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A Threat to Our Sensex 40,000 Idea

Aug 25, 2016

In this issue:
» Stressed assets in banking system continue to rise
» PSU performance not as bad as it seems
» ...and more
00:00
Rahul Shah, Co-Head of Research

It baffles me how two different series of events, both facing hiccups along the way, can create totally different emotional experiences. One leaves a smile on your face. The other totally devastates you.

Our trip to Pune to catch up with family and friends during the long Independence Day weekend is a perfect example of the first kind. The journey wasn't without its share of glitches, a long traffic snarl, overcrowded restaurants, a flat tire. But once we were there, all our troubles vanished. The bonding, the warmth, the sumptuous food. It was an affair to remember. The glitches are now mere footnotes.

On the other hand, last weekend, I was supposed to go on a trek. I was full of excitement and planned everything to a tee. Alas, a couple of days before the trek, I sprained my leg. Devastation may be a strong word here, but I certainly wasn't left with a smile on my face.

The discipline of mental modelling has a name for each of these cases. They call the first case an additive system.

In an additive system, a few glitches aren't catastrophic. You can still have a good end result, as with our Pune trip despite the flat tire, etc. It's like addition. When you add lot of numbers, and even if a few of those numbers are zero, you still end up with something positive.

The trekking event (or non-event, as it were), is an example of a multiplicative system. It's like a chain that is no stronger than the weakest link. And when this link breaks, you end up with nothing. Multiplying a string of numbers with zero at the end still leaves you with a big fat zero. Multiplicative systems have binary outcomes. You either win or lose - nothing in between.

Now, what would you call the Sensex journeying to 40,000 over the next two to three years? It's an additive event, isn't it? Even if we experience a few temporary dips, the tailwinds are such that we can still end up with respectable returns.

But what if I told you there's a trend out there that has the potential to turn our projections upside down? Yes, a trend could derail India's growth story and turn the stock markets into a multiplicative system, a binary game where you either earn great returns or suffer huge wealth destruction.

Well, if our CEO, Rahul Goel is to be believed, Vivek Kaul has spotted such a trend...

And based on what he has discussed with Vivek, he can tell you this is serious...

It's certainly controversial. Even among Vivek's own colleagues.

But it is something that must be taken up.

After all, it is our responsibility to bring honest, credible, and transparent views to you...

No matter if Vivek and his group at the Diary hold views that may be at variance with the views held by Equitymaster's Research Team.

In fact, we still believe Sensex 40,000 is a reasonable target. But we recognize that Vivek has found a genuine threat to what has been as additive system of growth in India.

So as always, we continue to bring you the best views, and then leave it to you to make a decision.

That's what empowerment, our mission at Equitymaster, is all about.

Now, Vivek has been working on these developments, along with Bill Bonner, for some time now...and he is finally ready to share them with you.

In fact, as you read this, Vivek has just come out with a full note that details all...including how this trend could impact you.

Click here to know more.

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Bill Bonner and Vivek Kaul, two of the world's most independent thinkers and truth seekers have come together to warn you about a financial crisis.

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------------------------------
03:00

The last couple of years have seen PSUs' fall from grace in the eyes of investors. From being perceived as unshakable, many have now fallen into the category of untouchable. But they're perhaps not as bad as they're made out to be.

In a recent study by the Business Standard, PSUs (non-financial) have logged in an average ROE (return on equity) of 10.5% for FY16. That's noteworthy for two reasons. One, amongst the top eleven business groups in India, this ranks as the fifth highest. Second, this is a better performance than many of the country's large business groups like AV Birla, Vedanta, Bharti, JSW, Anil Ambani and OP Jindal.

The groups that have performed better than PSUs are Tata, Mahindra, Adani and Mukesh Ambani. It seems that despite all of the brickbats, PSUs put together are doing a pretty fair job navigating the slowdown that has gripped the economy.

PSUs Doing Better than Many of the Large Private Groups


04:00

But there's also some bad news in the world of government owned companies. The stressed assets in the banking system continue to rise. They've gone to 12% in the June 2016 quarter, up from 11.4% during March.

Further, as Reserve Bank of India Deputy Governor S S Mundra highlighted yesterday, the level of bad loans and standard restructured assets among PSBs (public sector banks) has spiked to 15.4% in June, up from 14.4% in March. This has taken the return on assets into negative territory for public sector banks during the quarter.

The deputy governor was quick to add that a few of the reasons for such dismal performance of government banks were external and not entirely in the control of bank managements. As per him, the right lesson to learn from this episode was that in the absence of strong structural governance reforms, consistency of performance should hardly be expected. Such reforms must be focused on misaligned incentives and compensation, among other things. Only then will the malaise in the banking sector be dealt with in a sustainable manner.

04:40

The Indian stock markets were trading strong today on the back of sustained buying activity across most index heavyweights. At the time of writing, the BSE-Sensex was trading up by around 70 points. Gains were largely seen in pharma and auto stocks.

04:55 Investment mantra of the day

"Since a chain is no stronger than its weakest link, it makes sense to look for - if you'll excuse an oxymoron - mono-linked chains." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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2 Responses to "A Threat to Our Sensex 40,000 Idea"

Kumar

Aug 25, 2016

like RRRajans prediction ofthe 2008 crash, your vivek paul is trying to become famous by predicting something in a book and then if the event happens , blow the trumpet "IO SAID SO...."

If 40000 is touched Equity master can blow their trumpet "We said so..." nice plan

Is this what is called hedging?

Like (1)

Pulkit Gulati

Aug 25, 2016

This is what I asked exactly by sending a query to equitymaster's helpdesk and got an almost blank response. I've been following these articles and it's really confusing whether to invest in the Sensex 40,000 idea at all when there are threats like Hormegeddon.

Like (1)
  
Equitymaster requests your view! Post a comment on "A Threat to Our Sensex 40,000 Idea". Click here!
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