How to benefit from India's multi-year bull run... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

How to benefit from India's multi-year bull run... 

A  A  A
In this issue:
» Is India's GDP under-reported?
» Is Fed boosting stock prices?
» SEBI cracks down on ponzi schemes
» ICICI Bank seems to be the favourite stock of mutual funds...
» ...and more!

Valuations have been the biggest concern for us in recent months. From 12-13x forward earnings the valuations have expanded to 16-17x forward earnings now. And the expansion in multiple is purely because of increase in liquidity flows. Agreed, that the macro-economic indicators have improved and there is a decisive leadership at the top. But the rally is fuelled by sentiments as earnings are yet to play catch up. Ajit Dayal recently spoke about this in the Honest Truth as well.

Interestingly, brokers and fund managers are going all out to call the current market sentiment an indicator of 'multi-year bull run'. They see no issues in investors putting in all their savings into stocks at steep valuations! Well, we would beg to disagree. Investors should certainly be optimistic about the potential upside in Indian stocks over the long term. But not without taking into account the risk of stock specific fundamentals and valuations.

This places investors in India in a very tricky spot. Rising stock prices has instilled greed. It has created a lingering feeling of being left out amongst investors. Hence, they have opened their purse strings and are over-exposing themselves to equities without knowing the inherent risks that come along with it.

One solution is to take baby steps and start investing smaller sums in Sensex stocks as they are considered to be safe. However, this strategy is not foolproof. We just did some back testing on returns from Sensex stocks over the last two decades and shared the results with our 5 Min Premium subscribers few days back. And they were startling to say the least. We found out that for every Sensex constituent that has created wealth over the past 2 decades there has been a Sensex company that has eroded wealth as well. Thus, the chance of making money in Sensex stocks is 50:50. And that too over a period of two decades, mind you.

If not Sensex investing, what is the best strategy to benefit from the high economic growth and subsequently a strong bull run should it materialize?

Well, we believe the best strategy is to identify the key areas that are bound to catapult business growth over the next decade. These areas will bring in...what we call a Megatrend of sorts. The concept of such a Megatrend is not unique to India. Japan, Korea, the US and China had theirs in the 1950s, 1960, 1970s and 1980's respectively.

Interestingly, the inflection point of each 'economic uprising' was the period of liberalization. As the governments opened up the economies to foreign capital and competition, the economies moved into a trajectory that ushered levels of GDP growth never seen before.

India had a similar fortune in 1991. And we have several factors pointing out the post 1991 Megatrend is once again playing out.

Which are the areas that will benefit the most from this Megatrend? Who should investors do to benefit from them? We will spill the beans soon. Please stay tuned.

According to you, which Mega Trends is India about to witness in the near future? Do you think you can benefit from such trends? Let us know your comments or share your views in the Equitymaster Club.

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02:15  Chart of the day
Foreign Institutional Investors (FII's) were driving the rally in the domestic equity markets so far. But just as foreign flows were waning, large investments by mutual funds have kept the party going. As per SEBI data, investments by mutual funds stood at over Rs 54 bn during the period between 24th July and 13th August 2014. This is nearly twice the total investments made by FIIs over the same period. A chief reason is the jump in the inflows in mutual fund equity schemes. This signals the comeback of the retail investor. After burning fingers in the aftermath of the global financial crisis in 2008, retail investors were away from equity markets in the past five years. Since the start of 2014, equity inflows in domestic funds have touched Rs 260 bn as per Association of Mutual Funds of India (AMFI).

But which stocks have caught the fancy of the mutual funds? Among the top ten stocks that attracted 25% of assets under management (AUM) of equity mutual funds, banks are a clear favourite. Banks will be the biggest beneficiary of the economic revival. Therefore, well run private banks like ICICI Bank and HDFC bank are the preferred bets. Even the largest bank, State Bank of India is a hot favourite. Mutual funds have also invested in frontline IT, infrastructure and auto stocks among others.

Which stocks are most favoured amongst fund houses?

Up till now, India's capital market regulator SEBI could have been termed a sleeping lion at best. To be fair, its powers were also limited according to us. But not anymore. In a rare show of bravado, the watchdog has swooped down on as many as 40 firms since May this year. All of these are believed to be running unregistered investment funds and luring customers with Ponzi-like schemes. This is in stark contrast to just 12 firms the regulator appeared to have pulled up the previous 12 months. This marked change in approach could be attributed to the new Government that passed an amendment to the SEBI Act. The new act thus gives SEBI enforcement powers previously unheard of.

It was indeed high time something was done to rid the society of this menace of illegitimate financial schemes that literally toy with a lifetime worth of savings of the less privileged. To some extent even the Government is to be blamed we believe. For it did not do enough to lift these people out of financial untouchability and give them access to traditional banking channels to park their savings. Hopefully the Prime Minister's ambitious Jan Dhan Yojana should help bridge this gap to a significant extent. This combined with SEBI's new found aggression can perhaps help nip in the bud most of the Saharas and the Saradhas of the world.

When was the last time you heard central banks predicting stock market levels. Well, if this is beyond your stretch of imagination, rest assured this is a near term possibility. Central banks were meant to regulate the financial system and avoid systemic risks. However, going by the trend in the US Fed and the inspiration drawn from it by the ECB and Bank of Japan, risk mitigation ranks low on priorities. The central banks in the developed economies are busy keeping stock markets booming these days. So everytime, stock valuations get dampened in anticipation of Fed rate hike, a few billions get printed.

First it was the US Fed itself then it was Bank of Japan and now the ECB. Pumping cheap money to inflate prices of assets like stocks, bonds and real estate is what keeps central bankers busy these days. As PIMCO economist McCully points out in Moneynews, none of the money printing had a benign impact on the economies. However, the Fed has certainly made Wall Street happy. With the S&P 500 having tripled since March 2009, the Wall Street has little to complain! This only makes the job of sensible central banks, like the RBI, tougher. We only hope it continues to do the good work!

Revising the method of GDP calculation is something that is done every five years. This typically brings in a new base and adjusts for changes in the economy. But the Modi government intends to do this early in 2015. The plan is to release GDP data based on the 2011/12 base year. Further, the focus will be on including under-represented and informal sectors while calculating the GDP. This means that the reported GDP figure would turn out to be higher than what is being currently reported. As reported in an article in Reuters, India's informal economy and service sector accounts for over three-fifths of its US$ 1.8 trillion economy. But currently not much reliable information is available on this and the government mostly relies on samples and surveys to arrive at some figures to capture this. As an economy evolves and new areas for growth emerge, it does make sense to make the GDP calculation upto the mark so that it reflects a true picture. Having said that, one cannot be satisfied with a higher GDP number solely because there has been a change in the way it has been calculated. Ultimately, higher growth has to be sustainable. And this can only be achieved through the introduction and implementation of reforms.

After opening weak, the Indian stock markets continued to languish in the red in the afternoon trading session. At the time of writing, the BSE-Sensex was trading down by 194 points (0.7%). Most of the sectoral indices were trading on a weak note. While FMCG and oil and gas have been among the top laggards, realty, power and metal stocks witnessed some buying interest. Asian stock markets were also trading on a poor note with Hong Kong markets leading the pack of losers. European markets too have opened the day on a pessimistic note.

04:50  Today's investing mantra
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2 Responses to "How to benefit from India's multi-year bull run..."


Sep 15, 2014

You are exactly right. There is reason behind everything that happens in the world. Probably, you might have read "The Stranger" by by Albert Camus. This is the reason that I am strong supporter of interdisciplinary education which is almost nonexistent in India.



Sep 11, 2014

We are getting confusing reports about present market scenario. By yardstick of PE, Present PE of 21.68 as against historical PE of 17.14, market is overvalued in general.Also I read article in EM that PE more than 20 is a signal to SELL.
Some investors believe Market Cap to GDP ratio is better indicator . Acc to them, if it is less than 0.5, it is signal to BUY, if over 1.2 it is time to sell and in between figures market is fairly valued.Present MCAP is Rs.92.34 Lakh Crore and GDP Rs.107.59 Lakh crore and ratio 0.85 and hence fairly valued.Can anyone throw light on this theory and from where we can get authentic GDP figures. SANKARAN VENKATARAMAN

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