"Stocks are not terribly expensive" - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

"Stocks are not terribly expensive" 

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In this issue:
» India's urban share is lower but rising
» US economy still faces big challenges, says Bernanke
» MF investors not too enthused about SEBI's move
» India is not a place to do R&D opines Novartis
» ...and more!

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Would you be willing to buy stocks if these offer a return of 5% per annum over the next couple of years? Nine times out of ten, your answer would be in the negative. Now how about buying stocks that give the same returns but in this case, you are allowed to borrow money at near zero percent interest rates.

Isn't this a bet worth taking?

It is exactly this rationale that the famous investor Marc Faber has sought to touch upon in a most recent interview. He argues that although stocks across Asia have run up a lot in the past few months, they haven't become terribly expensive, partly due to the fact that the US central bank chief, Ben Bernanke will have to keep the interest rates very low given the far from recovery position of the US economy right now.

While it is indeed a correct thing to say, we believe what also matters is the underlying fundamentals. And if those remain weak or are fully reflected in stock prices, then no matter how excessive the liquidity, buying stocks may turn out to be a dangerous proposition. Hence, investors could do well to remember this.

00:46  Chart of the day
Urbanisation is gathering considerable pace especially in the emerging economies. As today's chart of the day shows, while India scores lower than its peers when it comes to percentage of the urban to the total population, the country's urban share is nevertheless rising. This is hardly surprising considering the tremendous growth that the Indian economy has witnessed over the past 3-4 years compelling thousands from India's interiors to look for brighter prospects in the cities. A similar scenario has been witnessed in China as well. In fact, the strong pace of China's growth has resulted in the urban share increasing at the fastest pace as compared to the other countries.

Data Source: United Nations Development Index

Ben Bernanke's yesterday's comments have led to today's fall across Asian markets. Speaking at the Economic Club of New York, Bernanke warned that the US economy still faces big challenges towards revival. This is clearly a signal that interest rates in the US will remain near zero levels for a greater timeframe.

Very interestingly, Bernanke also mentioned that he does not see US asset prices to be out of line with their underlying values. This is despite the fact that stockmarkets in the US have risen by around 65% since March and are current trading at high valuations!

As he said, "It is inherently extraordinarily difficult to know whether an asset's price is in line with its fundamental value. It's not obvious to me in any case that there's any large misalignment currently in the US financial system."

But Mr. Bernanke, isn't this exactly what we had heard at the height of the bubble in early 2008?

Retail investors in India may not be the biggest contributors to the corpuses of mutual funds. But they do have very wise opinions on the functioning of the industry. Our 5 Minute Wrapup dated 14th November carried an update on SEBI allowing investors to buy and sell mutual funds through stock brokers. While this has been only one of the many decisions taken by SEBI in recent times to change the dynamics of the industry, mutual fund investors seem to be particularly irate about the regulator's latest move.

Strongly condemning SEBI's ridiculous decision to one hand banning commission to mutual fund distributors and other hand allowing brokers to milk their clients by churning their portfolios, readers seemed rather confused about where the mutual fund industry was heading.

Some also believed that the transaction cost for dealing through brokers will be substantially higher and the move would in fact be detrimental to the interests of long term investors who were earlier benefitting through the advisory services provided by the mutual fund agents.

Can China pip India when it comes to R&D in the pharmaceutical space? The CEO of global major Novartis Mr. Daniel Vasella thinks so. Novartis is of the opinion that India is not a place to do R&D because its intellectual property laws are not strong enough to protect discoveries. After the company lost the battle to patent its anti-cancer drug 'Gleevec' in India, Novartis is wary of making investments in the country and has turned its attention towards China due to the "investment friendly environment" there.

This is what Mr. Vasella had to say, "There are significant differences between India and China - in the political system, in the decision making processes, in the complexities of the processes and in the continuity. I think India has potential but things take longer to get done."

While the product patent law was introduced in India in 2005, MNC pharma companies have vociferously opposed various loopholes in the law. Having said that, while Novartis has been battling with the Indian courts, others like GSK Pharma, Pfizer and Aventis have gone ahead to launch products from their parent's portfolio.

Availability of cheap funds in their domestic economies and mouth watering returns in the emerging economies continue to lure foreign investors, even at the risk of creating fresh asset bubbles. As per the Securities and Exchange Board of India (SEBI), overseas funds have so far bought Indian stocks worth about US$ 15 bn during 2009. The previous high of overseas investment in local stocks was US$ 17.7 bn in 2007.

Given the current run-rate, the inflow of foreign money should soon be close to the 2007 peak, unless there is a sudden sell-off in the remaining weeks of this year. While investors are attracted by India's economic growth opportunities, even as the US and Europe struggle to come out of the worst recession since the Great Depression, an inflation-induced change in the monetary policy may soon trigger a flight to safety.

A member of the World Bank, International Finance Corporation (IFC), plans to invest US$ 1 bn in India this year. IFC has been increasing its exposure to India in the last couple of years to the point that it is now the entity's single largest investment in any one country. These investments will go towards fostering sustainable economic growth, supporting private sector development, mobilising private capital, and providing advisory and risk mitigation services to businesses and governments.

The priority areas will be the important spaces of energy efficiency, renewable energy, infrastructure projects, micro-financing and food security. With these being critical areas where India is most in need of capital, the investments by IFC will surely come as a shot in the arm.

Among the many telltale signs of US dominance of world affairs over the past 60 years is the status of the US dollar as the de facto global currency. The recent financial crisis and the steady rise of alternate powers like China is likely to change that. In fact, Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF) believes the new global currency will be issued by a global body like the IMF (backed by a basket of currencies) and not a single nation like the US. And if you thought this was the IMF's brainchild, guess again. It is the Chinese central bank governor who has proposed this idea. Given how much acceptance is gaining at IMF, it does seem like the days of dominance of the US Dollar are numbered.

Markets got off to a shaky start today and were languishing deep in the red throughout the session as profit booking took toll. At the time of writing, the BSE-Sensex was trading lower by 127 points (0.7%). Losses were seen in energy and banking stocks. The Asian indices were trading mixed at the time of writing while the European indices are trading in the red currently.

04:58  Today's investing mantra
"In this business (investing) if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch
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14 Responses to ""Stocks are not terribly expensive""


Nov 17, 2009

Rupali is right


jatin modi

Nov 17, 2009

kindly suggest me some stocks freely before subscription so i can analyze it very well.



Nov 17, 2009

I have never invested in MFs, and never will, given that over the short, medium and long term, 80%+ of them under-perform the index. Each one of us could beat 80-90% of the MFs just by investing in sensex stocks in the proportion they weigh in the index (including the venerable Mr. Dayal and his oft-touted clutch of poor-performing "quantum this-and-that" funds).

I was as surprised by all this tamasha over "MF from broker" because on the ICICIDirect platforms (and perhaps others too), I had observed that one could buy the MFs directly. So what was new? And why were these "innocent investors" so irate?

Perhaps the "irate investors" are irate because their "advisors" share the commission with them in cash? Almost 80% of the commission perhaps makes it way back to the investor? King Cash. No tax. All black. Small amounts. Put it in the monthly ration kharcha, perhaps? Is that why these irate investors are getting all steamed up?

Assuming the "small retail investor" is a bechara of some kind would be naive - we are dealing with the top 20-30% wage-and-money earners in this country - all thoroughly willing to cheat their country of tax income.

Worth investigating - "MF investor ko gussa kyon aata hai"?



Nov 17, 2009

same as above



Nov 17, 2009

Dear Ajit,

In a recent magazine, I read an article that too much money is coming in from abroad for investment into infrastructure projects are not utilized and hence our govt is paying penalty on these amounts apprx.78,000 crores. What a poor dilemma ?

I believe since everywhere interest rates are low, the international investors are finding the penalty % as much better earning than keeping their money invested in other sources. They seem to be properly utilizing our loop-hole or the laziness of our govt towards execution of projects in a timely manner more effectively. Shame!!! Shame!!! Govt. of India.



Nov 17, 2009

In this business (investing) if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch

Above quote is very correct,so that conscious periodical verification and its review on the strength of sectoral movements of similar stocks, alone would enhance the ability to be on the right side and not being left out.



Nov 17, 2009

SEBI's move to have the Mutual Funds listed on the Stock Exchanges will prove to be more cumbersome and expensive to the investors. It is not all a helpful one. In fact, none would have complained about the existing system which is pretty easy from the investors' point of view



Nov 17, 2009

02:02 MF through broker: Instead of just writing " ... readers
seemed rather confused about where the mutual fund industry was
heading", I expected Equitymaster to clear the confusion. One
reader wrote of "allowing brokers to milk their clients by
churning their portfolios". The facility is optional not
mandatory; you cannot completely absolve yourself of thinking
(long term investment). Another reader wrote: "For long term
mutual fund investors like me, it really did not matter that I
paid my trusted broker a percentage. ... I have now lost his
advice and services ...". He will offer you advice if you
continue to pay the broker. I expect a quality organisation such
as Equitymaster to summarise the thoughts/queries/confusions of
readers and then offer best remedy.


raju shah

Nov 17, 2009

pls let me know the future of gold prices


Naveen Shukla

Nov 17, 2009

i want to invest for short term, please give me detail.

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