Here is how you can cash in on the huge opportunity in stock markets... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Here is how you can cash in on the huge opportunity in stock markets... 

A  A  A
In this issue:
» Indian on road to recovery, but challenges remain
» Rising royalty payments a cause of concern for minority stakeholders
» India ranks highest in Asia in terms of shareholder activism
» Alibaba not an ideal model for Indian ecommerce firms
» ...and more!

The rise in power of Modi Government through a clear mandate has shaken the markets out of a long stupor. The leading indices have touched fresh highs this year. The Sensex is trading up 27% so far in 2014. And mid cap and small cap indices have surpassed with 45% and 67% gains in the year till date, signaling the return of retail investors to the markets.

Some experts believe that this optimism has been taken too far. At 16.6% and 5.5% respectively, the rise in share of mid cap and small cap stocks in total market cap of listed companies is being flagged as danger sign. As suggested in article in Business Standard, in the past, such a trend has been followed by a market correction.

Should this deter investors from participating in the stock markets?

Such a rise in markets before a clear economic revival warrants caution. That said, we believe that there is still a lot of value left in many stocks. This is especially true for stocks in the small and mid cap space. And some seleced stocks from this space could be a strong bet on the economic turn around.

It would not be fair to say that bull run is all driven by sentiments and expectations. That Indian economy has broken the jinx of below 5% growth in the last nine quarters suggests that green shoots are indeed there. But what might not be so obvious at this stage to investors are the Megatrends in the making. As we have been discussing for quite some time now, Indian economy is set to witness some pivotal shifts that will change the present and rewrite its future.

The onset of the economic reforms, thrust on infrastructure and manufacturing sector, favourable demographics, growing and aspirational middle class, financial inclusion, rise in consumerism and small businesses are some such themes that will unleash the growth potential for the firms with strong fundamentals and astute managements. Despite the recent run up in the valuations, there are businesses that will witness high growth rates, the same acting as catalyst for higher valuations for stocks that are well geared to ride the Golden decade ahead of us. It's a story that has just begun. It promises tremendous potential to make huge gains. But to participate in it, one needs to identify the key signals of the Megatrend and the potential beneficiaries as soon as possible.

We at Equitymaster also believe that investors stand to profit immensely from India's golden decade. In fact, Tanushree, my colleague and Co-Head of Research at Equitymaster, has been working on what she calls the Megatrend Master Series. The purpose of the series is to help you understand the huge opportunity that lies ahead, and also aims to show you how to profit from it. If you are yet to register to attend this series, we strongly recommend that you sign up now! And just in case you have already signed up, view Part I of the Master Series here...

02:00  Chart of the day
Finally, we are out of the below 5% growth curse. UPA's mismanagement ensured that the Indian growth juggernaut took a backseat in the last two years. Today's chart with a sub 5% growth in the last two years of UPA's regime is a reflection of that.

However, the GDP growth data for the first quarter ending June suggests that the Indian economy is back on track. While a 5.7% figure is nothing to boast about, this has been the highest pace of expansion in the last 9 quarters. And with the growth chariot now in the right hands, many believe that things are bound to improve from here on. However, we reckon the road will be not as easy as thought. For one, insufficient monsoons in some parts of the country shall restrict agricultural growth. Also, with inflation refusing to calm down, monetary policy is likely to remain hawkish. This shall make revival in capex a slow affair and hurt growth. Further, rising bad loans have made banks cautious. As such, the credit growth may also suffer. In short, the overall macro-economic situation is dim. Thus, it would be interesting to see if the turnaround is sustainable or the shade of revival seen is a mere dead cat bounce.

Indian Economy Back On Track?

In a country strongly in need of foreign capital, dollar outflows are definitely a cause for concern. Therefore when an item surfaced in FY10 that led to an outflow of almost 10% of our inward FDI, alarm bells started ringing. What more, in FY13, this small item ballooned to nearly 20% of India's FDI inflows. This thus set the tone for a serious discussion. Well, this outflow that we are referring to is nothing but the royalty payments made by Indian companies to their foreign partners! It should be noted that up until 2009 there was a cap on the royalty that Indian companies should pay to their foreign promoters. But as soon as this cap was removed, royalty payments increased substantially. Worse still, the payments were made even as the domestic economy suffered and the topline grew at a much smaller rate than the growth in royalties.

Consequently, concerns were raised over the shareholder friendliness of such companies. An article in a leading daily has once again brought this issue to the fore. It has argued how these royalties are unfair to the shareholders. Not only do they lack transparency but are also not performance linked. It then looks like there's a case for this parameter to assume strong importance whenever one is considering investment worthiness of a domestic firm having foreign promoters.

Minority shareholders in India are no longer a subdued lot. Since the global crisis in 2008, shareholder activism in India has been on the rise. This means that minority shareholders are increasingly looking to protect their interest against promoters who have a higher shareholding. Indeed, India now has the highest incidence of shareholder activism than any other Asian country. Many examples in the last 5 years are testimonial to this fact. Perhaps none is as big as the one in December 2008 when institutional investors forced Satyam to block its US$ 1.6 bn deal to acquire two firms owned by the promoter family. What happened after that is history. The most recent example has been with respect to Maruti Suzuki. The company had come out with a plan wherein it would source cars from a plant that would be set up by its parent company. This did not go down well with shareholders given that Maruti has enough cash to build the plant on its own. One of the major reasons why such activism has been on the rise is because of laws implemented by SEBI. Indeed, the regulatory body has done well so far in terms of protecting the interests of shareholders and not letting them get bulldozed by managements and promoters having vested interests.

Just two days ago, we had shared our thoughts about the mega Alibaba IPO. Much has been written about the company. A lot of interest has also been directed towards Indian e-commerce firms like Flipkart. However, as per an article in Livemint, the Chinese firm is not a role model for free market entrepreneurship. Its corporate structure is opaque. 27 partners control the board despite holding a minority stake in the firm. This dual class share structure will certainly not win any awards for corporate governance. The level of disclosures made by the company has also been called into question. Stories are doing the rounds about how the IPO has made a few top communist party leaders in China quite rich. We believe that Alibaba is not a good example for Indian e-commerce start-ups to follow. The Indian firms should look to develop home grown solutions to drive their growth.

Indian stock markets continued to trade weak in the post noon trading session. At the time of writing, the BSE-Sensex was trading down by 45 points (0.2%). Majority of the sectoral indices were trading in the red led by engineering and realty stocks. FMCG and metal were among the few stocks trading positive. Most of the Asian markets were trading strong led by China. However, the Japanese index was trading negative. European markets have opened the day in the red.

04:55  Today's investing mantra
"The key to making money in stocks is not to get scared out of them." - Peter Lynch
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