What aspect of the Megatrend are these specialist investors tapping into? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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What aspect of the Megatrend are these specialist investors tapping into? 

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In this issue:
» Narayana Murthy's views on PM Modi's trip to the US?
» From 10,000 to 10,000: The top midcaps over the last 6 years
» Will India see a rating upgrade anytime soon?
» The US bond market disagrees with the Fed...
» And more!


00:00
 
Beyond the noise of the stock markets, there is an exciting story playing out in the economy that many people may not have noticed. This story does not make it to news headlines. Indeed, it has taken the form of a quiet revolution. It is certainly not talked about too much, yet we believe that it will be among the most important drivers of the Indian economy. We are referring to the entrepreneurship displayed by young India.

The inclination amongst the young and educated Indian youth to try their hand at entrepreneurship is stoking high rates of growth in several new sectors. We have seen it in action during our travels across the country. Young India has begun to take charge of the economy! They are doing so, not just by joining the work force but also by starting their own ventures. Food chains, taxi services, online retailers, recruitment firms, fashion brands... the list is endless. Startups have begun to compete with established players. And according to us, investors should be taking cues from this spirit of entrepreneurship. For this is certainly an indication of what we call a Megatrend in-the-making. The businesses in new high growth sectors, if executed and managed well, will hold immense potential for wealth creation over the long term.

The average investor in stock markets remains focused on big firms and the next quarter's earnings. However, large companies, as well as astute venture capitalists (VCs), have already spotted the opportunity. Big money has begun flowing into these small firms. Compared to the average investor, VCs typically take a longer term view about the business. They invest early in the growth stage and at favourable valuations. When these small firms come to the market, the VCs exit during the IPO. Big firms too, have begun to participate. Instead of competing with startups, they have begun to partner them. This trend has already begun in the Indian IT sector and we will not be surprised if it spreads to other sectors as well. In this promising story, one thing is certain. Young entrepreneurs driving Megatrend in India, is a story that has only just begun. There are miles to go before India is recognized as a country in which it is easy to do business. However, by overcoming many problems, nimble and creative startups with the advantage of their small size can create huge wealth, in this decade and beyond.

We can learn a few lessons from this story while investing in small listed firms. First, it pays to invest in promising small companies that are benefiting from the Megatrend that is set to drive the economy in the next few decades. Secondly, despite the high growth on offer, investors must be patient. It takes time for a mid-sized or a small firm to establish itself in its industry. Thirdly, invest cautiously after doing your due diligence, as the business models of these firms may not have matured. Most importantly, never over pay for the stock. This is not an exhaustive checklist. However, it will provide a starting point for investors who are keen to participate in the growth that the Megatrend will unleash in the years to come.

Now, in case you are not aware....we will soon release a 3 Part - Megatrend Master Series that will reveal to you everything you need to know about this Megatrend in the Indian Economy and the 7 signals.

In fact we believe that once you have gone through the 3 Part Master Series you will be well on your way to make the most of this mega opportunity. And because of its sheer potential, and our desire to share it with you, we are giving you the opportunity to access this 3 Part Master Series for free!

That's right! All you need to do is click here and you will join the list of select readers who will be among the first to access this Master Series.

Meanwhile do keep sharing your experiences about investing based on a Megatrend in the past. And also keep your questions on the 7 Hidden Signals of Economic Boom coming. Let us know your comments or share your views in the Equitymaster Club.

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02:10  Chart of the day
 
In the first week of 2008, when the markets were at the peak levels then, the BSE-Midcap Index closed at levels of about 10,000 points. However, it is only now that the index has closed higher than the 10K mark i.e. after a period of six and a half years! As reported by the Business Standard, out of 193 actively traded stocks in the index, about 73 of them are still trading lower than what they were then. However, about 80 of them have doubled since then. A look at the list of the top and worst performers gives a strong indication of the kind of companies that investors should look at and those that people should ignore. Why this exercise makes sense? Because the two market situations is very much comparable right from a period of ultra optimism, to maximum uncertainty and back to an era of strong buoyancy.

Some of the big midcap wealth creators


02:40
 
The Prime Minister's recent trip to Japan can be termed as a successful one. Especially when you consider the US$ 35 bn investment that the Japanese corporations promised to make in India. Mind you, this investment is likely to come in over the next 4-5 years. Therefore in this context, our US$ 40-45 bn software exports every year to the US do seem quite large isn't it? There's one more thing. The Japanese investment will of course create a large number of jobs. But the software industry has already created some close to 3.2 m jobs. Not to forget 2-3 times that number of jobs in the secondary and tertiary sectors. Is it any wonder then that one of India's most famous industrialists, N. R. Narayana Murthy has termed our Prime Minister's upcoming US visit more important than his Japan visit. As a matter of fact Murthy considers it one of the most important visits of Modi's tenure.

Writing in a leading daily, Murthy is of the view that the only way we can secure our future is by way of better higher education and through research innovation. It is therefore extremely important that we build close relations with the US, the number one country in the world in these areas. Murthy has also urged Modi to raise the status of the Indian IT industry in the eyes of the US policymakers. This he believes is extremely important. Especially in the context of rising clamour there about how Indian software professionals are taking away US jobs. Murthy believes Modi has the charisma to achieve these objectives and has hoped the visit brings the two nations closer than before.

03:00
 
Possibility of GDP growth higher than Brazil and Russia. Gradual bridging of current account gap. Fortified forex reserves. Possibility of stability in prices and cut in interest rates by the RBI. Do these expectations make a good reading for the Indian economy? Well, certainly yes! What is the possibility of these expectations turning into reality? Well, that is anybody's guess. And can this affect India's sovereign rating? Well, at least the economists at Merrill Lynch think so. It may be recalled that India's rating was downgraded in April 2012 on the back of inflation and deficit risks. Many deemed the downgrade as unwarranted. However, is it safe to assume that rating agency S&P will be proactive in upgrading India's rating based on the positive economic cues? We for one do not think so. Unless India's GDP growth numbers, inflation and current account deficit give sufficient comfort in terms of sustainability, rating agencies may not budge at all. That is not to say that until then global investors will not keep a watch on India. They are already doing so. However, as has been the case in the past, it will take a lot of action from Indian policymakers for the economic prosperity to reflect in our sovereign ratings.

04:05
 
There is an interesting phenomenon going on in the US right now. The US Federal Reserve thinks the US economy is recovering and will improve from here on. However, investors in America's $12.2 trillion government bond market beg to disagree. In fact, US government bond prices, which reflect nothing but the combined decisions of all investors in the treasury market, seem to indicate a lower outlook for long-term inflation, growth of the economy and interest rates. More so, investors' outlook on such metrics now seems even lower than what it was at the end of the Fed's first two rounds of quantitative easing. Considering that the Fed is now in the midst of winding down the third round of its stimulus, such a state of affairs is nothing short of intriguing. A Bloomberg report goes on to observe that the implied yields on the benchmark 10 year treasuries now suggest that investors don't foresee the yields increasing to 3% for at least another year. With one of the biggest group of investors in the US betting that America's forecasted steady recovery is more of a mirage; it will be interesting to see what the future holds.

04:40
 
Indian stock markets continued to languish in the red in the post noon trading session. At the time of writing, the BSE-Sensex was trading up by 201 points (0.7%). Majority of the sectoral indices were trading in the red with metal and IT stocks being the major losers. Pharma and power were among the few stocks trading in the red. Most of the Asian markets, with the exception of China and Japan, were trading in the red. European markets have opened the day on a weak note.

04:55  Today's investing mantra
"A good business is not always a good purchase - although it's a good place to look for one." - Warren Buffett
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