Is this really the time to be pessimistic? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is this really the time to be pessimistic? 

A  A  A
In this issue:
» RBI governor openly criticises the Food Security Bill
» Will rural Indians salvage India Inc?
» The rupee continues to hit new lows against major currencies
» NSEL fiasco gets murkier
» ...and more!

The BSE-Sensex has shed over 2,000 points over the last one month. That's a sharp 10% fall! Among other economic factors, the falling rupee has been a major trigger for the market decline. In the last one month alone, the Indian rupee has depreciated about 8.3% against the US dollar.

Other economic indicators too spell a very gloomy picture for the Indian economy. Investors have been dumping Indian stocks. Many have written off the Indian growth story. Many have sworn not to touch Indian stocks for a long time to come.

These concerns are quite valid we believe. The degenerative state of Indian polity has heavily dented the prospects of the Indian economy.

But is this really the time to be pessimistic about India? We don't think so. This does not mean you undermine the problems and challenges that India is facing. But vehemently writing off India as if things will never get better is a very myopic view.

We came across an interesting article in the Economic Times that reinforced our beliefs and approach to investing. Bill McGlashan who heads TPG Growth, an investment platform for growth investments, is optimistic about India.

A testimony to his belief in Indian businesses is that he has moved his residence to Mumbai a couple of months ago. This is very unusual. So many private equity funds have been struggling to survive. And here we have an American who sees opportunity in India.

How does Bill manage to take a contrary view? He says, "Our discipline is around micro stories. We are more concerned about individual companies and try not to get bogged down too much by the macro."

These words resonate perfectly with the bottom-up investing approach we follow at Equitymaster. When the macroeconomy is in trouble, the effect is likely to trickle down to individual businesses too. But the impact of the problems will not be the same across sectors and companies. Certain businesses, because of their inherent economic moats, tend to be relatively resilient to the macro challenges. And these same businesses are likely to rebound strongly once the economic environment improves.

So this is not the time to be pessimistic, but to be on the lookout for great opportunities. Take advantage of the pessimism in the market. Let other investors dump great stocks in a panic. Once you believe that there is an adequate margin of safety, go shopping for great stocks.

Of course, this does not mean the stock market is at the bottom. There could be more bloodbaths on the bourses. Stocks could get battered even more. So when you buy stocks, be careful about two things. One, make staggered stock purchases. Meaning, don't put the money in a stock all at once. Second and the most important factor is asset allocation. We suggest you have a diverse portfolio of stocks so that even if a couple of stocks fail badly, the overall impact on your stock portfolio is limited.

Do you think it is appropriate to write off Indian stocks totally because of ongoing macro challenges? Please share your comments or post them on our Facebook page / Google+ page

---------------------------------------------------- Emergency WebSummit ----------------------------------------------------

India is not just facing a slowdown... we are going in reverse.

And the Government has no clue on how to deal with it.

As an investor, and someone with a stake in the future of our country, you have to take action NOW! And that's precisely why we are organising an Exclusive WebSummit with Ajit.

This is what you can expect once you attend the session that will be held at 11 AM, on Monday, 26th August...

First, Simple, and Actionable Opinion on how to deal with this stock market meltdown

Second, Answers to the question YOU have for Ajit

There are only a limited number of Free seats... Sign Up Now and post your question for Ajit!

But please note that we offer this opportunity only once or twice in a year. So I urge you to read it very carefully and also take action on it!


01:30  Chart of the day
India's internet user population has been growing at a rapid pace. In 2012, India added 17.6 million new users, a surge of 31% year-on-year. As a result, India's internet population increased to 73.9 million, beating Japan to become the third largest internet population after the US and China.

In the Asia-Pacific region, India ranks second. The region accounts for a total of 644 million home and work internet users as of March 2013. With 54% share, China leads the internet population in this region. India ranks second but is roughly just one-fifth the size of China. The increasing use of mobile internet, changing consumer behaviour, etc. has given a boost to digital media consumption.

Data source: The Economic Times
*Home and work internet users as of March 2013; ^Asia-Pacific

It is touted as one of the world's largest subsidy programmes. But it seems the Food Security Bill does not have much to its credit beyond being UPA chief Sonia Gandhi's pet project. From economists within and outside India to ex-central bank governors and bureaucrats, most have chided the logic of the subsidy programme. But for the first time, an incumbent RBI governor has clearly finger pointed at the blatant flaw in such policy making. For the uninitiated, the Centre plans to spend Rs 900 bn on food subsidy in 2013-14. Of this, Rs 100 bn is earmarked for the National Food Security Bill. The plan aims to provide food grains to poor families at subsidized rates.

In the recently released 2013 annual report of the RBI, governor Subbarao has not minced words about his opinion on the Food Security Bill. Warning the government that the bill will "eat into finances", the governor has done his job of sounding the alert. It is another matter that the alerts, however loud, will fall on deaf ears. But the logic of the warning is as sound as it can get. Dr Subbarao contends that the subsidy bill is very likely to exceed the budgeted amount. And such unscrupulous spending could be disastrous given India's precarious fiscal position and trade balance. Sad that even our economist Prime Minister does not see any virtue in such arguments!

With the doldrums that it is in, we would be hard pressed to find any silver lining in the thick grey clouds surrounding the Indian economy. Fortunately for us, there exists one such lining. It is of course not a result of some human act but a favour bestowed upon us by the rain gods. India has been having a particularly good monsoon this year. And as a result, it could potentially lift the rural demand for goods and services across sectors and give the much needed fillip to the Indian economy. Already, lot of companies across sectors have lined up rural marketing strategies. And plenty more will jump onto the bandwagon, all trying to grab a share of the rural farmer's wallet.

While this is no doubt a welcome phenomenon, one wonders how long we can continue to depend on rain gods. Imagine the tragedy that would have befallen us if rains would have played spoilsport. There would have been no place to hide we believe. Also, in the euphoria, it gets forgotten that there is still tremendous scope for improvement in farm productivity. Imagine the benefits that could accrue if we create enough factories to put the millions of people occupied in agriculture to jump ship. And at the same time still improve agriculture yield through increased mechanisation and higher productivity. However, precious little can be expected from a Government preoccupied with redistributing the existing economic pie. The fact that it can be enlarged is just alien to them.

The Indian Rupee's woes do not seem to be ending. It touched an all-time low yesterday when it crossed the 65 to a dollar level. In terms of the British Pound, the currency has not fared too well either as it has crossed the 100 to a pound level. The RBI has been announcing several measures to stem the fall. But none have been successful at doing so. Unfortunately, the fall in rupee has further spooked the foreign investors who have been losing confidence due to the worsening macroeconomic situation. To add to this have been the fears of the tapering off of QE measures by the US. As a result, foreign institutional investors (FIIs) have been pulling money out of the Indian capital markets. This outflow has hurt the rupee even more.

The problem is that the RBI's measures have ignited more fear in the minds of the foreign investors as many have viewed them as capital controls. And this has hurt the rupee rather than helping it. The only thing that can help the rupee now is if the government decides to implement measures to support the economy. This would provide intrinsic strength to the currency and help it stabilise. At the same time, policy reforms and implementation would also help renew investor confidence which would bring about more forex inflows. This in turn would help the rupee further. Therefore the onus of saving the rupee now rests on the shoulders of the government.

Unfortunately the government is busy preparing to get itself re-elected. It is just going along with short term band aid fixes for both the economy as well as for the rupee.

The National Spot Exchange Ltd's (NSEL) fiasco has highlighted the loopholes in India's regulatory and risk management systems. The basic tenet of having such an exchange was to allow price discovery. The exchange also provides a common trading platform across the country. However, the settlement schedules have been a matter of concern. Being a spot exchange, the term of the contracts should have been 1-2 days with settlement following soon. However, this was not the case. Lengthy nature of contracts resulted in settlement uncertainty. Also, not holding the adequate stock of commodity for future delivery resulted in a default like situation. Though NSEL is claiming that it would make the payments to investors it has defaulted on its first installment.

This entire tragedy highlights inappropriate risk management practices in India. For one, there was no regulatory body to oversee NSEL's operations. Though Forward Markets Commission (FMC) is there, it is more of a toothless tiger. It does not have the requisite powers to oversee NSEL's operations. In order to ensure that the trading in spot commodities is trouble free, it's high time we need a regulator. If not, such fiascos would repeat and ultimately the end losers will be investors.

In the meanwhile, Indian equity markets have extended their rally. At the time of writing, the benchmark BSE-Sensex was up 161 points (0.88%). All the stock indices apart from metal and realty were trading in the green. Consumer Durables and Oil and Gas stocks were leading the rally. All Asian stock markets were trading higher led by Japan and Hong Kong. The European markets opened on a negative note.

04:45  Today's investing mantra
"The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage."- Charlie Munger
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1 Responses to "Is this really the time to be pessimistic?"

V K Maheshwari

Aug 25, 2013

Yes. It is appropriate to not to invest in stocks in india this time. There is no holy cow in this market. Stocks of every sectors will get hammered down more looking to the economic condition of india. We are in perfectly a bear market and growth in economy is not looking to be rising in few years to come. India society is a very weak society and its present strength coupled with government policies and so many near future development on political horizon, it is better to stay away from indian stock market. Making money by investing in few sound companies will also not going to help for FIIs. Even if they make money, Re/USD parity will eat away their profit.

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