Should you follow Jim Rogers out of India?
(Sep 7, 2015)
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In this issue:
» The surprising strength in rural FMCG demand
» Suzuki Chairman requests component makers to focus on core business
» ...and more!
A few days ago I woke up to this message from a friend:
'You have the land, the people, weather-God gave you everything. And then, he also gave you Delhi to mess it all up.' - Jim Rogers
Jim Rogers exits India. Are you still bullish?
Curious to know why the renowned international investor and commodities guru had dumped Indian stocks, I read his interview on Livemint.
Jim Rogers is a smart, veteran investor. Not one to panic and run for the exit. Could he be right in making a timely exit from Indian stocks? It got me thinking...
The reasons for Jim Rogers' 'Sell' view on India were indeed valid. But do they call for a complete exit from Indian stocks? After contemplating it for a while, I identified five key reasons Indian investors may be wise to not follow Jim Rogers' lead this time.
- Jim Rogers' top-down investing style
Rogers appears to be following a top-down approach to investing. He is a maverick when it comes to spotting long-term trends and making bold contrarian bets. His call to exit India was based on macroeconomic and political reasons. At Equitymaster, we believe that investors are better off following a bottom-up approach to investing and focusing more on individual stocks rather than worrying too much about the economy. Despite all the political roadblocks and lack of economic reforms, Indian markets have been impressive wealth creators in the last two decades. The problems that Rogers has pointed out are hardly new.
- Master of many trades
Rogers is a financial market veteran and hedge fund manager who understands many asset classes including commodities, currencies, stocks, and so on. Not just that, he also knows how to juggle between markets across geographies. These are surely skill sets that not many investors possess. This gives him a much bigger playing field for capital allocation, unlike a normal retail investor who has limited choices for investments.
- Rogers' India exit is all about opportunity cost!
It was clear from Rogers' interview that he exited India because: 1) Valuations of Indian markets were not depressed; 2) He felt that there were no immediate triggers to drive Indian stock markets higher; 3) He saw opportunities for better, quicker returns elsewhere.
So, he appears to have exited India not because the Indian markets are doomed, but because he may have more lucrative opportunities in some other markets. And while he has bid adieu to the Indian markets for now, he did express his willingness to enter again if the reform agenda goes through or if the valuations become cheaper.
Currency risk is another factor that foreign investors have to contend with. Wild currency fluctuations tend to impact their stock returns. In an environment where the US dollar is strengthening against other currencies, investors may be prompted to move out of emerging markets like India.
- The limitations of big money...
As a retail investor, you may envy the fortunes of big investors. But the bigger your corpus gets, the more challenging it becomes to find large, liquid investment avenues that can earn high returns on capital. Jim Rogers cannot easily make headway in the high-potential small and mid-cap space in the Indian markets the way a small retail investor can. In our view, if you have a solid investing process, you can earn spectacular returns in the small and mid-cap space even if the benchmark indices go nowhere.
- Why Rogers' India exit doesn't mean much...
Rogers has been a commodities guru, a China bull...and guess what...an India skeptic! In his famous book, Investment Biker: Around the World with Jim Rogers, he even went as far to predict that 'India as we know it will not survive another 30 or 40 years.' No wonder Rogers kept away from India for so long. His one-and-half year stint as an India investor could not be called a serious long-term investment. And while he may lament the lack of reforms by the Modi government, he's probably walking away with a handsome return on his investment.
In conclusion, it may be worthwhile to pay heed to Jim Rogers' investing wisdom and his perspectives on the global economy, but blindly mimicking his exit from Indian stocks wouldn't be in your best interests as an Indian investor.
What are your views Jim Rogers exiting Indian stocks? Do you think it would be wise to follow his lead? Let us know your comments or share your views in the Equitymaster Club.
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What do you think is happening to the rural growth story? If the weakness in overall economy is anything to go by, you might well be tempted to think that rural growth is indeed under stress. However, you would do well not to jump to conclusions just yet. For the trend in FMCG consumption volumes is painting a very different picture. As today's chart of the day highlights, growth in rural FMCG consumption volume for the period between Jan-June 2015 is actually up by a decent 5.5% on a YoY basis. It is in fact well ahead of the urban pockets where the growth has come in at a subdued 2.6%.
Of course some of the growth in the rural areas can be attributed to a lower base effect. But as some industry players pointed out, it does not take away much from the uptick in consumption. It is also worth pointing out that while urban consumption isn't quite as price elastic, rural consumption reacts more to any increase and decrease in prices. And consequently, a part of the growth can be attributed to the deflationary trend seen in product prices.
So, where to from here? Well, we are of the view that since the deflationary trend is here to stay, any improvement in the economy is only going to add to the volume growth both in rural as well as urban pockets. However, below normal monsoons could prove to be the dampener in rural areas.
Rural growth story still going strong?
Jim Rogers could well be bailing out of India but if there's one company that's deepening its commitment with every passing year and actually putting its money where its mouth is, it is India's largest auto maker Maruti Suzuki Ltd. As a result, we weren't surprised when the Chairman of Suzuki Motor Corp requested Indian auto parts makers to re-invest their profits into pedigree sectors and not diversify. It is common knowledge that auto is a cyclical business. Therefore, in order to keep their capacities humming along, component makers tend to diversify into other areas like defence, aerospace and railways.
As a matter of fact, some even venture into as unrelated areas as hotels and leisure. Mr Suzuki however feels that this trend is unhealthy. He is of the view that if Make in India is to not just remain a slogan, then auto makers would do well to have a maniacal focus on quality. And this is possible only if they remain focused on their core business. Quite a valid point indeed we should say. Focus does indeed pay in the long run.
Meanwhile, Indian stock markets opened on a negative note today with the BSE-Sensex down by 40 points at the time of writing. NSE-Nifty on the other hand was down in the region of 18 points. S&P BSE Midcap and S&P BSE Smallcap indices were faring worse, down 1.3% and 0.7% respectively. Amongst sectors, pharma and metals appeared to be the worst hit.
"We don't have to be smarter than the rest. We have to be more disciplined than the rest." - Warren Buffett
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|This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst) and Rahul Shah (Research Analyst).
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