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Profiting From Tata, Trump and Fed

Nov 3, 2016

In this issue:
» Mistry continues as chairman in many Tata Group companies
» What to make of S&P's India sovereign rating
00:00
Tanushree Banerjee, Co-Head of Research

Tata, Trump, Fed.

Indian stock markets are hooked on these stories. Each has the potential to send equity valuations into a nosedive.

The Tata episode may impact the valuations of just a few stocks from the group, temporarily. But you'd be grossly wrong to assume that will be the only damage done. The ugly spat at India's most trusted and respected corporate group has shaken investor confidence.

Ajit Dayal, founder of Equitymaster, used to always remind us...

  • There are four things of immense value in this country: the HDFC brand name, Infosys, Tata, and gold.

However, here is what he wrote in The Honest Truth back in 2013...

  • Gold is the only thing of value left in the country - despite the wild swings in price; most corporate groups have shown they respect price more than they respect values.

So as the Tata episode unfolds over the coming months, it could impact stocks in more ways than we imagine.

A Donald Trump win in the US would have no less an impact on Indian stocks than it would on US stocks. His stances on trade, immigration, and foreign policy already have markets jittery, as a Trump presidency is expected to deal a big blow to US trade deals in Asia. While economies like China may suffer the most, Indian exports would not remain untouched. The prospects for India's IT sector are particularly clouded.

Even if Indian stocks manage to sail through the election in November, December too has a challenge in store for the markets. In its latest policy meet, the US Fed nearly confirmed a rate hike in December. A hike, however small, would lead to a global change in the direction of interest rates. This would mean a drying up of liquidity in emerging markets, including India.

Now, we'd rather predict the direction of individual stocks than the broader markets. But there are times when we must. The environment reminds us of when Buffett wrote just prior to the market crash in November 1999...

  • Investors in stocks these days are expecting far too much, and I'm going to explain why. That will inevitably set me to talking about the general stock market, a subject I'm usually unwilling to discuss. But I want to make one thing clear going in: Though I will be talking about the level of the market, I will not be predicting its next moves. At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it's going to go next week or next month or next year, a line of thought we never get into.

    The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts. So what I am going to be saying--assuming it's correct-will have implications for the long-term results to be realized by American stockholders.

So we are obliged to warn you, dear reader, of the excessive optimism in stock valuations currently. However, there is a silver lining. The last two months of 2016 could impact stock valuations in more ways than one. And the fallout could offer great opportunities for diligent long-term value investors.

Take a vow to steer clear of the three biggest profit killers. And make the most of possibly the best months of the year to find the choicest safe stocks.

02:30 Chart of the day

Cyrus Mistry may have been quickly ejected as Chairman of Tata Sons, but he very much continues to be the boss in many important individual Tata Group companies. Companies like Tata Motors, Tata Power, Indian Hotels Co, Tata Steel, Tata Chemicals, Titan Co. etc. continue to have him at the helm.

And it may not prove to be quite as easy to remove him in these cases. This is because in many such companies, Tata Sons just doesn't own a majority stake. Have a look at today's chart of the day. It pegs Tata Sons' direct stake in some of its group companies.

Apart from Tata Consultancy Services and Tata Investment Corp., Tata Sons seems to be very low on direct equity stake holdings. Its stake in most seems to be in the 20% range, which is quite a low number.

Through its low holdings and large cross holdings, the group has for long relied on being high on control but low on actual equity stake. But it may not the best state of affairs to have in a situation such as the current one.

Tatas High on Control, Low on Equity Stake


03:20

Yesterday, the ratings agency Standard & Poor's (S&P) reiterated the lowest investment grade sovereign rating of 'BBB-' for India, with a 'stable' outlook. It has also ruled out any upgrade for the next two years, weak government finances being the key reason.

The rating agency has called on more efforts to lower government debt to below 60% of GDP.It does not expect revenues to rise enough to meaningfully lower the fiscal deficit over the medium term.

This has seemingly riled the government. As per reports, it has been quick to slam S&P's statement highlighting the rating agencies' views are not in sync with investor perception about India.

What should you make out of all this? Well, we suggest that whether it's about the country or individual companies, you must take such ratings by ratings agencies with a pinch of salt. And a rather large one at that. That's because starting with the US subprime crisis, time and again, these firms' stark ratings mistakes have betrayed the frailties of the processes they follow to come up with the ratings. Not the best track record to rely on, we believe.

04:30

The Indian stock markets were trading in the positive today on the back of buying activity across most index heavyweights. At the time of writing, the BSE-Sensex was trading up by around 50 points. Gains were largely seen in telecom and metal stocks.

04:56 Investment mantra of the day

"Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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2 Responses to "Profiting From Tata, Trump and Fed"

SRINIVASAN CHANDRASEKHARAN, BAHRAIN

Nov 8, 2016

Well said by TANUSHREE and thanks to her that she has rightly alerted the Investors to exercise caution on the potential impact on the equity valuations due to the factors of TATA, TRUMP, and FED in the next two months.

She has also said that the fallout could offer great opportunities for diligent long-term value investors. I would suggest her to come-up with her recommendations then to pick-up the right stocks for her readers.

Thanks once again.

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B.N.Manjunath

Nov 4, 2016

I like Equity Master's contrarian approach and consistent policy in stock picking. But feel a bit too much is being made and repeated of Warren Buffett's investment approach , his quotes , sayings etc. Its being overdone actually in my view.

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Equitymaster requests your view! Post a comment on "Profiting From Tata, Trump and Fed". Click here!
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