and his ministers amounted to a staggering Rs 91.1 crore, out of which only a fraction (2.1 per cent) was allocated to equities.

    The Prime Minister himself has allocated 79 per cent of his assets to real estate followed by 15 per cent to bank deposits, 1 per cent to gold and a big fat zero per cent to equities.

Total Assets od Modi


This is shocking for a group of self-proclaimed free market champions.

To make matters worse, the author of the article tries to justify Modi's asset allocation skills. Considering the Sensex's 5% return in the past two years, Modi's aversion to stocks does look full of foresight.

But is two years long enough to evaluate the performance of an asset class that is meant to be held long term? Absolutely not. Equities are one of the best performing asset classes over a five-to-ten-year period. We see no reason to change this view.

Or perhaps these ministers know something about equities that we don't? Do we need to revisit our forecast for a 70% gain in stocks over the next two-to-three years?

Well, you win the game by focussing on the field, not the scoreboard. Only the facts matter, not what certain authorities or the rest of the market is doing.

And the facts are pointing to an upward shift in the profit margins of India Inc. This, along with topline growth in line with historical trends, makes us positive about stocks.

Irrespective of what 'experts' and policymakers are doing, stocks look like a great bet from a medium-to-long-term perspective.

What do you think is the reason behind Modi and his ministers' aversion to stocks? Let us know your comments or share your opinions in the Equitymaster Club.


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02:31 Chart of the day

With the Indian government getting stringent about fuel emission norms, the passenger car manufacturers are facing a tough time. In January this year, the government preponed the Bharat Stage-VI norms by a year to April 2020. This meant that car manufacturers would have to expedite their product development plans and achieve targets in a much smaller time frame. Next the Supreme Court imposed a six months ban on selling 2,000 cc diesel vehicles in the National Capital region. Recently, the National Green Tribunal has restricted registration of 2,000 ccc diesel vehicles in Kerala. Growing uncertainty about the fate of diesel vehicles has adversely impacted their sales and hit car manufacturers in the country.

Traditionally, petrol vehicles had a precedence over diesel vehicles in India. But the deregulation of petrol prices in 2010 led to a jump in its price thereby widening the premium commanded over diesel. To capitalise on the rising demand for diesel vehicles, car manufacturers went out of the way to invest in the setting up diesel engine capacities. Resultantly, the share of diesel cars shot up from 37% in FY11 to 58% in FY13. However, the pricing advantage enjoyed by diesel cars has reduced after the fuel was finally deregulated in October 2014. Consequently, its share has since come down swiftly to 44% in FY16.

The government seems to be getting more tough on diesel cars in a bid to address pollution concerns. In the Union Budget 2016, a cess of 2.5% was imposed on diesel cars as compared to a 1% cess levied on petrol cars with engine capacity of 1,200 cc. Diesel cars are already expensive as compared to their petrol counterparts. And with limited benefit of fuel price differential, diesel cars are losing favour with buyers. Moreover, the Supreme Court is also mulling a 30% cess levy on diesel cars above 2,000 cc engine capacity. Therefore, the growing uncertainty in the regulatory environment for diesel cars has compelled manufactures such as Toyota, Honda and Mahindra & Mahindra to make tough adjustments to their growth plans.

Diesel cars no longer in demand

Diesel cars no longer in demand


03:44

The government seems to be finally moving in the right direction to address the NPA crisis plaguing the public sector banks. As per the newly formed Banks Board Bureau, the strong banks need to write-off bad loans while weak banks need to be recapitalised before the consolidation exercise can kick off to reduce the number of state banks to not more than six. Vinod Rai, the recently appointed bureaucrat in the Banks Board Bureau, has said that the consolidation has started with State Bank of India's move to merge the five subsidiaries and Bharatiya Mahila Bank with itself. He expects more such mergers in future. The consolidation of state-run banks has been long overdue and its implementation will make the banking system more competent and strong.

04:45

Indian stock markets opened the day in the green and surged ahead on the back of persistent buying activity across index heavyweights. The BSE Sensex was trading higher by 571 points (2.3%) at the time of writing. Banking, capital goods and IT were the biggest gainers.

04:56 Today's investing mantra

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst) and Madhu Gupta (Research Analyst).

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8 Responses to "Do Modi and his Ministers Hate Stocks?"

Parimal B Shah

May 27, 2016

Rahulbhai....

Kuch bhi...!!!

I am proud to have a PM and his team who are equity averse.
The comments from your members also are in the same area....

Equity master should refrain from indulging in such theatrics.

By the way just for academic discussion

1/ the figures in ET dont add up..the total is 84.580 .

2/ If you bifurcate them in two group - Group A - Lowest 5 and Group B Top 5 . It becomes quite evident that Group A which is about 5 % of of the Total assets dont have any excess funds to invest into equity...

Total Assets (Rs) Crs Gold Estate Bonds Equity Deposit Total Profession

Suresh Prabhu 0.170 0.00% 52.45% 0.00% 0.00% 8.00% 60.45% Carrer Politician
Narendra modi 0.261 0.96% 79.29% 0.16% 0.00% 15.00% 95.41% Carrer Politician
Venkaiah Naidu 0.439 0.00% 0.00% 0.00% 40.00% 40.00% Carrer Politician
Nitin Gadkari 0.860 4.73% 81.47% 3.21% 0.00% 5.00% 94.41% Business / Politician
Rajnath Singh 2.500 0.70% 74.10% 0.00% 0.00% 24.00% 98.80% Carrer Politician
-----
Total A 4.230

Smriti Irani 4.140 2.13% 67.18% 0.00% 0.08% 7.00% 76.39% Ex-Actor / Politician
Sushma Swaraj 5.650 46.82% 24.73% 0.00% 0.00% 27.00% 98.55% Carrer Politician
Manohar Parikar 6.150 1.02% 26.35% 0.00% 3.87% 1.56% 32.80% Business / Politician
Ravi S Prasad 14.900 0.04% 25.02% 22.42% 5.56% 47.00% 100.04% Lawyer / Politician
Arun Jaitley 49.510 0.35% 25.49% 0.00% 0.00% 36.00% 61.84% Lawyer / Politician
------
Total B 80.350

Total A+ B 84.580
======

Hope Equity Master sticks to basics of being MASTER of Equities.....

Like 

V S Agarwal

May 26, 2016

Your report about government Vis a vis corporate CEO is very skewed. The mind and time of a person like modified is not devoted to his personal Portfolio building. If you achieve what he or they have, personal assets hardly matter. Every one needs house and calling that real estate investment is not OK. Overall a very misguided report. Sad, but such reports only inflame wrong passions.

Like 

Milind

May 26, 2016

Mr. Author - you're reading too much into their portfolio.
Few points
1. Most of these leaders belong to old school of thought, being brought up under socialist regime, where bank deposits (rather than equities) were the norm. Just check the portfolios of any of your old uncles, chachas, aunts, mamas and you will know. My dad even though having tremendously benefited through HDFC shares (bought in 1981 - he was unwilling but HDFC thrusted these upon him (his own words), since he availed their home loan), still vouches for bank deposits..

2. Their assets are not that high or huge (26 lakh is not that huge no) to think of asset allocation. Most of them probably don't have that asset allocation mindset. Given a chance, its likely that their assets would have been lying in dividend paying stocks, LIC policies, bonds etc.

3. Most of them are past their prime (in 60s). Aren't we told by investment advisors, that your equity allocation should go down as you approach retirement? So in fact they should be lauded for following your (investment advisors' advice).

Like 

Ramasubramanian

May 25, 2016

Though equity is an asset class with superlative growth prospect, how many companies collapse and fall on the way side! If you happen to hold growth oriented shares, you are lucky. But with such a high premium, is it really worth holding the shares? There is no logic in investing hard earned money in shares. Those who secured income without much of efforts, shares are best place to multiply. May be Dr. Modi has earned his wealth in a hard way!!

Coming to Banks, strong banks were created due to hard labour of employees concered. Now the reserves created by these banks are being fretted away in making provision which will lead to write-off eventually. Thus the hard labour of public and bank employees are getting passed on to fradulant borrowers!! As bees collect honey, monkey drink it later on!!

Like 

R Tayal

May 25, 2016

Rahul finds it "SHOCKING' that Modi & his ministers have little investments in stock market. I find it "shocking" that Rahul thinks so. I thought it was only the business news channels that acted as if "markets equal nation". There is a huge part of Indian economy that is not represented by the markets. The illustrious economist Raja Chelliah (whom even Manmohan Singh held in high esteem) had once (very much in the post-liberalization era)famously said "markets can go to hell for all I care. They don't dictate government's policies". Govt's job is to work for the all round growth of economy & nation & not just the markets. To that extent, Rahul's equating the Govt to "CEO of Markets" is childish. The fact that over the last several years the markets have seen huge volatility on a daily/weekly basis itself makes the integrity of market operators suspect and is enough to scare away the retail investor.

Like 

RAJESH

May 25, 2016

Dear Rahul,
You have pointed out that Mr. Modi has 79% of his money in real estate. I would have really appreciated if a learned person like yourself had taken some effort to read the absolute wealth of Mr. Modi, which as shown in your table is Rs.26.1 lakhs. Would you expect a person with such limited wealth to invest in to equity and not buy himself a house?

Wish people don't pass comments simply on the basis of % allocation without taking in to account the absolute values. I am really disappointed at your analysis.

Like (1)

Sundaravaradan S

May 25, 2016

Hi,
Stocks & Modi's Ministers...
What COULD happen if ruling Party's Ministers have Stocks of INDIAN Companies...?

1. The company will manipulate the Ministers & the Stocks of their Companies...???
2. The OPPOSITION Party, will have people to do STING operation on the Ministers of ruling parties
and manipulate the Media, the Ministers & Ruling Party-Chief...!!!!
3. What can the Ruling party DO.......?
ADVISE every minister, not to INVEST in Stocks of Indian Companies.....!
------

Think.....THINK...THINK.....!

Like (1)

Krishnaswami Bhat

May 25, 2016

PM Modi and his ministers do not want to own any equities because they do not want to be close to any promoters. Just think about it: If any such company does any wrong thing, then it will become a major scandal and then the ministers will not be able to take unbiased decisions. There will be a situation, which is called Conflict of Interest.

Like (1)
  
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