FIIs doing a Zebra - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

FIIs doing a Zebra 

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In this issue:
» Lehman's downfall
» OPEC's crude decision
» Analyst's valuable contribution
» Mittal's support
» ...and more!

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00:00   Of FIIs and Zebras
YTD, the Indian stock market is down more than 30% and this has not taken them very long to change their stripes. Infact, they could give even the Zebras a run for their money. We are referring to FIIs who are invested into the Indian stock markets. Lumped together, these institutional investors have shown a marked change in their sector preferences for the quarter ended June 08 as opposed to June 07. Studying the ownership of stocks that comprise the Nifty across different periods, we have found that FIIs have increased their exposure towards the so-called defensives like FMCG and telecom over the last one year. Furthermore, export dependent sectors like IT and Pharma have also witnessed increased FII shareholding. The reasons may not be difficult to find. With the rupee sliding to record lows against the dollar and with interest rates remaining tight, focus has been shifted to sectors that either benefit from a lower rupee or are immune to interest rate changes. On the other hand, sectors like capital goods, banking and auto have witnessed reduced FII shareholding on the back of earnings threat to these sectors from a high interest rate scenario. Thus, while the FIIs seem to be riding the macroeconomic wave, it could be good time to turn contrarian and look for stocks that have been beaten down way below intrinsic value owing to near term concerns but possess good long-term outlook.

0.39   One more bites the dust....
In the end it was greed that managed to do what several wars and depressions could not i.e. bring down Lehman Brothers, one of the icons of the US financial supremacy, literally to its knees. The bank that has survived for 157 years and has seen it all has had the current credit crisis leave such a gaping hole in its finances that its very existence is now in question. Observers believe that unless the company raises capital quickly or engages in sale of some of its assets; it will be difficult to avoid a Bear Sterns like collapse. Furthermore, it appears that the government is also not likely to come to the rescue of the troubled bank as post the recent takeover of nation's two largest mortgage finance companies, it must have exhausted most of its resources. In nearly 18 months, the firm has seen its market value fall by more than 91%, eroding US$ 40 bn worth of shareholder wealth. The fact that the company did raise capital in an earlier round of capital injection and those who had invested then have burnt their fingers badly, makes is difficult to convince potential buyers about the safety of their invested capital. Hopes were further dashed when a Korea based bank, which was believed to be in talks with Lehman for a possible stake sale, ended negotiations citing lack of consensus on terms of the deal. Thus, the next course of action will only become clear when the bank announces its results later in the day today, where it also expected to discuss its plans.

1.20   ...McDonald's however is going from strength to strength
While their financial brethren are running for cover, things are looking rosy for McDonald's, one of the world's biggest fast food giant. It is not only the domestic market that is helping it grow, the international markets are also making handsome contributions. Thanks to this trend, the company's global sales surged more than 14%, a very good performance given the kind of headwinds prevailing in the global economy currently. Although the company has said that it is not immune to slowdown, it is quite unlikely it will go the way that a lot of other companies, especially from the financial sector have gone. Because, unlike the latter, it does not engage in financial engineering to boost sales and instead relies on selling high quality, affordable food through stores spread globally. In other words, it is a kind of business that someone like Warren Buffett would love to invest in and the one that provides atleast a safety of capital if not outsized returns, something that the investors in the US financial sector in recent times would have learnt the hard way.

  • Also read - Lessons from Warren Buffett

    1.51   Are analysts driving the markets?
    If you thought FIIs were the only ones having a major bearing on the movement of the indices, think again. It has been revealed that stock analysts too play an important if not a larger role in determining the performance of a particular stock. According to a study by UK-based investment bank, Noble and published in the Economic Times, underperformance of a stock is linked to its coverage by analysts. For instance, when the analysts' coverage on a particular stock drastically reduces, it results in lower traded volumes for that stock; a scenario which gets all the more exacerbated in a weak market. While large cap stocks have known to weather the storm, midcap stocks are not so lucky. Particularly in the case of the latter, slumping volumes and concerns over fundamentals fail to catch the analyst's eye probably explaining why midcap stocks trade at a discount to large caps especially in turbulent times such as these. This is despite the fact that the fundamentals of some of the midcap stocks are more or less comparable to those of large caps. At the end of the day, be it largecaps or midcaps, fundamentals count and if a sound company with an able management is available at attractive valuations, nothing should deter an investor from investing in that stock.

    2.27   Nobody lets go of their Golden Goose...
    And those of us who thought otherwise should have known better. We are talking about OPEC and its vested interest in low production levels and high crude oil prices. When crude prices spiked to their historical highs earlier this year, most consuming nations urged the OPEC to intervene and increase production - as if the consumers and suppliers of oil are on the same side! In our opinion, that is naive. In fact, the interests of the two parties are actually diametrically opposite.

    In its latest meeting, OPEC has said it will reduce its oil production by about half a million barrels a day in order to halt the recent decline in oil prices. What is interesting is that oil prices, while 30% lower than their July peak, are still substantially higher than the levels that prevailed last year. So this really is a matter of the oilmen wanting to hang on to the supernormal profits that they have been generating from the commodity. If there is a glimmer of hope its in the fact that the cartel is split, with Iran and Venezuela advocating lower levels of output and Saudi Arabia wanting to maintain ouput.

    2.59   Want to do business? Choose Nepal over India
    This is what a report, prepared jointly by the International Finance Corporation and the World Bank seems to be telling. Titled 'Doing Business Report 2009', the research has shown India in a very poor light placing it 122nd out of a total of 181 countries covered, even below than Bangladesh, Pakistan and Nepal. Singapore retained the first place in ranking, which covered 181 countries of the world that provides quantitative measure of regulation for starting a business, getting credit, paying taxes, enforcing contracts and closing a business. Time for India to do some soul searching as while it tom-toms its status of being the second fastest growing nation in the world, it has failed to come before much smaller nations like Bangladesh and Pakistan.

    3.22   Mittal bats for policymakers
    At a time when most of India Inc is busy giving negative reactions to the Singur case, help has come to the policymakers from the country's richest NRI, L N Mittal. The steel tycoon has stated that it will be wrong to make a perception about the whole country on the basis of just one incident and feels that it could have happened in any country. There was a sense that he was indeed walking the talk as he elaborated on his flagship company, Arcelor Mittal's India plans and said that those were firmly on track. The projects though are facing significant cost overruns, forcing the total cost to touch US$ 30 bn, up 50% from when they were envisaged. Mittal also expressed satisfaction at the efforts being taken by governments of both the states, Jharkhand and Orissa towards the successful completion of the projects.

  • Also read - Key growth drivers

    3.46   In the meanwhile
    The Indian markets edged lower for the second straight day today with the BSE-Sensex, Sensex shedding nearly 1.5%. Metal stocks turned out to be the wreckers in chief as the decline mirrored the trend witnessed on most Asian indices. In the US markets yesterday, concerns over the future of Lehman Brothers and the financial sector in general sent the stocks into another downward spiral and in the process undo most of the gains that emerged from the bail out of housing mortgage giants. European markets are also trading lower currently. Crude prices also inched higher in the Asian markets today, in reaction to OPEC's decision to cut production.

    4.08   Ray of hope after Olympics...
    Atleast the Chinese inflation numbers suggest so. The Beijing Olympics that was touted as China's ostentatious show of its super power status, after the climax, almost spelt doom for the fastest growing economy in the world. While economists predicted the country's growth to 'slow down' to 10% (more than 3 times the growth of world GDP), other doomsayers saw the economy going into a tailspin with stricter environmental and labour laws. In this context, the International Herald Tribune reported - "Although Beijing's new stadiums dazzled Olympic visitors, China's vast interior is crying out for modern housing and clean drinking water. Fast-growing cities, meanwhile, need much better public transport and less-polluted air. And the national rail network is overburdened and its power grid is inadequate." While each of these allegations may be true, what comes as a welcome relief to the Mandarin population is the fact that the inflation number has cooled off to a 14-month low (4.9% in August 2008). This has also aroused hopes that the Chinese Central Bank (People's Bank of China) will now loosen its grip and lower the cash reserve ratio for Chinese banks that was raised to a steep 17.5% in June 2008. The government has already cut taxes on exports of textiles and garments and encouraged more lending to small and medium- sized businesses. Thus, while weaker overseas demand, rising input costs and an appreciated currency has restricted export-driven growth, the Chinese are now looking at capitalising on internal consumption. And a lower inflation will only aid the cause.

    4.50   Today's investing mantra
    "A bear market is a financial cancer that spreads. Intermediate rallies (occasionally very strong ones) keep the hopes of investors alive. Furthermore, by continuously publishing bullish reports, brokers and economists, like good nurses, keep the flame of hope from burning out. But after 18 to 36 months of continued losses, total capitulation usually sets in and a major low occurs." - Marc Faber
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