Could the Greek tragedy lead to happy endings for investors?
(Jun 29, 2015)
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In this issue:
» Private Equity deals in India gain momentum
» Tough times for realty firms
» Round up on the markets
» ...and more!
Greece - a nation known for offering the world its legendary heroes like Hercules and Achilles has now fallen from grace. Ironically, the country has become Achilles' heel for the Euro zone and for the institutions like International Monetary fund.
What it still retains however is the flair of giving the world epic dramas that have the power to shake great empires. The latest drama is about the Greek debt default- the potential casualties being Euro zone, IMF and who knows, may be the global economy. For now, it is moving enough to rattle the global stock markets.
Greece owes billions in debt to IMF and European Central Bank. It is no position to pay that debt by itself. The bail out talks between Greece government and foreign lenders have ended up in a stalemate. For if Greece accepts the help it will have to accept a policy that would mean high taxes and lower pensions, a bitter pill to swallow indeed. And something that Greece believes will deepen the economic crisis. The choice is between the devil and the deep sea. If Greece defaults, it may get expelled from the Euro zone.
As the rulers have failed to come to an agreement, the decision to be or not to be the part of a Euro zone has been left to the public vote that will be conducted on July 5th. And with this, the drama has taken an interesting twist, with stakeholders across the world left in a state of suspension. Meanwhile, the banks in Greece have been shut, and capital controls have been imposed.
It is interesting to see how Greece, which contributes to a small portion of Euro zone's GDP, has been the seismic centre lately for global stock markets. The benchmark indices back home have crashed, with Sensex slipping down 600 points in a day. Not just India, but all major Asian markets are trading in the red. The event is a harsh reminder of how vulnerable we stand to the global risks in an era of high economic coupling. It is not just Greece. The bubble in China's stock markets and terror strikes in several locations by ISIS are some of the events that could have defining impacts on the fate of emerging economies, India included.
So, what happens next? We can not hazard a guess on events and consequences in the short term. The best non investment short term advice we can give is that those of you planning to visit this beautiful but ill fated nation should keep your wallets packed with cash as ATMs and banks are likely to be shut. Better avoid the trip altogether considering the capital controls.
As far as the world of investing is concerned, the knee jerk reaction of the markets to this negative global event offers great opportunity to buy some of the safe stocks at reasonable valuations. However, this is not as easy as it seems.
As Tanushree Banerjee, the Managing Editor of Stock Select cautions, the recent correction can also make some of the fundamentally weak stocks appear cheap, thus leading to investors getting stuck with value traps. As such, it is extremely crucial to not just focus on price corrections, but see the valuations in correlation with the fundamentals. The Stock Select team is constantly on the lookout for safe stocks that could become very attractive with the recent correction. Meanwhile investors need to ensure that irrespective of the market volatility, they do not give in to undue fear and keep their exposure only in the most fundamentally sound companies. Most importantly ensure that your exposure to no single stock crosses 5-6% of your overall portfolio. Doing so will ensure that your portfolio remains resilient no matter what the fate that Greece eventually meets.
Do you think that negative global events like the ongoing crisis in Greece offer opportunities for the long term investors in Indian stock markets? Let us know your comments or share your views in the Equitymaster Club.
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The improved investor sentiments made the Sensex touch life time highs last year. And while the stock markets are struggling this year for various internal and external factors, one segment that seems set to rise is Private Equity (PE) deals. While we are yet to complete six months, the year so far has already surpassed prior years with regards to the number of PE deals and the value of the same.
As an article in Business Standard suggests, the PE deals in the year till date are estimated at US$ 12.7 bn. With almost 6 months left for the year 2015 to get over, this amount is 17% higher than the peak PE deal value in 2008 and around 22% higher than the value last year.
A focus on efficient governance and shift towards better policies has boosted the confidence of PE investors. Not to mention an improved exit environment.
This is indeed a good development for an economy like India where the need for capital can hardly be overstated. However, this is also a trend that warrants some caution. The PE investors are mostly taking exposure to businesses which are in the nascent segment, and which are difficult to value. It is worth mentioning here that the major beneficiary of high PE activity has been the Indian e commerce sector, comprising almost around a third of the total.
When the PE firms make exit, these businesses are likely to hit the IPO market if the market sentiments are positive. And when this happens, we recommend investors not to get carried away by the broader trends and stick to their circle of competence and look for attractive valuations.
PE deals in India accelerate
Source: BS Research Bureau, Business Standard
* Bloomberg data counts deal value of only those who disclose it
While the private equity segment is overheated, there is another sector that is struggling for funds. With equity markets not being as favorable as last year and banks already struggling with bad debts, the players in the realty sector are not leaving any door unknocked to get funds to finance unfinished projects. With no support from markets or banks, the realty firms are looking at the unlikeliest of the sources, including private investors with money.
But why would these people be ready to put their money when even experienced investors have been hesitant? Well it seems that the lure of high returns has made them willing to take the risks. As mentioned in an article in Economic Times, the private money is available at a rate of 36%-40% per annum. And that too for the ones that meet the private investors' selection criteria that focus on regular interest payments and loan servicing.
A not so great economy has led to a slack in the demand in the real estate. However, despite the high inventory build up, the prices in real estate remain sky high. The unwillingness of the builders to compromise on the prices has done no good so far. The builders are apprehensive that a single round of correction will not result in property buying, but will only build up expectations for further price cut. And with high costs paid for land acquisition, this may not be a good idea. This is indeed a precarious situation with no perfect solution. However, if the firms in the real estate are suffering, it is well deserved we believe. We hope that the crisis leads to catharsis with realty firms forced to deleverage and only competent players getting the environment to survive.
The Indian stock markets opened the day in the red and continued to trade below the dotted line. After crashing almost 600 points in the early hours, the markets made a sharp recovery. At the time of writing, the BSE-Sensex was trading lower by 167 points (down 0.6%). Barring FMCG, all sectoral indices were facing selling pressure with stocks in realty and software segment leading the losses.
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years". - Warren Buffett
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