Will this make you fully trust broker reports? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this make you fully trust broker reports? 

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In this issue:
» What does the best indicator of recession now say?
» Is this why Obama's policies seem confusing?
» Has India got its priorities wrong?
» The best commodity bet in emerging markets
» ....and more!

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HDFC Ltd, Infosys and Biocon. What do you think is common between these three firms? You certainly won't be wrong if you answered that all three of them qualify as being the bluest of blue chips. That they certainly are. However, we are looking for something very recent. And here, what comes foremost to our minds is that they have been at the receiving end of a few brokerage reports. While Infosys has been taken to task for its enormous cash hoard, it is the aggressive or rather inappropriate accounting practices of the other two that have come into question. The list by no means ends here. It is populated with a clutch of other companies who too have come in the firing line.

It is a different matter altogether that the companies under consideration have mostly chosen to ignore the claims made by brokerages. But we certainly see the dawn of a rather new trend here. The trend of equity analysts shedding the robe of PR agents for the companies they cover. And instead, donning the garb of a forensic accountant and even a shareholder activist. Indeed. Analysts who once went around town writing only good things about companies are not afraid to give even SELL recommendations now.

All this makes us wonder whether objective, unbiased equity research has finally come of age in India? While the signs are encouraging, it will be too early to uncork the bubbly according to us. For all you know, it could just be a survival strategy from brokerage firms. Thus, once bull markets return, they could again go all out in pleasing their clients, ditching genuine research in the process.

The best way to judge the genuineness of a research firm according to us is to remember this small proverb from the venerable Charlie Munger - 'Whose bread I eat his song I sing'. In other words, it is extremely important to understand the revenue structure of the brokerage firms coming out with the report. If it is paid for by the clients they write about, you can totally forget about getting an objective report. But if the report is paid for by investors, there is a very strong chance that it is genuine. Of course, there could be errors even here, but since the incentives for an analyst would be linked to the correctness of the report, he would go all the way to ensure a totally objective report.

We don't know for sure whether the new approach by brokers is here to stay. But remembering the principle mentioned above will go a long way towards solving the issue of trustworthiness of research reports we believe.

Do you think your broker can be fully trusted to come out with objective reports? Share your views or you can also comment on our Facebook page / Google+ page.

01:28  Chart of the day
North America, which includes the US, no longer has the highest population of millionaires. That honour now belongs to Asia. Today's chart of the day highlights how as per the recent world wealth report by Capgemini, Asia is now home to the largest number of millionaires in the world. At 3.37 m millionaires, it is only marginally ahead of North America as of now. But that gap is all set to widen in the coming years as Asia, led by China and India, continues to log in strong economic growth and create more wealth for its citizens.

Source: World Wealth Report 2012

Imagine an alien reading Indian business daily to try to form an opinion on the economy. His state would be pitiable to say the least. After all, some of the recent developments in Indian economy are perplexing to the hilt. On one hand, the GDP growth is touching historical lows. Deficits are ballooning and rating agencies are threatening to offer a 'junk' sovereign rating. On the other hand, the world is looking at India for jobs. Food production and procurement have broken records. Plus, we recently offered a US$ 10 bn (Rs 560 bn) aid to 'poor' debt crisis stricken Europe'.

What does one make of all this? As we had said earlier, our heart goes out to economists and analysts who have to figure out short term trends from these confusing signals. At the same time, the government's inability to send out some strong signals is frustrating. That alone could soothe ruffled feathers and bring back long term investors into Indian markets. Moreover, doing something about storage of 19 MT of excess food currently lying in the open could solve inflation problems as well.

Instead of pressuring Reserve Bank of India (RBI) and forcing PSU banks to lend cheap, some quick policy measures could address multiple issues. Showing generosity to frivolous European economies comes at a cost. Having ambitions to become a world super power means no harm. But ensuring that the problems in your own backyard are resolved is more pertinent we guess.

So what do you think is the best commodity bet in the emerging markets in recent times? If you think it is gold or even oil, think again. It seems that opportunity lies in palm oil. Let us look at the demand side first. Emerging markets have grown at a stupendous rate in the past few years. With this, incomes have also swelled. This in turn has fuelled the demand for food rich in calories and saturated fats. This is where palm oil comes in. In fact, global demand for palm oil has risen by a CAGR of 7% for the past 10 years. Prices have tripled.

Further, palm oil is more than 10 times more efficient per acre than soybean oil and 7 to 8 times more efficient than rapeseed oil. Every acre of palm planted yields nearly 11 times the volume of soybean oil and 7 times the rapeseed oil. Total land under cultivation is somewhere around 15 m hectares. This is less than 2% of that which is dedicated to soybean production. On the supply front, Indonesia and Malaysia produce 87% of the world's palm oil followed by Thailand and Nigeria. Countries such as Kenya and Brazil are also ramping up production. Thus, in a world where there are still millions to be fed, palm oil could be one commodity that could achieve this simply because it yields more energy per acre. And hence, this is a commodity that should be on everyone's radar.

More or less we are all disillusioned about the merit of politicians and government institutions. Their mere mention brings to mind images of corrupt, dishonest and power hungry individuals. But they are even more dangerous than that. Let's take the case of US President Mr Barack Obama. With elections just a few months away, one can imagine what's going to be his single-minded agenda. He may be busy portraying himself as a messiah for the common man with his socialistic ways. But what he is doing behind the scenes is reminiscent of dictators. A gentleman by the name of Thomas Sowell shares some interesting insights.

For one, Obama clearly doesn't want market forces to determine the course of the economy. He wants the control of the economy to remain with politicians and bureaucrats. But the kind the control that he is seeking is very insidious in nature. He doesn't want the government to own the means of production. Because that would call for answerability. He rather prefers that to be in private hands. Obama enjoys calling the shots from behind and then shifting blame for any disaster on private entities. We're afraid the story in India would hardly be any different.

The first thing that comes to mind when we see skyscrapers in a city is development. We get the feeling that the city and therefore the country must be highly developed as it can afford such lovely buildings. But what if we were to tell you that skyscrapers actually indicate recession. That's right. Spookily, plans to build skyscrapers are closely linked to oncoming recession. This was the net result of a study carried out by Barclay's quite a while ago.

If their study's results are anything to go by, the world is headed towards another recession. This is based on the announcement made by China. The dragon nation plans to build the world's tallest building in an astonishing period of seven months. The country does have the resources and the muscle power to accomplish this feat. But the bigger question is does that mean that there is an oncoming recession? The indicator has proved to be eerily true most of the times and the signals coming out of China do point towards a correct prediction this time as well.

Meanwhile, indices in the equity market in India have been trading lacklustre today with the Sensex down by more than 50 points at the time of writing. Heavyweights like Reliance Industries Ltd and Tata Consultancy Services were seen driving most of the decline. Most Asian markets closed weak today with Europe too opening on a negative note.

04:52  Today's investing mantra
"The biggest mistake people make is to be co-opted by management. The CFO will always have an answer for you as to why a certain number that looks odd really is normal, and why some development that looks negative is actually positive." - Jim Chanos
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5 Responses to "Will this make you fully trust broker reports?"


Jun 22, 2012




Jun 22, 2012

As you have rightly observed becoming a super power is the idea that PM MM Singh has been toying with for some time.He must know that India is lagging behind in economic development and in vital economic indicators and our affordability is very low indeed. His offering on a platter $10 billion to Eurozone bail out is nothing short of trachery on the Indian people. The amount is almost equal to 10 per cent of our direct tax collections. It is surprising that no political party has made any critical
or commending comments on that issue. This speaks a lot about their patriotism. charity begins at home. the UPA II has become an albatross around our neck.

Like (1)


Jun 21, 2012

Even equity master recommendations during last one year or so has been awful.Miserable;For instance IDFC.You have to review your Analysis Process.

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Jun 21, 2012

Why don't you folks start a similar 5 minute wrap up edition of US markets ?

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Jun 21, 2012

Palm oil price tripling in 10 years is CAGR of 11.6%, im sure gold would have given better returns than this. But being a perishable commodity, its holding periods are short, implying shorter future contracts.

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