Profit from short term investment opportunities! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Profit from short term investment opportunities! 

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In this issue:
» Will El Nino be a dampener for Indian GDP growth?
» Fuel subsidies in India are a sham!
» Iraq crisis to open window of opportunities for Indian investors...
» Will Fed hike rates this time?
» ...and more!

These are the times of extreme volatility in Indian stock markets. While the economy is not yet out of the woods, the Indian stock markets have been painting a different picture altogether. With Modi Government taking a charge at the centre, the bulls in the markets have been unleashed. The sense of despair that once ruled the markets and economy has given way to positive sentiments.

As investors get carried away by sentiments, fundamentals have taken a backseat. At Equitymaster, we have always asked investors to be cautious of the euphoria and follow a bottom up approach for investing in stocks. While some may question our view, we believe that common man's inability to grasp the complexities of the short term events makes short term trading highly risky. As the statistics reveal, around 90% of the traders end up losing money using this approach.

However, just because we are long term value style stock pickers does not make every other investing strategy bad!

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01:20  Chart of the day
While the South West monsoons have already made their presence felt in some parts of India abating worries of a delayed rainfall, fears of El Nino have still not subsided completely. Many forecasts continue to claim that El Nino will disrupt India's monsoon this season. It may be noted that El Nino phenomenon has occurred thrice in India since 2004 resulting in below average rainfall in the respective years. Out of these three occasions India faced a drought like situation twice.

Thus, a forecast of El Nino this year sounds a grave concern for India. Particularly because India is an agrarian economy. A below average rainfall can hurt agriculture growth in India and thus put GDP growth under pressure. Further, fall in agricultural growth can also lead to a decline in farm income. This will impact the rural spending as disposable incomes decline. Lastly, poor rainfall may also lead to a spiral in food prices. All these factors indicate how a deficient monsoon could spell a death knell for Indian economy. That is why it is important that the government focuses on ramping up infrastructure in agriculture; particularly by bringing more of the land under irrigation.

Do you think that that a poor monsoon will have a significant impact on India's GDP growth ? Let us know in the Equitymaster Club or share your comments below.

Will El Nino put GDP growth under pressure?
# Years when ElNino occurred

After years of poor reforms and policy paralysis, a lot of hopes are pinned on the new government at the Centre to take some bold steps and revive the Indian economy. Among other things, there has been a lot of buzz about subsidy reforms in the petroleum sector in recent times. In theory, it may seem correct. Heavy subsidies tend to hurt government finances, investments and the economy, at large. Hence, subsidies should never be perpetual. There should be a plan to wind them down. And while there may be some short term pain in terms of higher cost for consumers, it bodes well for the economy in the longer run.

But here is a question... Do Indian consumers really enjoy subsidies on petroleum products? One may counter - Isn't it true that oil market companies have been incurring massive losses each year because of subsidies? Yes that is true. Oil companies do lose money selling petroleum products at subsidized rates. But the same products are then loaded up with massive state and central government taxes and which make the subsidies inconsequential for the end consumer. The end consumer in India ends up paying a bomb. Even more than what consumers pay in Japan and the US. And that too for lower quality petrol and diesel. So the subsidy program in India is nothing more than transfer of profits from OMCs to central and state governments. In our view, petroleum subsidy reforms should not just be about removing subsidies on petroleum products, but also rationalizing the taxes on the same.

For those who've missed the recent rally in the Indian stock market, we can see a small window of opportunity opening up. Last week, the Indian markets ended lower on the back of news of turmoil in Iraq. Now, it's common knowledge that any time there's something negative brewing in the Middle East, crude oil is the first commodity to get affected. It was no different this time what with oil prices scaling new multi-month highs. And when crude prices catch a cold, there is a risk of pneumonia in the Indian stock markets. Consequently, if oil prices continue to climb, the much needed correction in Indian equities could well materialize. However, for savvy long term investors, this may not be the time to exit. As a matter of fact it will be the moment to stock up on equities. This is especially in the back drop of the Government taking steps to bring about a structural improvement in the Indian economy. Therefore, as Warren Buffett says, we don't quite like pessimism but we certainly like the price it produces. Indian investors could also be hoping that some amount of pessimism does indeed engulf Indian stocks.

The oil crisis resurfacing from the tension in Iraq is not the only overhang on stock valuations. Several other global concerns are catching up with investor euphoria in domestic markets. The US Federal Reserve's monetary policy for one is slated to be a sentiment spoiler. The US central bank's policy meeting on June 18 is unlikely to make changes to the bond buying program. The policy to reduce its massive bond-buying stimulus by US$10 bn per month is on auto pilot. However, as per Moneynews, this time around the Fed may refer to actual rate hikes. This second step of monetary policy exit can have far reaching effect on global liquidity.

We have our doubts about whether the Fed will take the step towards rate hikes very soon. Just a few days back, the European Central resorted to negative interest rate policy. The logic was to disincentivize banks from hoarding money and instead lend more aggressively. Thus we do not think the US Fed will take a stance that will be different from its counterparts in the West anytime soon. Asset prices will continue to inflate on the back of cheap money coming in from West. Companies will find it easier to borrow, if not in domestic markets then abroad. And economies will indulge in currency wars to protect their turf. Investors would do well to keep some gold in their portfolio as a hedge against such risks.

The erstwhile UPA government was hell bent on PSU firms doing their bit in terms of reducing the government fiscal deficit. So if a stake sale was not possible, the government forced them to dole out special dividends. The current government intends to do things a bit differently and in a manner which makes more sense. As reported in the Economic Times, the government may raise the dividend receipt target from state undertakings. More importantly, this will be linked with their ability to achieve capital expenditure plans. Thus, if a company is not doing much capex, it will have to return this excess cash to shareholders, the biggest one being the government. The point is that the government is of the view that there should be no idle cash lying with these firms. This is pretty much akin to what other non PSU companies do. While it is important to have sufficient cash reserves, too much idle cash is always questionable and hampers return ratios. And so if the excess cash cannot be utilized effectively, then it makes sense to give this back to the shareholders in the form of dividends or buybacks.

The Indian stock markets have been trading weak. At the time of writing, the benchmark BSE-Sensex was down by 96 points (down 0.4%). Majority of the sectoral indices were trading in the red with capital goods and power stocks being the biggest losers. IT and pharma were among the few stocks trading in the green. Asian stock markets were trading mixed today with China being the major gainer whereas Japan was trading in the red. European markets have opened the day on a negative note.

04:56  Today's investing mantra
"There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating." - Peter Lynch
Today's Premium Edition
What does the Iraq crisis mean for your portfolio?
The crisis in Iraq has sent oil prices soaring and will also have implications on inflation in India? What should investors do?
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1 Responses to "Profit from short term investment opportunities!"

T.K. Balappan

Jun 17, 2014

The Labour Laws Reforms cannot wait. The ID Act has to be repelled and the definition of "Industry" has to be scrapped. That is hurting us. Corruption has to be checked in all offices. And the Govt. offices should work six days a week and they be there at the designated time. Appointments should be contract based for three years to be renewed after review every year. Therefore if a dead wood is selected, at the most the country has to bear with that person for three years. All these "anywhere in India" LTC be scrapped. When the V CPC submitted, it had recommended this "5-day work schedule" and also recommended that there be only three closed holidays and the rest be restricted holidays. But these recommendations were overlooked.

For earning Rs.100 a street vendor has to work for 10 hours. A government servant in the lowest category earns around Rs.20,000 per month plus perks, bribes, and five day work schedule.

T.K. Balappan, Ahmedabad.

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