Will this key participant halt the rally? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this key participant halt the rally? 

A  A  A
In this issue:
» Government's plan to set up ARCs could be a scary proposition
» 40% of the infra loans to get restructured by the end of this fiscal !
» Can infra sector reduce the share of bad loans in the banking system?
»  High time to introduce fuel price reforms
» ...and more!

00:00  Chart of the day
The Indian equity markets are shining these days. This is in contrast to Indian economy that doesn't paint a bright picture. In the year till date, Sensex has gained around 21%. The bull run can largely be attributed to Modi factor pre and post elections with foreign institutional investors (FIIs) being its main drivers.

And in the meantime, there is an interesting piece of statistic that is not getting its due importance. We are here referring to the decline in the participation of retail investors in the current stock market rally, which is being more than made up by institutional investors. Consider this! In the last one month alone, around Rs 200 bn has been raised in the market through the qualified institutional placement (QIP) route. Meanwhile, retail investors are getting left behind. As per an article in EconomicTimes, the latest shareholding pattern data for 1000 odd companies suggests small investors have brought down their stake in two thirds of these companies. The trend is irrespective of the sectors or size. After the bitter experience of 2007 rally followed by a long bear phase (that led to erosion of most their wealth), the retail investors seem to be more focused on booking profits and protecting the downside.

But is anybody bothered? It doesn't seem so. The Government and regulator are not doing enough to restore the trust of retail investors in the markets. While another IPO boom is around the corner, nothing has been done to ensure fair pricing of the issues, the lack of which in the previous IPO boom led to a burnt fingers. Infact, with lesser share of retail investors in the rally, they seem to have absolved themselves of the responsibility to guard shareholders' rights. As far as Corporates are concerned, minority shareholders' interests are the last thing on their minds. Of the many cases where minority shareholders' interests were compromised, only in a few the dominant shareholder has been disciplined. And that too at the behest of shareholder activism, the cases of which have been few and far in between.

But can Indian stock markets really manage this momentum while sidelining the retail investors? We don't think so. The rally seems to be on a very slippery ground without the support of small investors, who are known to be long term investors. The current bull run is infact exposed to significant risks on the global front. And there are not one or two but several such risks. Weakening currencies in the emerging markets, the Fed's decision to withdraw the stimulus or even a volatility in crude prices to mention a few.

Hence, the current state is a lose-lose situation. It does not offer enough opportunity to retail investors to gain from any potential reforms. Also it makes the markets highly vulnerable. It is high time that regulators, Government and Corporates stop taking things for granted and do the necessary groundwork to restore the trust of retail investors and in turn the much needed balance in the markets. Meanwhile, investors should not get carried away by the euphoria and invest purely on the basis of fundamentals and valuations.

Do you think lack of retail investor participation makes the current bull run highly risky? Let us know in the Equitymaster Club or share your comments below.

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It was amply evident from the new NDA government's recently concluded budget where its priorities lie. The core infrastructure and construction sectors. These sectors, amongst other things, are also rife with high debt levels. Companies here have been quick to resort to high levels of leverage while taking on projects. And with economy seeing some rough weather, many of companies have been left in precarious positions with respect to their borrowings. The government's solution? It is now planning to set up asset reconstruction companies (ARCs), with a view to clean up bad debts in the power and road sectors.

Indeed, having companies specializing in buying and turning around distressed debt may seem like the order of the day. However, having the government as the chief sponsor in such firms is a scary proposition. The very nature of such a venture demands that the private sector rather than the government should spearhead such companies. This is because accountability needs to be very high when purchasing such assets. Any slippages on the part of the governments and it will mean the taxpayers once again end up getting the raw end of the deal. It would be much wiser if the government restricts itself to the role of a facilitator rather that sponsor of such institutions in India.

Infrastructure funding in most developed and developing economies has a dedicated funding avenue. More importantly, because of the tenure and risk involved, banks alone do not shoulder the entire responsibility. In fact specialized infrastructure funding vehicles and pension funds support infrastructure outlays. Hence the enthusiasm over the Indian government's push to banking system for funding infrastructure could be a little premature, we believe. Not because such an approach is destined to fail. But because the recent experience that Indian banks have had in infra lending clearly shows that they hardly have any expertise in appraising infra projects.

Banks have lent more to infrastructure as compared to any other sector in the past few years. However, it is estimated that one fifth of these loans have already been restructured. As per an article in Mint, nearly 40% of the infrastructure loans will eventually get restructured by the end of this fiscal. Hence the risk to the banking sector's asset quality from over exposure to infrastructure is evident. The government may facilitate the sector's ability to lend towards infrastructure. However, the banks themselves need to have the stomach for the risks. Without that the health of both, the infrastructure sector and the banking sector will suffer.

Now...we do not wish to be pessimists and write off the infrastructure sector once again. In fact in all likelihood, the vicious cycle for infrastructure firms in India is fast being replaced by a virtuous cycle. It can be recalled that in anticipation of strong growth continuing, a lot of infrastructure companies took on a significant amount of debt few years back. However, the economy started faltering and companies that took on debt started having cash flow problems. In order to mitigate the same, they took on more debt. Now, this in turn led to even greater strain on their balance sheets.

This continued till about a few months back when the economy finally started reviving. And as per a leading daily, these leveraged entities are now busy cleaning up their balance sheets. They are not only getting rid of non-core assets at attractive prices but are also going in for equity issuances. Well, the companies themselves are not the only ones rejoicing this change. It remains to be seen if the infrastructure sector can reduce the share of bad loans attributed to it in the banking system. If it does, the banking sector will also have a huge sigh of relief as it will mean significantly lesser non-performing assets going forward. The sector can then enhance its lending activity which in turn can help revive the economy further.

Oil is a very critical fuel for the growth and development of any economy. And since oil supply tends to impact almost the entire population and government finances, its appropriate pricing is a matter of great importance. But it seems oil pricing in India is mired in a perpetual controversy. As per an article in Business Standard, a recent report by the Comptroller and Auditor General of India (CAG) on the working of public sector oil companies raises some serious questions.

As per CAG, state-owned oil market companies had benefited to the tune of Rs 266 bn through the administered pricing mechanism. Even private players such as Reliance Industries and Essar Oil seem to have enjoyed supernormal profits because of murky pricing rules. In FY12 alone they gained Rs 6.67 bn on just high-speed diesel.

What is the reason for this anomaly? It seems a faulty and not-so-transparent pricing system is the culprit. For instance, the price at which private refineries sell refined petroleum to oil marketing companies is 80% import price-linked and 20% export price-linked. Now, let us tell you that export prices are lower than import prices. The reason is that custom duty and other charges get added to the import price. Why should custom duty be involved in the calculation at all? There are many such serious questions. It seems that reforms and better transparency in the petroleum sector is the call of the hour.

It has been around 6 years since the 2008 global financial crisis broke out and the response of the Fed has hardly been satisfactory. Indeed, a dangerous cocktail of low interest rates and massive bond buying has only increased liquidity and fueled the prices of various asset classes. The economic scenario has largely remained weak. While the Fed has been trimming its bond purchases, it has been rather vague with respect to its interest policy going forward. However, there is a minority of Fed officials that believe that it is high time that the US central bank stops these loose policies and begins raising interest rates. Indeed, these Fed officials fear that too much stimulus could fuel bubbles and trigger rapid inflation and we believe that these concerns are well founded. It is indeed quite ironic that the 2008 global crisis was a product of a loose monetary policy among many other things and the only way the central bankers have addressed this issue is to do more of the same. Thus, unless there is an end to such accommodative policies, another crisis of bigger proportions could very well be on its way.

In the meanwhile, the Indian stock markets continued to trade strong. At the time of writing, the BSE-Sensex was trading higher by 126 points (+0.5%). Majority of the sectoral indices were trading in the green led by oil and gas and FMCG. However, IT and metal stocks were facing selling pressure. Asian indices were trading mixed with Indonesia posting strong gains whereas Japan is the biggest loser. European markets have opened on a weak note.

04:50  Today's investing mantra
" The key to making money in stocks is not to get scared out of them." - Peter Lynch
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9 Responses to "Will this key participant halt the rally?"

M M Amalsadvala

Jul 26, 2014

Thank you Mr. Agnel Pereira for corrections in pointing out the exact issue of the flight of AI Plane.



Jul 22, 2014

Excellent news and observations you provide to your customers. Great thanks, just keep it up. Your quote--
"Thus, unless there is an end to such accommodative policies, another crisis of bigger proportions could very well be on its way." On the light of this comment,
Whether there is any foreseeable threat or intimidation to be expected, especially to retail& small investors?


Agnel Pereira

Jul 22, 2014

Talking about Indian banking system and its exposures, NPAs and profitability, I want to ask EM and its readers - dont you smell anything fishy? There is clearly a pressure from the up (read it to be the government, through Ministry of Finance, the majority shareholder) to the top managements of banks to show higher business and profitability (to show that the good days have come!). In their pursuit for more profitability without any support from the broader economy, it can only be achieved through some unfair means, window dressing, fooling, coaxing, influencing the auditor about the interpretation of NPAs! What is the Return on Assets for banks, esp PSU ones? around 2%? What is the exposure to the risky infrastructure and construction sector? More than 25% of total assets? I will leave it to your wise counsel and readers' imagination to make out how much of RE/Infra sector has to go bad to wipe out the bank profits every year!
Remember, restructuring of advances does not turn a bad loan into good, it continues to remain bad, but such window dressing measure helps the banks to kick the Can down the lane for a little more time!
Good luck.


Agnel Pereira

Jul 22, 2014

In response to Mr MM Amalsadvala: Please note that the plane that was 90 seconds behind was not the one carrying our PM. It was another AI plane, as all AI planes were flying the same route. But our PM's plane also had traveled the same route a few days earlier.
But I agree, if such a thing takes place, the effect will indeed be disastrous on the markets.
So, it is safe for retail investors not to trust Mr Market for gains, unless they have a huge lot of surplus money to be risked for risky returns.


Agnel Pereira

Jul 22, 2014

If your statistics (on lack of participation of retail investors or their exits) are indeed true, then I must congratulate the retail investors for coming of age! All the stock market theories are based on the premise that the hapless retail investors enter the market at the peak and exit at bottom, benefiting smart and big investors! Indeed there are many risks and Equitymaster has been raising this issue, but the greed factor is taking the markets higher and higher. I hope this time the small investors dont get crushed when the tall structures on the equity graphs come tumbling down when the realisation dawns that all this was much ado about nothing! Dont know how long this lasts!


Tikam Patni

Jul 22, 2014

Retail investors are always meant to take the burnt. They hv no institutional support.Hence frequent scares.


parimal shah

Jul 22, 2014

Two comments - one on ARC and One on banks landing.
With respect to the government as the chief sponsor in ARC firms is indeed very scary.
Instead of learning from US property bubble few years back, the govt wants to follow the same path, But INR is NOT international currency unlike US dollar. Had US dollar not had that privilege US would have gone down under and in situation worse than Cyprus and other bankrupt nations.

As regards Banks landing to infra and realty sector, it is the connivance of some officials of the bank that lands the bank in trouble. In fact the banks know very well how to judge the risk but some crooks take their superiors for a ride by betraying the superiors' trust in them.


M M Amalsadvala

Jul 21, 2014

No, not in the present scenario. Retail Investors, small investors never had the chance to make high profits in pre Election scenario. They never expected the Market to be so high as at the present levels. Hence high no. of small investors did encash their holdings. This does not indicate that they will not reinvest again. The Market is high for small investors to come in at this stage - least the Market plummets.
Has any one given a thought to the recent incident 4 days back of a Malaysian Civil Aircraft being shot down AND the Aircraft carrying our PM just 90 seconds behind on the same route. The plane re-routed / diverted in the nick of time otherwise the resultant effect would have been catastrophic not alone for the Market but for our Nation.
At this stage India cannot afford to have any disaster even natural calamity. We pray for a safe transition.
Retail & Small investors will continue to patronize the Markets but at the right opportunities. For them the Market is high at present to invest.

Like (1)


Jul 21, 2014

Your observations are well directed. Repeat of past events would not help retail interest revival of the market; without retailer participation, the market would not sustain the momentum.
The fight for minority shareholder interest is timely and laudable. Hope this will have some impact on powers that be.

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