What's keeping you worried, dear investor? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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What's keeping you worried, dear investor? 

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In this issue:
» Emerging market rally spurs unease
» US recovery-Real or fake?
» The great liquidity race - Why gold will soar?
» Bharti Airtel's take on competition
» ...and more!


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00:00
 
The financial markets' stress tests are done. All is well. Green shoots are popping up all over the place. The worst is behind us. Stocks are rising. In fact, they have already risen by 4 to 5 times over the past 6 months.

Everything is cool, right? And so, there's nothing that you are worried about as far as your investments go, right?

Or is there something that worries you? What about the poor corporate governance of companies that you invest in - companies that have messy balance sheets, disclose very little, and that too very late?

What about the fear of the next corporate scandal, a la Satyam, that can wreak havoc on your entire investment portfolio? Or for that matter, what about the irritation that, while you have funds to invest into the markets, everything seems so expensive after last six months' massive rally that you are in fact considering taking some money off the table?

See, there's no denying that all these worries and concerns are for real - especially the ones regarding high stock valuations. And there's no doubt that you have to keep your portfolio protected against these. The need of the hour is, therefore, to maintain a keen vigil on your investment decisions. Staying disciplined and having a long term perspective of things is the key.

Anyways, why don't you tell us what's worrying you the most these days? We might probably have an answer to reduce your worries.

01:03  Chart of the day
As we've indicated above, foreign money flows into the Indian markets have been fickle to say the least. And as today's chart of the day shows, it is these very volatile foreign inflows that move our markets. As seen from the chart, there emerges a very close connection between how FIIs (foreign institutional investors) have behaved in the past and how the Sensex has danced to their tunes. And as compared to the FIIs, inflows from Indian mutual funds have been relatively steady and small.

Data Source: SEBI, Trend

It's not the quantum but the volatility of FII inflows that disturbs us a lot. And the volatility has continued over the past many years. So the next time some someone tells you that FII money is here to stay forever, you know what to take from it.

01:37
 
"We are all Keynesians now." This cult phrase invented by the noted economist Milt0n Friedman in the 1960s made its grand comeback in 2008. Keynes had advocated that during times of financial crises, when the private sector becomes reluctant to spend, governments should step in and create massive investment projects so that jobs could be created and economy could be stabilized. And Messrs Obama and Bernanke did just that.

They flooded the system with liquidity. In fact, the wave of liquidity unleashed this time around is greater than that of the 2001-2003 period and hence, it is almost certain that cash is going to be a terrible place to park one's money in, as the 'great liquidity race' goes about destroying its value against other more useful assets.

And what are these assets? Most certainly, gold is going to be one of them. In fact, it has already proved its worth by rising handsomely year after year since the turn of this decade. However, many believe that it may not be done just yet. With the problems that the world is facing unlikely to end anytime soon, the yellow metal could surge higher in the months to come.

So, have you adequately insured yourself against this 'great liquidity race'?

02:23
 
Telecom major, Bharti Airtel, announced its 2QFY10 results today. Under pressure from the intense price competition within the industry, it reported a huge 24%YoY decline in its average revenue per user. This impacted the company's sales growth that stood at a rather tepid 16% YoY during the quarter. However, despite all this, the company managed to hold on to its operating margins at last year's levels.

The company's management has come out heavily against competitors who are employing massive price cuts to grow their own subscriber base. While such tactics are not new to the telecom industry, what the management believes is that this would lead to a faster consolidation within the industry. This is because non-profitability of operations of smaller companies due to this price based competition will ravage these players who might then be gobbled up by a larger player. Overall, the management has kept its faith in India's telecom future.

02:57
 
Pessimists might call it a 'low-base effect'. Optimists might look it as a 'real improvement'. Call it whatever, but the US economy has come back in the recovery mode, or so it seems. As reported yesterday, the US GDP has grown by 3.5% YoY during the quarter ended September 2009 (3Q09).

Data Source: US Commerce Department

While this growth in the September quarter unofficially ends the country's worst recession in forty years, economists are still doubtful whether this is sustainable. This is given that a large part of this growth in US GDP has been brought about by the government's stimulus program that has helped raise consumer spending, and housing and automobile demand.

See for instance the cash for clunkers program, wherein the US government was offering a cash subsidy to consumers to exchange their old cars for new ones. This was done with a view to bail out auto companies, which stood on the brink of bankruptcy. Now what this cash for clunkers program has done is push up the automobile output during the September quarter by a massive 158% YoY, which isn't sustainable.

To put this into GDP terms, according to the US Bureau of Economic Analysis, this surge in automobile production added around 1.6% to the US GDP growth figure reported. Thus without it, GDP growth would have been only 1.9% (3.5% minus 1.6%) during the third quarter!

03:34
 
In the meanwhile, Indian markets were the worst performer in Asia today. This was despite the fact that these had opened the day extremely strong following positive US GDP numbers. The BSE-Sensex was trading lower by around 150 points (1%) at the time of writing. The mid and small-cap stocks also traded weak. Among other Asian markets, key gainers included Hong Kong (up 2.3%) and China (1.2%). Stocks in Europe have opened mixed today.

03:51
 
Notwithstanding the past week's selloff, emerging markets have enjoyed a spectacular rally in the year so far after the hammering that they received last year. For instance, the run-up in emerging markets is around four times that of Standard & Poor 500 index, which has gained 18% this year.

But doubts have started to emerge whether this buoyancy will be sustainable. While the preference for these markets is evident from the strong growth that emerging economies are expected to post as compared to their developed peers, it is being increasingly felt that the stockmarkets in these emerging markets have run ahead of fundamentals.

What is more, as reported in the Wall Street Journal, emerging economies could be headed for a downturn irrespective of how the developed countries fare in the future. If the US and Europe continue to grow sluggishly, countries relying on exports such as China and Brazil will be hit hard. So if the world economy slows further, commodity prices will plunge. On the other hand, if the US economy for instance starts growing at a strong pace, interest rates will head upwards and the dollar will appreciate thereby taking the sheen off emerging markets.

Then, emerging economies have their own set of problems to deal with. While China is still dependent on exports, India has to grapple with a rising fiscal deficit. Thus, while nobody is denying the allure of emerging markets, irrational optimism is bound to have its negative effects.

04:57  Today's investing mantra
"What an investor needs is the ability to correctly evaluate selected businesses. Note that word 'selected': You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital." - Warren Buffett

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5 Responses to "What's keeping you worried, dear investor?"

vinay kumar agrawal

Oct 31, 2009

dear sir
this curent down trend not more another maximum 100 point in nifty so near about 4650 nifty will setal down and then the great aporchunity for long turm valu invester for four years in power sector great welth in curent prise and second one is media and entertrenment like network 18 ,tv18 ,ibn 18, brodcast iniceative,ext




Like 

SGKrishnan

Oct 30, 2009

Stocks have run up too fast and most of us have atleast recovered the losses. But how to protect the value of portfolio in order to make gains, if the market goes up further?

Like 

Girish v shah

Oct 30, 2009

1) non disclousre of forex exposure and losses
2)fiscal deficit of india
3)food inflation things of absolute necseites have MORE YES YES MORE THAN DOUBLED----YOU MAY TRY GOING TO THE MARKET AND CHECK THE ACTUAL PRICES OF VEG'S AND FOOD GRAINS
4) MASSIVE AND ALLROUND SHAMELESS CORRUPTION IN THE GOVT
5) false inflation +growth rates +other statitics
6)more than 1/2 of india lives in abject poverty and govt is leased worried about them giving rise to maoist type movements
7)even cities like pune are having power shortages forget about all india
8)THE LIST CAN GO ON AND YET THEY SAY THAT INDIA IS A SUPERPOWER -------THEN ALL THE OTHER COUNTRIES MUST BE LIVING IN PENNURY AND MEDICANCY

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VENKATACHALAM

Oct 30, 2009

IN THIS UNCERTAIN VOLATILE MARKET, IT HAS BECOME VERY DIFFICULT TO ARRIVE AT THE SUPPORT LEVEL EVEN FOR BEST AND FUNDAMENTALLY STRONG COMPANIES' STOCKS. EVERYDAY THE SUPPORT LEVEL IS CHANGING,AND I WOULD LIKE TO KNOW HOW TO OVERCOME THIS PREDICAMENT.

Like 

Mayank Desai

Oct 30, 2009

Dear Sir,

In this volatile market can you guide on F & O trading,

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