Will Your Stocks Go Up or Down After Today's Election Verdict? - The 5 Minute WrapUp by Equitymaster
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Will Your Stocks Go Up or Down After Today's Election Verdict?

Nov 8, 2016
In this issue:
» India is Near the Bottom of the Global NPA List
» Startup Valuations Are Going Down!
» ...and more!
00:00
Kunal Thanvi, Research analyst

Well, the big day is here. In a few hours the suspense will finally end. By tomorrow morning, the American people, the American people would have given their verdict - Hillary or Donald.

It seems to be a case of trying to decide who is the lesser evil. Here's what Bill Bonner had to say.

'How does it come to be that a nation of 330 million people - including some of the smartest, most accomplished, most dynamic people on Earth - end up with a choice between a fool and a knave? Is this the best you can do?'

We don't envy the American voter.

This was truly a historic election. The long campaign was filled with vitriol, sleaze, absurdities, lies, accusations, threats, and who knows what else. It was enough to keep global markets on tenterhooks.

No matter who wins, there will be an impact on markets around the world. After all, markets do not operate in isolation. The government of the day can and does influence it. The US is by far the biggest economy on earth. It follows that the US government and its policies have the most impact.

Yesterday, we wrote about the Indian market's reaction to US election results. You can read it here. It turns out, that our markets move in a similar manner as the benchmark American index, the S&P 500.

But here's the catch.

It lasts for only a week or so. After that things tend to go back to normal, as it should.

But what about the long term? If Donald Trump wins shouldn't we be worried? Won't his policies trigger a recession?

My colleague Rohan Pinto, wrote about why we are not worried about Donald Trump over a month ago. Here's a quote.

The US presidential election is important. The next president will play a crucial role in shaping US economic policy. This policy will affect every economy in the world. But the impact of an individual business in a given country will probably be minimal. This is especially true if the business is in good financial health and run by competent people.

The conclusion?

No matter what happens to market sentiment, fundamentally strong businesses tend to remain strong. This is especially true in bad economic conditions, when weaker firms go bust.

So, if Trump wins, and the world economy goes into a recession, should you be worried?

As long as you're holding the best of the breed businesses in your portfolio, the answer is NO. You can sleep well at night because these will be the companies that come out on top when the recession ends.

Indeed.

We will use any market crash as an opportunity to recommend great businesses. To quote Mark Twain,

'I've had a lot of worries in my life, most of which never happened.'

Alas, if only this were the entire story. But it's not so. There is something more that I would like to emphasize here.

It's true that you should not worry about the best of breed businesses. They will do well no matter what policies the US government adopts. However, you should worry about the poor businesses in your portfolio.

In fact, we couldn't help but notice recently, that it's the stocks with poor fundamentals that are running up.

Stocks prices of many fundamentally strong companies, across various sectors, have not risen as much. Some good stocks are actually falling. A few of them have fallen a lot.

It's almost as if the Indian stock market is slowly losing touch with reality. This is especially true of smallcap stocks. The aam investor is heavily invested in smallcap stocks. This worries me. They are not prepared for a crash.

What if the election results are not to the liking of foreign investors? They will flee to safety. The Indian markets wouldn't be insulated from a global selloff. The Indian retail investor will be left holding the can. It always happens this way.

But what if the results are positive for the markets?

Let's say Hillary Clinton wins by a landslide. The media will rejoice. Everyone and his uncle will tell you to buy stocks. Junk stocks will continue to rise. The bull market in India could turn into a bubble.

And we all know how bubbles end, don't we?

Don't think it can happen? I'll quote Twain again,

'History doesn't repeat itself but it often rhymes.'

We are poised at a very important juncture. In 2014, Modi's victory sent stocks flying. In 2016, Trump or Clinton could either send stocks down or up. An intelligent investor would want to cover both possibilities.

How?

Stay away from the three biggest Profit Killers which prevents the aam investor from making big money in the markets. Avoiding them helps to protect against the downside risk. Find out more about the 3 Profit Killers here.

But what about profiting from the upside?

Well Richa and her Hidden Treasure team, have recently revealed their three highest conviction stock picks in a unique report called Junior Bluechips. These are small caps which possess five crucial properties that remind us of blue chips. She and her team believe; these three stocks will do well no matter what happens. Gain access to the Junior Bluechips report here.

So are we worried about the US election results?

We believe, the more important question should be, are we prepared for any eventuality?

We have no doubt about the answer to that question.

Yes. Absolutely.

03:55 Chart of the Day

India is going through a severe bad loan problem. Major banks have reported poor numbers in the recent earnings season.

For 2QFY17, most banks both public and private, have witnessed asset quality pressures which have impacted their profitability and loan growth. This has raised concerns over the end of the bad loan saga.

The problem of bad loans is indeed quite severe and when we compare it with other global peers it looks daunting.

A comparison of bad loans/Non-Performing Assets (NPAs) as a percentage of gross loans suggests India is among the top ten worst-performing major economies of the world.

India is Near the Bottom of the Global NPA List


Out of the ten major economies facing NPA problems, India is ranked seventh.

Further, according a leading financial daily, a comparison of the NPAs of 25 large Asia-Pacific banks shows that the large Indian banks have the worst NPA ratio when compared to their large cap peers in the region. For FY16, India has been the worst performer with NPAs of 4.6%. Thailand has been the second performer with NPAs of 3.2%.

The state owned banks have suffered more than its private peers. This will have serious consequences on India's overall credit growth as state-owned banks account for two-thirds of overall credit disbursed by scheduled commercial banks in India.

The overhang of bad debts has not only hit their profitability, but has also restricted their loan book growth. Given the scale of the bad loan problem, the bankers may remain cautious in granting new loans and approving new projects. This may delay India's investment cycle.

04:20

There is yet another mark down in startup valuations. E-commerce startups are disrupting traditional businesses. At one end, Flipkart/Amazon/Snapdeal has disrupted the consumer discretionary space. At the other end, Ola/Uber have disrupted the public transportation space.

They offer services/products at discounted prices and convenience. Even though it helps gain market share over their competitors, the important question is - How sustainable is this?

Earlier this year, large global investors marked down their stake in Flipkart. The company's value fell from a peak of US$ 15.2 billion to US$ 9-11 billion.

Now Japanese investor Softbank, has marked down the value of two of its largest Indian start-up investments - Ola and Snapdeal. Softbank led a US$ 210 million investment round in Ola and US$ 627 million investment round in Snapdeal in October 2014.

It did not spell out the individual details of the drop in fair value of the investments in the two companies. However, Ola and Snapdeal's valuation have peaked at US$ 5 billion and US$ 6.5 billion respectively.

With one of the largest investors marking down its investments, we believe Indian startups will face difficulties in raising funds going forward. Does this development augur well for players like Amazon? Watch this space.

04:35

Here's an interesting take on the US elections from Apurva Seth, editor Profit Hunter. Apurva explains how traders can learn from the experience of facing volatility in stocks during uncertain events like this. I highly recommend this insightful piece by Apurva.

04:45

After opening the day flat, the Indian stock markets remained near the dotted line. At the time of writing the BSE-Sensex was trading lower by about 30 points (down 0.1%), while the NSE Nifty was trading lower by 10 points (down 0.1%). Sectoral indices were trading mixed with auto stocks leading the gains.

04:55 Today's Investing Mantra

"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Kunal Thanvi (Research Analyst).

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