Are BRIC stocks at an inflection point? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are BRIC stocks at an inflection point? 

A  A  A
In this issue:
» Global debt at an all time high!
» AGM = Annual Grievance Meeting?
» A pleasant surprise for NHAI
» Private sector growing at weakest pace ever
» ...and more!

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The US debt crisis may have been averted... but the chance that there could be a global crisis in the months and years to come cannot be ruled out.

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Given this possibility, how should you plan your portfolio? Where can you find investment opportunities that could benefit from this scenario?

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Asad's views on the crisis, and the opportunities it presents, are available in a 10 Minute video, which you can view right now! For Free! Just click here...

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00:00
 
"Provisioning costs a dampener." "Cost overruns impact profitability." "Margins low despite higher sales growth." These are some of the headlines for the latest set of June quarter results that we have published. You will need to really sift through all of them to find the few enthusing ones. What we are trying to drive home is the point that investors have already got some heavy dose of bad news in recent days.

Falling earnings, rise in interest costs and bleak macro economy have all made equity investing more risky than it was in the past 2 to 3 years. Investor appetite had been close to all time lows in the past week with the US government close to a debt default. Not that there has been any dramatic change since the rise in the US debt ceiling. Nor is it that the domestic economy is out of the woods. Issues such as high fiscal deficit, lower credit demand, high inflation, infrastructure and policy bottlenecks and corruption continue to cloud the outlook for the Indian economy. BRIC peers China and Brazil too continue to struggle against their own set of problems. Those are equally if not less detrimental to their stock market prospects. But while Mr Market remains gripped by fear, it is probably time for smart investors to get greedy!

The central banks in China, India and Brazil have been working overtime trying to rein in inflation numbers. The furious pace at which the interest rates have been raised in the past 24 months has had an impact on both growth and profitability of corporates. In addition, price rises have also shown signs of cooling off. Commodity prices that have been close to their all time high should soon start reversing to the mean. With that even the demand scenario in the otherwise healthy and resilient BRIC economies should pick up. All of these point out to the fact that the business fundamentals in the BRIC economies are at an inflection point. Finding little comfort in the developed world, FII funds are certain to once again make a beeline for emerging market stocks. Mind you not every company will have the same lure due to different abilities in tiding over the crisis. Also valuations could be an important benchmark. However, that the upside to BRIC stocks, especially ones listed in India, could be mouthwatering is a given. Provided the stocks are chosen carefully and held for at least 3 to 5 years.

Do you think emerging market stocks could outperform ones in developed economies from the current levels? Share your views with us or you can also comment on our Facebook page.

01:15  Chart of the day
 
Debt has become a dreaded word for economies and companies across the world. And why not? The kind of problems that the 'potential time bomb' presents makes policy makers and investors alike cringe with agony. The reasons for the latest focus on dent problems are not restricted to Greece or Portugal or the US. In fact as today's chart shows, the global debt levels at 2.6 times global GDP were at an all time high in 2010! In fact it dwarfed the market capitalization of all listed companies globally by a higher margin than ever before.

Data source: Economist, IMF


01:55
 
At a gathering, when one of the people present demands a cold drink rather than tea, you can be sure that the gathering is an informal occasion or a small celebration. However, we were deeply amused when it was pointed out by a daily that the demand was actually made at an event as important as an AGM. What more, it was made to no one else but the Chairman of the company! The AGM in question is that of Tata Steel and the Chairman, Mr Ratan Tata himself. Surprisingly, there was very little by way of reaction from Mr Tata. It appears that by now, he has gotten pretty much used to such type of questions. This incident is perhaps representative of the kind of affairs that AGMs have become these days. They seem to have very little in terms of meaningful content. For important things like capital raising and quarterly results, other mediums have come to the fore. Furthermore, companies don't do themselves any favour by refusing to make forward looking statements and outlining future plans. Also gone are the days when Chairmen of companies used to make awe-inspiring speeches. Thus, with the world suffering from information overload, there is very little value that the management seems to bring to the table during AGMs. Consequently, as someone rightly put it, the word 'General' in AGM has now been replaced with 'Grievance'.

02:35
 
The National Highway Authority of India (NHAI) has failed miserably on its road construction targets. In fact, about 75% of its completed road projects have run behind schedule. Land acquisition delays, manpower shortages and other such reasons have been the main causes for the delay.

However, some recent road project bids have been quite a pleasant surprise. The NHAI generally offers a viability gap funding (VGF) to attract bidders. In a reversal of sorts, some recent highway projects have witnessed bidders offering a premium to the NHAI to acquire the project. This has created a new income avenue for the NHAI other than tolls and fuel cess. There has also been a rise in instances where developers have asked for lower grants than what the NHAI had estimated. All this construes well for the highway authority.

03:15
 
Off late all eyes have turned towards US. Will they default? Will they raise the debt ceiling? Every newspaper, every headline covered these questions in depth. For a break, people would concentrate on the Eurozone crisis. But a bigger crisis has been brewing in the meantime. This refers to the slowdown in the private sector. And this slowdown has happened not just in the US or the Eurozone but also in the super growth Asian economies like China and India. As per a recent business survey, firms in Asia and Europe have pulled back the strings of growth. This has led the private sector to grow at its weakest pace ever. In Europe, the fiscal problems have made future growth challenging for the firms. In Asia, the slowdown has been more on account of higher inflation that has led to monetary tightening in countries like China and India. Nevertheless, the fact of the matter is that private sector growth has slowed down in most parts of the world. And that is an indicator that times ahead are just going to get worse.

04:00
 
As if environmental clearance issues and land acquisition woes weren't enough trouble for infrastructure firms. Now, since most banks have hit their ceilings on exposure to infra companies, finding debt to fund their projects has become another concern. As per the latest RBI data, the banking sector's exposure to the infrastructure space has doubled over the past two years to Rs 5.5 trillion. Funding to the power sector comprises more than half of this total. With this aggressive lending to the space, most banks have now hit their maximum exposure limits. They are thus not willing to increase their lending to the space, fearing asset liability mismatches.

So what other route do these cash strapped infra firms have? Well, with high domestic interest rates in the India, there firms are increasingly looking at cross border funding. Even including the cost of hedging forex exposure, external commercial borrowings (ECB) are much cheaper. Corporates have now approached the Finance Ministry for enhancing the current ECB ceiling of US$ 30 bn. But, we believe this spells bad news for our domestic banks. Infra loans helped fuelled balance sheet growth over the past 2 years. The economy is now seeing a relative slowdown. And, the rising interest rate cycle is also dissuading borrowers. We thus expect loan growth in the banking sector to be muted for this year.

04:30
 
Continuing with the profit booking in heavyweights seen over the last 2 sessions, the benchmark indices in the Indian stock market once again nosedived into the negative territory today. At the time of writing, the BSE Sensex was trading lower by 132 points. Most other Asian markets except Japan and China also closed lower. Europe has also opened on a mixed note.

04:50  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
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5 Responses to "Are BRIC stocks at an inflection point?"

om prakash

Aug 7, 2011

THE U.S DEBT CRISIS MAY HAVE CREATED THE PERCEPTION OF A SET BACK TO INDIAN STOCK MARKET BUT THIS ALL PANIC RIDDEN EMOTIONAL REACTION. FUNDAMENTALLY IT IS LOGICAL TO INVEST IN INDIA WHOSE STOCKS ARE NOW UNDER VALUED.

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Borkar

Aug 4, 2011

TISCO AGM, I donot know where it was held. If it was in Bombay House, then the 'socalled investor' probably does not know the tradition of Bombay House. Long long ago AGMs have lost its traditional seriousness. There is a new "one share owned investors" whose aim is to collect goodies. U will find 4/5 of such speakers whose only job is to praise the management to the hilt. and some Mgt do encourage this because they r also not interested, rather they encourage non seriousness of the AGMs. In one AGM, persons seating by my sides were pressing me to beg for the "Bonus". When I told them why r u begging for bonus? U R the owner ofthe company.
ANSWER WAS WE HAVE ONLY 5/10 shares. Why n when bonus shares can come can be more or less predicted. Some magazines do give or use to give "Bonus Candidates". Of course sometime this is also a price manipulation attempt. - Borkar

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S.K.DAMANI

Aug 4, 2011

Well, the inflow of even a couple of billion $ would be sufficient to push up our stocks. But would it be prudent to buy them?. IF (and it is capital IF) again the developed mkts improve, there can be withdrawl, leading back to a fall in our share prices. So investors will have to be more than alert. Also, as is said in the mkts, "this time it is different", the funds are moving into currencies and bullion. Will they chase stocks?? Any how for us even few billion $ would be good enough for us.

The chart is good read. In 2010,the global stock market Market cap has gone done, but the Debt has increased.

Buy bullion. Gold would reach 25000/- by diwali and Silver will seek new highs.
Thanks Damani

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pathan habibulla

Aug 4, 2011

America's debt crisis is not a financial crisi. It is actually economic backwadness. Strong economy like Japan and middle-east countries have strong economy and because of this they are not facing or suffering from finincial crisis like America and Greece. America"s financial crisis represents economic backwardness. Now so called super power"s technology has become old. As such it has lost hold on global market leading to financial crisis.

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MUKUND

Aug 4, 2011

YES IT IS VERY TRUE IT IS VERY DIFFICULT TO KNOW EXACTLY WHEN THE STOCK PRICES WILL GO UP OR GO DOWN

IF WE GAIN WE BUY MOR OF THAT STOCK
IF U LOOSE STILL U BUY SUCH STOCK IN ORDER TO COVER THE LOSSES U HAVE MADE.
TO SOME IT IS JUST LIKE LOTTERY GAME
m india

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