Why is this the perfect time to identify great stocks? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why is this the perfect time to identify great stocks? 

A  A  A
In this issue:
» India ranks poorly among Asian peers
» Did Greece commit fraud to enter the Euro Zone?
» Central bankers are fleeing away from the euro
» FIIs are selling Indian stocks
» ...and more!

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We all know that the Indian economy is facing some really tough times. The rupee has been falling, the economic growth is faltering, government deficits are bulging up and inflation continues to remain high. All these factors have severely affected the growth and profitability of Indian corporates. This in turn has put a dent in the confidence of retail investors in Indian equity markets.

Despite all these depressing factors, we strongly insist that there couldn't be a better time to go scouting for fundamentally strong stocks. Surprised? Let us share with you the reasons why we think so. Most companies tend to do well when the times are good. At such times, it becomes difficult to figure if the success is attributable to the strength of the management, or to sheer luck and positive market forces. Legendary investor Warren Buffett has very aptly said, "It's only when the tide goes out that you learn who's been swimming naked." In other words, it is only when the business cycle turns adverse that the true competence of a company's management can be known.

During the heydays preceding the financial crisis of 2008, several companies chalked out massive expansion plans fuelled by huge debt. Some made big ticket acquisitions while others ventured into unknown territories. Now when the business environment has turned sour, the consequences of these past extravagances have backfired. Many are witnessing a drying order pipeline while their cost structures have inflated owing to the burden of excessive debt. It has now become clear which companies loaded up their balance sheets with excessive risks.

On the other hand, companies that had been wise with their capital, maintained their focus on their core competencies and avoided the lure of excesses have managed to endure the crisis with relatively lesser pain. These are also the companies that have been the best wealth creators for shareholders.

It is clear that adverse economic conditions tend to separate the wheat from the chaff. This is indeed the right time for retail investors to roll up their sleeves and stock up the wheat while it's available at a good price.

Do you think this is the ideal time to identify great stocks? Share your comments with us or post your views on our Facebook page / Google+ page.

01:25  Chart of the day
Over last several months, the inherent weaknesses of the Indian economy have come to the fore. The government been has putting the blame of India's deteriorating economic condition on the eurozone crisis. But several indicators hint that the India's current predicament is majorly the result of its own doing. Today's chart of the day compares the current account deficit of India with some Asian peers. It is evident from the chart that India has the highest current account deficit among major Asian economies. India's current account deficit has been adversely affected mainly due to high dependence on fuel imports, high subsidies and a falling rupee.

Data source: Business Line

Here's one more evidence perhaps - and a pretty strong one at that - of why Greece's exit from the Euro Zone is all but guaranteed. And it has to do with the very intention of why Greece wanted to join the Euro Zone in the first place.

If Michael Lewis, the famous author of books like Liar's Poker and The Big Short is to be believed, Greece's agenda right from the beginning was suspect. It did not join the group to improve its long term competitiveness. Instead, it wanted to have fun courtesy the low interest rates and the borrowing power that the entry into the Euro Zone would provide them with.

It even went to the extent of fudging its budget deficit numbers to achieve its goal. Yes, that's correct. The Greek government is believed to have falsified its numbers to gain an entry in the Euro Zone. And once it did so, it borrowed freely at record low interest rates and distributed the money amongst its Government employees and citizens.

It is hardly any surprise then that a hard working German who pays taxes through his nose may absolutely hate the sight of his money being squandered by a greedy and free spending Greek. Thus, as it turns out, this marriage was doomed right from the beginning. It will only take a miracle to keep the Euro Zone together.

There may be plenty of threats to its numero uno status! But all said and done, the US dollar remains the most widely held currency at central banks. The greenback in fact makes up more than 60% of total reserve funds according to the IMF. In comparison, just a quarter is held in euros. Until recently, central bank managers had considered increasing their euro exposure to as much as 40%. This was in a bid to diversify risk and reduce exposure to the US dollar. But with the drastic fall of the Eurozone fortunes, their views stand changed. A number of central banks are now diversifying into Sterling, the Australian dollar and the Canadian dollar. Therefore the Euro is consistently being taken to the cleaners. With central banks keen to get rid of their euro holding and with no takers for it, the Euro lost nearly 7% against the US dollar in May. It seems that with the lingering fears about Greece's exit from Eurozone, there is more correction in the offing.

At a time when the markets are seemingly 'very attractive' in terms of valuations from a two to three year perspective, one would imagine investors (especially the 'know it all' institutions) to be accumulating stocks left right and center. Institutions, market participants who significantly influence the market movement in India, however, seem very skeptical about the Indian markets. This holds true for both - foreign and domestic institutions. But the former's market perception seems to have changed in the past two months.

From being a net buyer in quarter ended March 2012, the perception of Foreign Institutional Investors (FIIs) has changed in the following two months. Just to give some figures, FIIs invested a total (net) of about Rs 440 bn during the quarter ended March 2012. However, it is believed that they pulled out about Rs 11 bn from the domestic equities in April and about Rs 6.7.bn (net figure) during the month of May this year. While the amounts are relatively lesser in terms of absolute numbers, they speak a lot about the sentiments and perception of the foreign market participants. And one could not really blame them as well! With the truckload of negative news and issues - the many scams, rupee depreciation, high inflation, tax provisions, political inaction, trade deficits, and the recent slowing economy - emanating in the past few months, FIIs' negative perception was expected.

India has 456 airports and airstrips spread all over the country. A number of these were built before or during World War II. And only 84 are currently operational. The government estimates that a whopping sum of Rs 675 bn would be required to develop and modernise airports during the 12th Plan period. The Airports Authority of India is expected to contribute Rs 175 bn. This means that half a trillion rupees would need to come in from the private sector. This amount is 67% higher than the Rs 300 bn that was pumped in by private players during the 11th five year plan. Keeping in mind this big investment, the government has put in place a draft policy on tariff regulation. Currently, only 15 airports are under the Airports Economic Regulatory Authority. The draft proposes that the government can however intervene on a case by case basis. But for these big investments to come through predictability on regulations and decision-making is needed. Else the private sector may shy away from the space.

In the meanwhile, the Indian equity markets have been hovering in the negative territory today. At the time of writing, BSE Sensex was down by 77 points (0.5%). Most of the sectoral indices were trading weak. Red marks were seen across Asian stock markets and Europe too opened in the red.

04:40  Today's investing mantra
"It took me 20 years [to get out of the textile business]. If you asked me to run a tough business, I wouldn't do it. It's too tough. Even the best manager in the world couldn't fix it. If you gave me first draft pick of all CEOs in America and you said it was my job to run Ford Motor now, I wouldn't do it." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Why is this the perfect time to identify great stocks?". Click here!

    3 Responses to "Why is this the perfect time to identify great stocks?"


    Jun 4, 2012

    Please respect readers' intelligence and stop writing about mammoth investments in infrastructure including airports and highways using some phony bombastic statistics. "Ho Jaayega" and "Kar Denge" are hollow terms used by Indian businessmen, administrators, and politicians.
    The country of India is a country of deception and "Mera Desh Mahaan" is as much an abusive term as a lie as no one writing it and reading it believes in it.
    India is no different from Greece though Indians are different from Greeks. They are different from Greeks because their aptitude for being corrupt is much bigger.

    Like (2)

    Agnel Pereira

    Jun 4, 2012

    Quite contradictory statements in just 5 minutes! At one end you encourage stock picking of good companies, at the other end, you are saying you expected FIIs to be sellers due to all negativity and on the third extent, the future is unknown due to the currency crisis led by the Euro. Couple of days ago I think you mentioned about how it is 100% likely to have a recession! If FIIs are selling, it is likely that they are selling good large-cap stocks (as they hardly invest in small or middle caps). We have seen how good companies like L&T, BHEL, Hero Motors have suffered due to their selling perhaps. Since this is going to continue (and with the 2008 debacle still entrenched in the investor's mind, with the other global woes looming large) it will be foolish to be into a buying spree yet. Maybe news of good monsoons, a rate cut as hinted by an RBI officer and lower real impact of Greece withdrawal from Euro will help the markets to bottom out.

    Like (2)


    Jun 4, 2012

    Great business does not result in great stock. If the overall derating happens in the market. No amount of greatness can help. Infosys is great company. But stock market tell something else for the last 18 months for Infosys. 18 months is not a short period.

    Like (1)
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