Inflation proof to currency proof to int. rate proof portfolios - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Inflation proof to currency proof to int. rate proof portfolios 

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In this issue:
» Why did RBI ban 80:20 home loan schemes?
» After gold, the shine is on silver
» Broke Kingfisher CEO gets millions in salary
» How is Japan impacting natural gas prices...
» ...and more!

Investors in stock markets may have been an agonized lot. But brokers and business papers are losing no time in selling them 'the next big idea'. In fact the volatile markets, uncertain economy and slippery oil and currency rates have given them enough fodder. If you have been following them closely, the list of 'hot sectors' have been changing every few months. And ironically, the papers and brokers choose to highlight the sectors only when the stocks are already hyped and oversold.

Take the case of IT and pharma sectors for instance. Both have made it to the headlines due to their apparent resilience to the fall of rupee against the greenback. The possibility of a margin improvement from their dollar revenues is the case being made for buying the stocks. Whether or not the notional forex gains will come to the books is anybody's guess. For a reversal in the rupee trend by the end of the fiscal could wipe out most of the gains! And thus hurt investors buying into the stocks at steep valuations.

Now, IT and pharma were not the only obsession of brokers and business papers over the past few months. These of course are the most recent favourites for their so-called 'currency resilience'. But over the past few months even FMCG stocks were endorsed in the same manner for their 'inflation proof' qualities. And now with interest rates rising faster than expected, we guess 'interest rate resilient' portfolio will be the next offering.

Investors who choose to blindly follow such advice will hardly do themselves any favour. Apart from burning fingers in stocks that are overvalued, the constant churning of portfolio will wipe out gains, if any.

As a matter of fact, at any point of time, there are not one but several variables that affect the business of a company. As long as the company has a reasonable amount of moat to tide through the problems, there is no reason to panic. So it is for the investor to select stocks that sport reasonable economic moat. And more importantly, buy them only when the valuations offer sufficient upside.

Buying stocks and sectors that are making headlines is a cardinal mistake. And even if you find them tempting, keeping the popular stocks and hot sectors at bay will be a wise investment decision.

Do you buy stocks or churn your portfolio based on the next big idea? Please share your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
No doubt the Reserve Bank of India (RBI) has been working overtime to stem the fall of the rupee. But as we wrote to you earlier, the new RBI governor will have to focus on the imminent risks in the books of PSU banks. The sharp deterioration in the asset quality of these banks has been evident over past few quarters. The bankers themselves are hardly willing to concede the poor quality lending and problems with restructuring. But if data from the RBI is anything to go by, for Indian banking sector, there may be a NPA crisis in the offing. While the gross NPAs recorded in the books of banks are yet miniscule, the quantum of restructured assets is huge. In fact for the infrastructure sector alone, the percentage of loans that are either bad or restructured is up to 5 to 8 times more than the gross NPAs. We hope Governor Raghuram Rajan gets the bankers to smell the coffee!

Source: Reserve Bank of India

On his last day in office, Dr Subbarao dealt a big blow for the real estate industry. His decision as announced by the RBI is to do away with the popular 80:20 home loan schemes. The Reserve Bank of India (RBI) has barred banks from disbursing such loans. The scheme had gained a lot of popularity in recent times. It essentially allowed the buyer to pay 20 to 25% of the total amount required for purchasing a property, upfront. The balance would be payable only upon completion. Such schemes were typically available for properties that were still under construction. It worked in the favor of two parties at least -the seller/developer and the bank.

For the bank, it worked well as it was able to classify a loan for construction as a retail home loan. Therefore it did not need to provide the higher provisioning that is typically required for construction loans. For the seller/developers this scheme was a boon as they were able to avail low cost funds. True that they had to pay the EMIs on the balance amount to the developer till the point of completion. But even then the cost of funds remained much lower than what it would have been had they taken the loan upfront from the banks. However, the risks involved were ridiculously high. If the developer defaulted on the delivery schedule, it increased the risks for the bank. Again, if there was any discord between the buyer and the developer during the course of construction then again the developer could simply stop paying the EMIs; thereby increasing the risk for the bank. Therefore the RBI felt that such schemes were increasing the risks in the banking system.

The real estate developers have of course hit back saying that discontinuing the schemes would hurt the buyers. But it is actually in the best interest of the buyers too if such schemes are done away with. Why? Because lets not forget the initial 20-25% payment is out of the pocket of the buyer. So if there is any delay, etc, then it is the buyer's amount that is stuck with the developer. Essentially the RBI's decision safeguards the buyer's hard earned savings.

Well, this could be yet another indication of the sorry state of affairs in Indian real estate. As per a leading daily, US lender Wells Fargo Group has shut its real estate advisory arm in India. It should be noted that recently another US based private equity firm shut down its realty business. Thus, this is the second high profile exit from the industry in quick succession. Little wonder, private equity investment in Indian real estate fell 46% in the first six months of 2013 over same period last year.

We have long highlighted how realty prices in most pockets of India appeared way out of reach of common man. Then there is the shady builder politician nexus across most regions. Is it any surprise then that investors are exiting the sector in droves? They may no doubt come back the moment some green shoots emerge. However, transparency and regulations around the sector need to improve substantially before equity investors can safely invest their money in the sector for the long term.

If a business is making huge losses and is almost on the brink of bankruptcy, what do think will be the fate of the employees? There will be job losses as the management would focus on cost cutting. For those who manage to survive, there could be pay cuts or delayed payments or some such issues. During tough times, it is but natural that the company would have a severe cash crunch and payment difficulties. So job cuts and pay cuts are understandable. What is not understandable is a lofty CEO salary.

Take the case of the ailing Kingfisher Airlines. As of March 2013, the company had accumulated losses of Rs 160 bn and a negative net worth of Rs 130 bn. In the last fiscal, the company's employee strength almost halved from 5,696 to 2,851. But yet there seems to be hardly any change in the annual salary of the CEO Mr Sanjay Aggarwal. In FY12, his salary was Rs 40.1 million. In FY13, it stood at Rs 39.9 million. That too at a time when the employee salaries and loan repayments to banks are overdue! It is a clear indication of the management's attitude towards stakeholders' interests. We wonder what is keeping the regulators and government from taking a stricter action.

What do you think is going to be major driver of gas prices going forward? Most people might respond with a shale gas boom in US. Huge gas supplies have been unlocked as a result of the shale gas revolution adding downward pressure to the gas prices. However, as a chart presented by Timera Energy suggests, some other factor might influence the gas prices.

Before 2008, the global gas prices across Japan, Russia, UK and US were in line with each other. Since then, while gas prices have come down in other nations, Japan has witnessed new highs for gas prices. This can be explained by the nuclear incident at Fukushima. The event led to the shut downs of nuclear plant and increased appetite for huge natural gas supply thus raising prices to above US$ 15 per unit. The reverse corollary to that is if Japan nuclear reactors come back to life, gas prices in Asia should come down. And they are likely to settle down at around US$ 8 to US$ 10 per unit - the stable price levels in UK. Such a development will be positive for India where high costs of imported gas are stifling the gas demand and hence growth in the economy. But this will further depend on how LNG demand unfolds in South America. Nonetheless, rather than pinning hopes on such global developments, we would be better off focusing on being self reliant in something as crucial as energy.

Gold has been the centre of attention in the investor community of late. Especially since the metal fell around 34% from its high in October last year to its low in June this year. But how has its sister metal silver performed? The trend has been more or less the same. During the same period silver registered a sharper fall of 49%. But now just as gold has begun to witness a rally, so has silver. And this the time the latter is hogging the limelight more. There are several reasons for this. One is the import curbs placed on gold. Since there are no such curbs on silver, the metal is evincing interest from retail investors. Second is the fact, that silver is also used for industrial purposes. The rationale is that if the global recovery has begun to take place, industrial activity will fall and hence the demand for silver will rise. But all is not necessarily hunky dory. China, a major driver of silver prices, has seen a fall in net imports. The fact that the global economy is on the mend does not have too much support yet. And even if certain silver specific sectors may be recovering, there are others which are struggling. Hence, taking a cautious stance on the metal may seem prudent at best unless a much clearer trend emerges.

Since the start of today's session, buying interest in engineering, telecom and commodity heavyweights has helped the key indices in Indian equity markets feature amongst top gainers in Asia. The BSE Sensex was trading higher by around 250 points at the time of writing. Key indices in Asia closed a mixed bag today while Europe has opened lower.

04:50  Today's investing mantra
"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."- Warren Buffett
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1 Responses to "Inflation proof to currency proof to int. rate proof portfolios"


Sep 4, 2013

yeah, i find it fruitful ...

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