Can the Markets be Saved?
In this issue:
» Agriculture loan quality is deteriorating consistently
» Is India staring at a drought this year?
» Developers' cash flows under major strain
» ...and more!
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The sentiment change has been so fast that investors have begun doubting us. 'Your recent recommendation is going down and down! Please advise.' We can empathize with these types of subscriber queries. The fear of losing money is powerful.
First, let's be clear. Market corrections are perfectly normal. They can happen even if the economy's doing great. And such corrections offer the chance to buy top quality business at good prices.
But why did the crash happen?
Indian markets move to the beat of foreign investors. And China has spooked them. The biggest driver of global growth is slowing down. The slowing dragon has taken commodity prices to historic lows. Countries dependent on these exports have been hammered.
Indian markets were hit even though the economy will benefit from falling commodity prices. That's the nature of global capital flows for you.
So what will happen now? What can save the markets if there's no growth? Here's Bill Bonner with the answer in The Daily Reckoning: "...And with the stock markets so fragile, would St. Janet risk being the one to cause a worldwide panic? Nah. No rate increase in September. Instead, when the crash resumes, we will see even EZ-er money, not tighter money."
That's right. Janet Yellen and the US Fed could come to the rescue. We will find out soon. The Fed meets in two weeks to decide if they should raise US interest rates. We don't believe they will. Instead, we tend to agree with Jim Rogers. He recently said the Fed will 'probably save the markets one more time'.
Don't be surprised if another flood of easy money makes its way to emerging markets like India. If that were to happen, you can safely expect higher Sensex levels in the short term.
But what about the long term?
We have always been clear with the answer. Only one thing determines the long-term level of a stock: the performance of the underlying business. This holds true for the benchmark indices too. This is why we always advise investors to pick stocks bottom up rather that top down.
Pick stocks with sound fundamentals when they are on sale at reasonable prices. Then hold on to them for the long term or until something bad happens to the business. Sticking to this simple formula will relieve you from the stress of market volatility.
So even if Janet Yellen and the Fed do not save global markets, remember the words of Benjamin Graham, the father of value investing: 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' When the dust settles on this latest crisis, the strongest stocks will come out on top, as they always do.
Should you buy stocks now or wait for the Fed to 'save' the markets? Let us know your comments or share your views in the Equitymaster Club.
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02:05 | Chart of the day | |
While this mode has its advantages - such as leveraging on the reach of banks, the fact of the matter is that banks do not differentiate between customers in the case of subsidized loans - as they have to meet the government's mandate of priority lending. Such an approach leads to deteriorating loan quality over time.
Today's chart of the day gives an indication of the same...
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As reported by the Business Standard, the Reserve Bank of India is believed to have written to the government suggesting it provide the subsidy directly to farmers. This would be a positive step we believe, as it could lower farming costs. In addition, such an approach would allow banks to provide loans keeping their commercial interests in mind; rather than their social interests.
Another point to ponder over - while the usual belief is that such priority lending is the key reason for the worsening NPAs, the fact of the matter is that this is relatively a smaller issue. What has really led to the worsening of the credit quality over the past few years has been the loans provided to the corporate sector. To put things in perspective, India's largest bank, the State Bank of India had gross NPAs of about Rs 568 bn as of March 2015. Of this, agriculture formed only about a fifth. The SME and the mid size corporate sector on the other hand had a much bigger share of 29% and 41% respectively in the bank's gross NPAs.
While small steps towards improving debt quality is more than welcome, the key focus areas we believe should be to address the elephant in the room - the poor lending processes to the corporate sector.
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Should these points concern you as an investor? Well... yes and no. Yes, because if things are played out as bad as they seem, it could lead to a lot of the froth being scooped away. And thus, would make sense to be prepared accordingly. And no because, it should not change your approach of sticking with high quality companies over longer periods. Such concerns come up each year; investors would do well to take advantage rather than be fearful of them.
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Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, please click here...
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04:55 | Today's investing mantra |
Today's Premium Edition.
A True Captain: GE Shipping's KM Sheth
An insight into how the company's management has done a fine job of navigating the choppy waters of the shipping industry through thick and thin.
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