Sensex doubled. So did 'hot money'. - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Sensex doubled. So did 'hot money'. 

A  A  A
In this issue:
» Warren Buffett is fearful. Are you?
» US loses competitiveness
» RBI gets tough on risk pricing
» Lehman Brothers' obituary
» ...and more!!

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It is not unnatural for investors to be ecstatic when they see their stocks doubling within a period of six months. Particularly, if this happens across a range of not only midcap and smallcap but also large bluechip stocks. The BSE Sensex had a dream run in the past six months when it doubled from near 8,000 levels in March 2009 to 16,000 levels in September 2009. And investors had enough reasons to smile. While the super-attractive valuations definitely attracted hoards of retail and long term investors, there was also another class of investors that is notorious for having caused havoc in the Indian stock markets. These are the unregistered FIIs who invest via Participatory Notes (P-Notes) only to artificially influence the stock prices in the short term.

As our founder Mr. Ajit Dayal writes, "The P-Notes are a strange animal in the Indian capital markets.

As an Indian, if you want to buy shares, the government wants to know everything about you. As an Indian, if you wish to buy a mutual fund, the government wants to know everything about you.

If you are a US, European, Japanese pension fund; a university endowment; a charitable foundation; then the government wants to know a lot about you.

But if you are a P-Note holder, heck no one wants to know who you are!"

Contrary to popular perception, the SEBI's crackdown on P-Note holders has had little impact. While the assets under management of FIIs has doubled from Rs 3.9 trillion in January 2009 to Rs 6.3 trillion in June 2009, the total value of P-Notes has also doubled from Rs 655 bn to Rs 983 bn in the same period.

As P-Note holders get greedy, probably retail investors need to get fearful.

Source: SEBI

01:15  Chart of the day
Even for long term investors, it can at times get quite tricky to figure out what kind of asset allocation is required when markets move from peaks to troughs and vice versa. While the small caps are the biggest gainers during market recovery, the large caps are undoubtedly the most resilient of the lot over the longer term. The annualized 3-year returns of the BSE 100, BSE Midcap and BSE Smallcap indices show that having a 70:20:10 allocation to stocks belonging to the respective indices or something similar can fetch the gains during the peaks and help tide over the troughs in a relatively safer manner.

Source: Prowess

Warren Buffett often says, "Be fearful when others are greedy and greedy when others are fearful". He has lived this statement several times during his career. The latest instance being the recent credit crisis. At the height of the meltdown, Warren Buffett advised investors to buy and he certainly bought himself. Now that there is a chorus from several quarters that we are out of the woods, he is realigning his bets. As per the New York Times, Berkshire Hathaway (Buffett's company) is now selling more stocks than it is buying, and is in fact buying corporate and government debt.

It may be noted that Buffett has become far more vocal with his investment advice than he has ever been. Observers believe it is because he wants the twilight of his career to be as spectacular as the rest of it has been. Reaching a wider audience helps his legacy. Whatever be the reason, we are not complaining.

If you expect interest rates to drop further, it is time for a rethink. While banks in India seem to be very sanguine about pricing their assets appropriately, unfortunately their regulator does not think so. As per a business daily, the RBI has directed banks to stop lending sub-PLR (below the benchmark prime lending rate). About three quarters of the bank lending in FY09 were at sub-BPL rates while term deposits constituted around 80% of banks' total deposits. This means while the banks were borrowing funds at higher rates, they were compromising on the loan pricing so as to encourage credit offtake. By doing this, they were compromising on providing for risk. The RBI believes that sub-PLR lending does not bring in adequate transparency in risk pricing. However, bankers do not seem to agree.

We all know that the financial crisis has dealt a body blow to the US economy. But now, the crisis seems to have affected the country's competitiveness as well. The US has slipped one notch down to number two in the latest global competitiveness report of the World Economic Forum (WEF). And the wrecker-in-chief is believed to be the country's banking system where, as per the WEF, a lot of imbalances have been building up. Infact, in what could come as an eye-opener of sorts, countries like US, UK and Iceland, that had a greater focus on financial services have been the heavy losers in the rankings. The big learning that can be had is the fact that in order to improve competitiveness, a country will have to focus more on technological innovation rather than an innovation of the financial kind. There was something to rejoice for India as well as it improved its competitiveness and stood 49th in the list.

And now, another American bastion has fallen. As per Moneynews, such has been the damage done to corporate earnings in the US following the crisis that for the first time, profits posted by the top 500 Chinese companies have gone way ahead of their US counterparts. Net profits for the Chinese companies stood at US$ 171 bn in 2008, significantly higher than those posted by the US companies, which came in at US$ 99 bn. A big achievement for China indeed as while it remains the fastest growing economy in the world; its GDP is still less than a third of the US.

And once again, it is the banking industry that seemed to have made all the difference. While many of the US banks remained mired in losses, half of the top 10 profit-makers on the Chinese list turned out to be financial companies. Clearly, the US' banking industry has left its economy nowhere to hide.

The month of September marks an anniversary that markets would love to forget. The bankruptcy of Lehman Brothers that snowballed into a global financial catastrophe had several lessons to teach.

Almost years after this crisis, the US and most large economies in Europe have managed to recover from recession. Global and particularly emerging markets have again limped back to optimism. But does this mean that we have left behind the risks that surfaced a year ago? While the massive correction in real estate prices has certainly tempered greed, there is a collective opinion amongst bankers that bailing out large entities at the cost of taxpayer money is not in the best interest of the nation. The G-20 finance misters have a clear resolve to ensure that entities that put the interest of the economy at risk for their vested interests will be brought to task.

Is it time to change the idiom from 'Too Big To Fail' to 'Too Big May Fail'?

The indices opened the day's proceedings on a volatile note and while commodity stocks sustained some buying activity, profit booking in key heavyweights limited the gains in the Sensex. At the time of writing the BSE-Sensex was up 45 points. On the global front, while key Asian indices closed weak, European indices have had a mixed opening.

04:50  Today's investing mantra
"The intelligent investor is likely to need considerable will power to keep from following the crowd." - Benjamin Graham
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10 Responses to "Sensex doubled. So did 'hot money'."

zephyrine goveas

Sep 11, 2009

I would say I was frightened with these P-Notes. Mr. Ajit Dayal yesterday on CNBC says the sensex will reach 20000 by mide 2010. Now, which are the companies where investment through P-notes is done or not done. How do we feel safe. I was just feeling optimistic about the Indian stock market and I invest based on research data supplied by Equity Master (so far Titan Industries) and HDFC Securities etc. Now what should be done, remain invested or stay in cash at 5000-5200 levels of Nifty.



Sep 10, 2009


in the 1st 2 paras of this article, you have quoted the FII & PN AUM figures & have rightly pointed out the fact that the PN investment as a perc. of total FII investment in the Indian stock market is on the rise at an alarming rate & is a cause for concern. I have few questions here. 1) Is all foreign money coming via PN route necessarily bad?
2) Is a further bifurcation/content of PN money available to you wherein you can judge the quality of the same?
3)Also, where do you get the data of FII & PN AUM? Can you point out the source please?
4)Last, does this indicate that the present stock market rally is artificial & one should book profits?



Sep 10, 2009

wonderful, meaningful and useful. keep it up.



Sep 9, 2009

just my investment care



Sep 9, 2009

I would request Equitymaster to get some more detailed analysis on the corporate profits of the top 500 companies of China. Please share the breakdown industrywise. The last FY has been severely cruel on the US based large caps, it is too early to write them off.Thier Economy is still 3 times the size of China's GDP. China's FINANCIAL SYSTEM is too opaque and I will not get carried away with the record breaking profits posted by thier top banks. The rapid credit growth in the 1st 2 quarters this year in the Chines banking sector did not make sense to me, at a time when their exports were shrinking and the manufacturing sector facing excess capacity. Let's face it - if US reduces its imports from China, thier economy will get derailed. China looks like an inflated bubble to me. A comparative study of the banking system of China and India will be an intersting read. Looking forward to the same from your team, which is doing an excellent job.


Vijay B ( Dubai )



Sep 9, 2009

wonderful attempt to alert lame investor by 5 minute wrap.
Kindly keep it up.



Sep 9, 2009

Excellent article. The adjective is always the same for allyour articles on stocks and investments.



Sep 9, 2009

So with your title today of "Sensex doubled. So did 'hot money'." and Warren Buffet's strategy of selling and the newspapers screaming of double dip recession, and ajit dayal talking of Pnotes (which I agree with him completely) what is the opinion of equitymaster?

does the retail investor sell and book profits and start buying at lower levels anticipating double dip recession or should one continue to hold?

Are we supposed to sell. Small retail investors are completely dumbfounded and also scared as they have started investing now...........




Sep 9, 2009

a good newsletter. however, it will good if it gives stocks to get it.



Sep 9, 2009

pl send me report on stocks which should be buy for delivery and target period i large cap & mid cap stocks


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