Megatrends via 7,650 kilometres
(Aug 20, 2015)
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In this issue:
» A new Megatrend in the making?
» MSCI EM index back to its October 2011 levels!
» Is India witnessing green shoots in urban consumption?
Part of our research process requires that we meet with companies before we recommend them. We've done this since 2002. This means we travel - a lot. Our travels allow us the opportunity to notice changes in India - the growth of a once small city, consumption patterns, the emergence of a business, the expansion of a brand into new regions... Our observations form the questions we ask the companies we meet - where they expect the next growth phase to come, where will they invest next, etc.
Their answers combined with our boots-on-the-ground observations reveal a certain pattern - one that signals what we like to call a "Megatrend", similar to the one we saw in India post-1991...
In early 2014, we resolved to dig out the companies that will be the biggest beneficiaries of this new Megatrend. By September of that year, we were ready to reveal our best ideas. That marked the birth of The India Letter.
Yesterday, we released the twelfth edition of that publication.
The India Letter is a service that aims to identify the companies that stand to profit the most from India's latest Megatrend. But what exactly is a Megatrend?
A Megatrend is a collection of large-scale changes big enough to impact lifecycles of economies and the companies operating within them. These are demographic, economic, political, and social changes that take place over decades.
Identifying the key players - the companies that meet the criteria to earn our recommendation - takes us to towns and cities over the country, including unfamiliar regions such as Kizhakkambalam. We've traveled more than 7,650 kilometres in the past year and a half. Our plant visits and meetings with management are immensely helpful in deciding which companies make the cut...and which ones don't.
So... let's take a look at the performance of The India Letter service so far.
I'll be frank: Initial response was mixed. A lot customer feedback had to do with us recommending companies that had already seen big runs: "This stock has run up 5x over the past few years, why are you recommending it now?" asked one reader, and "Equitymaster is late in recommending this stock!" claimed another.
Our response is simply that, after meeting with these companies, we believe in their long term prospects and aren't concerned with how their stock has moved in the past.
Of the twelve recommendations we've made so far, ten were actionable ideas - that is, buy recommendations (some with limited exposure, some with full).
We are glad to report that nearly 80% of them have been successful (this, of course, does not include yesterday's recommendation). Furthermore, each of the successful call has outperformed the benchmark index -- the BSE-Sensex -- considerably. We aim to continue - or surpass -- this performance going forward.
This month, we'll be visiting a few cities in Gujarat. As always, we'll keep you up to date on any Megatrend signals and investment ideas.
Does the Megatrend approach to investing appeal to you? Let us know your comments or share your views in the Equitymaster Club.
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Continuing our discussion on Megatrends, here's possibly one more signal in the making. The big financial news story of the day concerns payments bank licences. The Reserve Bank of India (RBI) has finally given the go ahead to eleven companies to start payments bank operations. Apart from the postal department, the names include corporate heavyweights like Reliance Industries, Aditya Birla group, Bharti Airtel, Vodafone India, Paytm, Tech Mahindra, NSDL, Cholamandalam and others.
What can these payment banks do? They can accept deposits up to Rs 1 lakh per individual, send/receive remittances, sell financial products, issue debit/ATM cards and offer various financial services. They are not allowed to give out loans or issue credit cards or accept fixed deposits.
This is welcome news indeed. Payment banks will certainly be able to spread financial inclusion to large sections of rural and semi-urban India. It will also increase competition in the banking industry and could result in banks improving the quality of services. What's more, this is not the end of the road. The RBI plans to eventually put in place a mechanism that will allow such licenses to be obtained 'on tap'.
However, as investors, you will have to be careful about selecting entities in the space based on their track record in operating in the financial sector.
The MSCI Emerging Markets Index is considered as a good benchmark to gauge the global view on emerging markets (EMs). And considering that the index is back to its October 2011 levels, it is fair to assume EMs are not in favour. The Bank of America Merrill Lynch (BofA ML) recently took a survey of global fund managers for August 2015. And it learnt that a third of the managers are underweight on EMs. As reported by the Mint, allocations to EMs are now worse than they were during the Lehman crisis in December 2008. But going by BofA ML's prediction, a bounce back is in order. Why does it feel so? Simply because the bearish levels are high and the cash levels at levels are over 5%.
Does this mean the good times will continue for Indian stocks? This is a question that makes us scratch our heads. On one side we have global emerging market funds which are overweight on India by as much as 400 basis points; it is believed that India was the only market in the EM universe where exposure increased by 2-3% in June. Allocation to other countries fell by 4-6%. On the other hand, valuations of the benchmark indices hover above the not so cheap 20x mark. As such a lot of expectations are built in.
All eyes will be on the earnings trend in forthcoming result seasons. The next few quarters will be interesting for sure.
A well known fact is the Indian economy's growth is highly dependent on rural consumption. After all, about two-thirds of the population does not live in cities. Their incomes depend on the monsoons or on the government work schemes. Thus, it is not surprising that so much has been written about the slowdown in rural consumption.
But what about the urban consumer? There seems to be good news on this front.
As per an article in the Mint which cites research of Morgan Stanley and BoA ML, urban consumption could be witnessing green shoots of recovery. Falling commodity prices (petrol/diesel), interest rates cuts (lower EMIs), salary hikes in the private sector and the upcoming seventh pay commission in the public sector, all point to better days ahead as far as urban spending is concerned.
Will urban consumption pick up?
Adding to this is the increasing penetration of credit cards and personal loans as well as e-commerce firms offering discounts left, right and center. Now it may be too early to predict a broad based recovery in urban consumption. However, there's no doubt that the trend is certainly in the positive direction.
In the meanwhile, Indian stock markets were trading flat with the benchmark index, the BSE-Sensex, trading lower by 16 points or 0.06% at the time of writing. Mid and smallcaps were trading weak, with their respective indices trading down by 0.13% and 0.5% respectively. Amongst the sectoral indices, IT and realty stocks were least favoured today, while FMCG and healthcare stocks were in demand.
"I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy" - Peter Lynch.
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|This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).
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