When will the 'Big Picture' reforms unleash big returns? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

When will the 'Big Picture' reforms unleash big returns? 

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In this issue:
» Is a Sensex level of 1,00,000 achievable?
» MFs replace FIIs as the biggest investors in August
» Will the GST see the light of day anytime soon?
» Why the Fed's critics may have the last laugh ...
» ...and more!

Big announcements were awaited right after the election results were declared in May. When that didn't happen, investors stayed in anticipation of the Union Budget. Unfortunately, the Budget too turned out to be a non event! Every meeting of the PM with Group of Ministers and even the Independence Day speech were closely scrutinized. In fact, over the last 4 months, as billions of dollars have found their way into Indian stock markets, investors have been awaiting the announcement of 'big reforms'.

Whether at all such reforms will be announced? Whether Indian stock markets will correct if the reforms are unduly delayed? And how soon can investors make money once the reforms are announced? These are the questions in the minds of investors these days.

Fortunately, the answer was provided by none other than RBI governor Dr Raghuram Rajan recently. As per Dr Rajan, the 'Big-Picture' reforms will take some time. In the short term, the Indian government is focused on the smaller things like clearing stalled infra projects and better implementation of government schemes. Is this really a bad thing? We don't think so. These measures may not make it to newspaper headlines but they are also crucial for growth. The money riding on stalled infra projects alone, add up to anywhere between US$ 50-70 bn. If these are implemented, Indian companies will see a strong acceleration in their growth rates. Some business in particular will see their profits grow at a multiple of the sector average.

From the investor's perspective, looking at reforms from a long term investment perspective is much better and safer than trying to 'time the reforms'. The 'Big-Picture' reforms will unleash a sort of Mega Trend that we have written about earlier and will certainly create huge wealth. On the other hand, the move towards smaller but important things like faster project clearances and reducing red tape, will be crucial to sustain the growth that the Mega Trend will bring.

Thus, as we have stated before, investors need to keep a close eye on both, the Mega Trend itself as well as the companies that will now have a huge growth runway in front of them on account of Government's efforts at doing several small things right. After all, well established companies with high returns on capital can also turn into multi-baggers if opportunities become available for them to reinvest their profits at the same high rates of returns. Thus, it is the ability to spot these companies as well as the ones benefiting from a new mega trend that's the secret to huge returns from growth investing. If purchased at the right price, these stocks could provide unbelievable returns. More to come on this Mega Trend. Watch this space!

Will Mega Trends unleashed by reforms create huge wealth? Let us know your comments or share your views in the Equitymaster Club.

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02:10  Chart of the day
Not a day goes by when there isn't a news item talking about how rosy the future of Indian stock market looks. Take for instance this article in a leading business daily. Its headline reads that India's stock markets can easily double over the next 3-4 years. Well, if you ask us, this is well within the realms of possibility. Even if the PE multiples don't expand from here, all it will need for the markets to double say in the next four years is earnings growth of around 18%-19% per year. And given how profit margins have been at a low in recent years, a small expansion here will take us to our Sensex target.

Extrapolating still further, a level of 1,00,000 on the Sensex in the next 10 years also looks quite likely. After all, a sustained earnings growth of 15% over the next 10 years is certainly possible. Therefore, if one hasn't invested in the markets one can certainly go ahead and take the plunge provided a strictly long term view is taken. But will all stocks benefit from this trend? Perhaps not. Only the ones with the required management depth and a strong business model will be able to capitalise on the trend we believe. And what is also important is to pay a price that does not have all this upside already captured into it.

India second in wealth creation in 2014

US$ 2 bn or Rs 120 bn every month. That is the kind of fresh investment Indian markets need to sustain the current rally. Thus, investors who are hoping that the current stock market rally will sustain, they should ask themselves if this kind of an assumption is realistic. An analysis of data from the past several months shows the constant pumping of funds by FIIs at such a massive scale has been the fuel for markets. The rally in August saw FIIs withdrawing and mutual funds staging the rescue act. Thus domestic investors have the proverbial double edged sword hanging over them, if they go overboard with stock investments at the current stage. Investing in expensive stocks at the last leg of the rally could be very risky if the FIIs stage a major withdrawal. Domestic funds can make up for them only to an extent. Secondly, if the fundamentals of the companies fail to live up to the expectations, correction in valuations is a given. Thus, without blindly buying into Sensex projections, investors would do well to assess their stock investments selectively.

The initial deadline was set at 01 April, 2010. And it has been four years yet the Centre and the States still seem to be working to find a middle ground to roll out the Goods & Services Tax (GST). States were apprehensive of GST in the first place as it would cannibalize their revenues. So, in these four years, Centre has tried a lot to allay States' concerns but nothing concrete has come to the fore. The most nagging issue pertained to the inclusion of petroleum products in GST. If that happens, it would result in huge losses to States as taxes on petroleum products constitute 26% of their revenues. However, Centre has finally decided to tread a middle ground on this issue whereby the revenues of States would be protected. Including these products in the GST ambit but taxing them at a zero rate is one option that is being probed. There are various other contentious issues where the Centre is willing to work out the solution with States so as to enable a speedy roll out of GST. Thus, it would be interesting to see if GST indeed sees the light of the day anytime soon..

The Fed's QE programs have received a lot of flak from prominent economists, professors and industry professionals. Why? Because of expectations of high inflation levels, eventually leading to debasement of the dollar. It's been close to five years now that this program has been on. And what is the result? Well... inflation levels are seemingly under control, and the job situation seems to have improved substantially. As Bloomberg reports - US government bonds have earned US $ 1 trillion for investors who would have bought and held US Treasuries since the end of 2008. This was the time when the central bank dropped rates to zero and began its bond purchase program. This development does go on to indicate that the critics of this program have been proved wrong for now.

Having said that, what will be interesting to see is how the markets will react to the change in interest rates. This is especially considering that there are strong expectations from one side that interest rates will be increased as a move to better handle the expected inflation in the future. On the other hand, bond buyers do not expect increase any time soon as the desired economic targets are yet to be achieved.

After opening on a strong note, the Indian stock markets remained on firm footing in the afternoon trading session. At the time of writing, the BSE-Sensex was trading up by 176 points (0.7%). Barring Consumer durables, all the other sectoral indices gathered steam. Asian stock markets, however, were trading on a mixed note with China topping the pack of gainers and Hong Kong leading the pack of losers. European markets too have opened the day on a mixed note.

04:55  Today's investing mantra
"We want to be right on something that will work right now, not something that might work in the future." - Warren Buffett
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4 Responses to "When will the 'Big Picture' reforms unleash big returns?"

Ashok Kumar Sethi

Sep 8, 2014

It looks as if the present way of functioning of the Govt.is to go on promising big big achievements and make promises but not to indulge directly to the mechanism of actual functioning. All the time, RBI Governor is put forward for comments,why? What's the role of Ministry of Finance? Is it putting RBI Governor ahead for any kind of announcements? All looks like ambiguous situation. If something goes wrong, the responsible will be RBI Governor.The investors have to be very careful now a days. Expecting SENSEX to touch to 1ooooo by next 10 yrs looks to be a rosy picture. Hardly 4 months have passed and we are talking for next 10 years.



Sep 8, 2014

Bigger things are made of smaller units and their working and efficiency depends on the smaller units as they are the core. Similarly if current govt takes care of smaller things like efficient , timely and just decisions by the bureaucrates , removal of VIP culture and stoppage of interference of political masters at every level than things will improve and common man might live like a human.



Sep 8, 2014

This article is written for majority of readers who are from India, then why use billions for referring to Indian rupees? Are we still aping Whites!



Sep 8, 2014

EPFO has been permitted by GoI to invest upto 30% of its corpus in equities. That would mean Rs. 6000 Crore annually. (Calculate 30% into Rs. on your own). That would make it second largest DII in India after LIC.

The European Central Bank has cut interest rates and made intention of embarking on a trillion-euro asset-buying binge. This would mean growth of nearly 1 trillion Euros in new assets. The central bank will be penalizing banks in Eurozone who do not spend it. That would mean 1 Trillion Euros = $ 100,000 Crores = Rs. 6000,000 Crores. If we assume that only 2.5% of it will come into Indian Equities, that comes to Rs. 150,000 Crores.

Only if US increases its rate then this liquidity could be absorbed. But looking @ current scenario, I doubt that US will ever increase rates till the end of this calender year.

So the bubble seems to be saved for the time being....

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