Such investors could make FIIs worthless! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Such investors could make FIIs worthless! 

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In this issue:
» Singapore not wanting to be Mauritius like
» Two impossible outcomes of the Euro crisis
» Why investing in mutual funds set to get more expensive?
» Burden of higher spectrum charges to fall on...
» ...and more!

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It is not easy to be greedy when others are fearful! Ones that manage to stick to their conviction certainly make a killing. Going against the opinions of Mr Market time and again is what it takes to be a truly successful value investor. But unfortunately, in stock markets like one in India, it takes more than fundamentals and valuations to score well. Particularly in the short term. For foreign investors playing the cheap money - high returns arbitrage control most of the market liquidity. And every time there is the slightest hint of short term uncertainty, they prefer to withdraw. It is therefore not uncommon for even the most astute investors to find their portfolio in the red in the short term. Stocks bought at unbelievable valuations head even lower. Ones sold at lofty prices often tease investors by going even higher. But those who can avoid a panic attack from these gyrations can truly savour the fruits of patience in the long term. That makes us wonder how wonderful would it be if Indian markets could rid themselves of the foreign institutional investors' (FII) whims and fancies altogether!

Some of our homegrown institutional investors have not always been at their best and most prudent behavior. Reason being many of them are government controlled. And the government's political interests are not always aligned with economic interests, as we all know. Hence every time we come across a shrewd move by any of the large domestic investors we are nothing but delighted! Take the case of Life Insurance Corporation of India's (LIC). The insurance giant has billions at its disposal for long term investment. But rarely does it show the astuteness that it did yesterday. LIC purchased Rs 20 bn worth of shares of software behemoth Infosys right after the stock crashed post a disappointing result announcement. Now buying a fundamentally robust and extremely well managed entity at a time when Mr Market is fearful is laudable. The fund managers at LIC managed to shut out all the noise with regard to Infosys' delayed hiring plans. Instead they focused on whether the company is capable of yielding safe and handsome returns over the long term.

We only wish that LIC acts more often like this whenever the FIIs play truant. Also having more entities like LIC (pension funds etc.) could make FIIs worthless to Indian markets altogether! We know that this is wishful thinking for the time being. But if the government is keen to make Indian capital markets more investor friendly , having strong domestic institutional investors is paramount. Not only will it bring in some resilience in the capital markets. But it will also give confidence to retail investors about their decisions in value investing.

Do you think the government should promote more domestic institutional investors (like pension funds) to invest in capital markets for the long term? Let us know your comments comments or post them on our Facebook page / Google+ page.

01:20  Chart of the day
Inadequate and uneven rainfall is one of the biggest worries for the government these days. For critics are already predicting spiraling inflation going forward. If the Rain Gods do not get generous soon, experts believe that supply shortage could take inflation to new highs. But as data from the past shows, there has not been a very strong correlation between rainfall deviation and inflation, against popular belief. In fact even in years of adequate rainfall, prices have risen due to unrelated factors. Thus instead of staring towards the skies, our policy makers would do well to undertake policy measures that would persistent inflation.

Source: Economic Times

Just last week we highlighted how the tiny island nation of Mauritius is having sleepless nights on account of GAAR policy (General Anti-Avoidance Rules) announced by India. And now Singapore has become the second country to send a high-level delegation to the country. However unlike Mauritius, Singapore has not made any pacifying offer to India. Instead, its Prime Minister has termed as complicated, the environment for doing business in India. "When a company invests in a particular project, and it is very often a big one in India, it involves a lot of money, a long gestation, a long payback period and a necessity of predictability of the environment in which they are going to operate", the Singapore Prime Minister is believed to have said.

The comment certainly must not have gone down well with Indian policymakers. But what he said does seem to be true. At a time when companies in India are finding it hard to get projects off the ground, it is only natural to expect overseas investors to feel the same way. Thus the policymakers could do a lot better for India if they focus less on releasing one white paper after another. And instead take some concrete actions to make the investment environment more conducive.

Nobel-Prize winning economist Paul Krugman has two possible outcomes on how the Euro crisis will end. But, both of them are impossible. One possibility is that the ECB aggressively buys peripheral debt and caps borrowing costs of Spain and Italy. This is while it makes it clear that it will promote monetary expansion that boosts inflation in Germany and helps restore competitiveness between Germany and the rest of the euro zone. The other possibility is a doomsday scenario. Basically if the ECB stops protecting all the banks there will be wide spread bank runs and currency redemptions. This would mean the end of the euro system which would have worldwide implications. What will actually happen? Well, it's all up to Germany. They seem to be the only European nation with some fight left in them.

The Indian mutual fund industry has been crying foul over its weakening business prospects. It has been lobbying hard to get the expense ratio increased. Currently, the expense ratio is capped by the regulators at 2.25% for equity funds. The same is proposed to be increased by 0.25%. This is likely to make investing in mutual funds expensive by 11%. The fund industry wants the government to increase the expense ratio so that it can pay more to distributors who are said to be having a tough time after the ban on entry loads. But are these reasons valid enough for the hike? Or is it just a hoax cry? Let's look at some numbers. Recent data released by Association of Mutual Funds of India (AMFI) shows that distributors have made good money in the year gone by. Their profits increased 5% year-on-year (YoY) from Rs 17.7 bn in FY11 to Rs 18.6 bn in FY12. Even the top fund houses witnessed a surge in their profits in the range of 5% to 22% in FY12. This too, after paying 5% more commissions to their major distributors. Given these above figures, we don't think mutual funds have a strong case for a hike in expense ratio.

Regulators and companies are at perpetual discord with each other. There is a never ending battle on who is right and who is wrong. The difference lies in the difference in opinions and aims. While one seeks to increase the bottom line the other is looking at the larger picture and greater good. As a result it is not surprising that the Telecom Regulatory Authority of India (TRAI) and the telecom companies end up being at loggerheads with each other. More often than not the companies feel that TRAI is treating them unfairly. And when it proposes sky high prices for reissuing spectrum, naturally the companies would scream. They went on to saying that TRAI's recommendations would force them to raise tariffs by almost 90 paise.

But yet again, TRAI seems to differ in opinion. It feels that the burden of high spectrum charges would lead to a tariff increase only to the extent of 5 to 10 paise. But we feel that overall, both TRAI and telecom companies seem to be ignoring one very important thing here. And that is the customers. In either which way, they are looking at higher telephone bills. The rise in tariff whether it is 10 paise or 90 paise or anything in between would lead to bills going up. So the net loser is not TRAI or the government or even the telecom companies. It is the consumer who would be hit yet again by another government policy. Hope the next time any regulator decides on a proposal they decide to keep the consumer in mind. Not themselves or the government coffers.

The Indian equity markets were amongst the poorest performers in the past week, as the BSE-Sensex ended the week lower by 1.8%. Nevertheless, with the beginning of the result season of the quarter ended June 2012, the week gone by was an action packed one with a handful of blue-chip companies announcing their results.

As compared to the other major global economies, the emerging markets had a dull week with Hong Kong, Brazil and China ending the week lower by 3.6%, 1.9% and 1.7% respectively. Japan also was part of the top underperformers list with its benchmark index reporting a weekly loss of 3.3%. On the other hand, European markets had a positive week with Germany, France and UK ending higher by 2.3%, 0.6% and 0.1% respectively. The US markets ended the week on a flat note.

Source: Kitco, Yahoo Finance

04:50  Weekend investing mantra
"We like stocks that generate high returns on invested capital where there is a strong likelihood that it will continue to do so. For example, the last time we bought Coca-Cola, it was selling at about 23 times earnings. Using our purchase price and today's earnings, that makes it about 5 times earnings. It's really the interaction of capital employed, the return on that capital, and future capital generated versus the purchase price today." - Warren Buffett

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    6 Responses to "Such investors could make FIIs worthless!"


    Jul 17, 2012

    ELSS funds currently are not that great performing funds, and fund houses maintain it that way cause they know funds will flow in by default due to tax exemptions. The Portfolios are not that actively managed for these funds. On the other hand a full fledged Equity fund or any other scheme the fund house brings that do not qualify for tax exemptions have a very good track record of perfomance ( I would say atleast a cream layer of funds). With the difference between these two maintained people will think twice why put all funds in ELSS.

    Mutual funds need to be more accountable when it comes to ELSS or else simply raising the limit wouldnt server the purpose.


    S.R. Jagganmohan

    Jul 15, 2012

    Yes. The Govt. will do well to allow and encourage pension funds to invest long term in equity market. Then the Govt. should encourage them to act like LIC did with Infosys purchase based on the fundamentals of the company and on the strength of its management and from a long term perspective. This will give a better and healthy direction for the market and to weather the unhealthy winds from the whimsical FIIs.



    Jul 14, 2012

    Financial reforms should be undertaken to permit market-determining investments and savings,eg;Import duty can be further liberalized to attract more FDIs not jeopardizing tax/ GDP ratio.



    Jul 14, 2012

    LIC will definitely make such good moves in the market lest its political bosses in the north block. We can get rid of the FIIs totally from our market, if only our political bosses are little more economy savvy.


    Shabbir Haidermota

    Jul 14, 2012

    Not only should the Government allow the Pension Fund money to be invested in stock markets, I would go a step forward and recommend allowing ELSS Mutual Funds to remain eligible under Section 80C of the Income Tax Act, 1961 AND increase the limit from the present Rs.1 lakh to at least Rs.3 lakhs. This will induce retail Indian investors to invest in the stock markets through the relatively safer route of mutual funds and increase DEPTH in the Indian stock markets with long term retail investor money and base.
    Yes, there will be a revenue loss to the Government in the immediate future as a consequence of this measure, but that I think will be a small price to pay for greater stability as well as depth in the Indian stock market.

    Like (1)

    Rashmin Shah

    Jul 14, 2012

    We are capable of everything, from Money to Management of Money to Making of Money.Its vision put in to action without wasted interest, and such thing could take place.We ofcource agree with you that such institutions should come along to show us our real vision to make financial strength on our own. TOTALLY INDEPENDENT.

    Like (1)
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