Market crash offers opportunities beyond stocks... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Market crash offers opportunities beyond stocks... 

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In this issue:
» China points at US' 'ticking debt bomb'
» Why PSU banks may be an attractive bet
» IT companies change hedging strategies
» Blackstone finds compelling valuations in India
» ...and more!

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The BSE Sensex has corrected by more than 5% in the past one month. For those tracking day today movement of stocks in their portfolio, the experience has been very unnerving. On the brighter side for those looking to invest their surplus cash, there have been opportunities galore.

Stocks, albeit in select sectors, have become so mispriced due to near term concerns that investors can afford to ignore them at their own peril. In some cases safe largecap stocks are fetching the same valuations as their midcap peers. The number of index stocks that have underperformed the benchmark indices over the past year itself showcase the kind of opportunities that the market is presenting. Yet again, fundamentally solid companies with smaller market cap have become attractive enough to enjoy some allocation in one's long term portfolio. We hope that our readers are following such opportunities closely enough, but not without keeping their asset allocation in mind.

Here again, asset classes beyond stocks attain significance. As per a business daily, property prices in 9 cities, largely non metros, have seen significant correction in prices during the September quarter. With interest rates peaking off and property rates becoming more affordable at least in the non metros, house buyers can have more options. Companies finding it difficult to raise funds via capital markets may approach bond markets with attractive rates. Thus debt too is an asset allocation that cannot and should not be ruled out completely, provided its quality is impeccable. Last but not the least, the volatility in currency markets has made the importance of having some gold in one's portfolio that much more pertinent.

Investing in stock markets at least has hardly ever been a smooth or pleasant ride in the short term. But the dividends that one can reap for the right decisions compound over the long term. Nothing other than Buffett's words sum it up better - "Cash combined with courage in a time of crisis is priceless".

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01:15  Chart of the day
Since 2009, Indian households have shunned paper assets in favour of more tangible ones. This trend has been more evident in recent times as stock markets have shed over 20% since the start of 2011. Today's chart of the day shows that Indian households have increased investments in gold and property over the past 2 years. With high interest rates, and double digit inflation in the country, households have reduced investments in low yielding PPF and small savings accounts. But, now with valuations at more reasonable levels, probably it is a good time for retail investors to re-enter the stock markets.

Data source: Morgan Stanley Report

When you own a large share of an asset, it is but natural that you would be very interested in the state of affairs of the same. Such is the case with China. It is one of the largest holders of US government bonds. As a result, the country is worried about the state of affairs in the American economy. More so with regards to the mountain of debt that the latter has managed to accumulate over the years. A Chinese media has accused US of sitting on a 'ticking debt bomb'. It has also urged US to adopt better deficit cutting measures and responsibly cut down its debt burden. The US currently has a national debt of more than US$ 15 trillion. Though President Obama has stated over and over again that there is no threat of a US default, the debt burden has worried economists the world over. It is not that the US is not trying to resolve its economic issues. After all a Congress super committee did hold a meeting earlier this week to try and come up with logical solutions. It is just that like any other political committee it cannot reach a consensus on the way forward. And with such indecisive outcomes coming out again and again after most high level meetings, it is little wonder that US has its greatest creditor China sweating and swearing.

Banks in neighbouring China are known to flourish thanks to the government. Indian PSU banks are classic cases of entities that have the ability to flourish despite the government. Keeping this in mind, we find no reason why, some of the biggest and well managed PSU banks deserve abnormally low valuations. The fact that the banking sector itself and PSU ones in particular, have several near term concerns cannot be euphemized. Most important of them is the risk of rising NPAs thanks to the steep interest costs. NPAs from restructured agricultural loans and the beleaguered power sector, are in fact a given over the next few quarters. Margins and loan growth too cannot be a big boost to the bottomline given the poor demand for credit. Capital constraints and social obligations like loan subsidy and financial inclusion targets may hold back the profitability prospects of PSU banks. But all said and done, the entities that control 70% of India's banking assets cannot lose value permanently. As and when the economy shows signs of resurgence, these stocks will be the first to recover.

With the rupee depreciating significantly against the dollar, IT companies have reason to cheer given that many of them derive a large chunk of revenues from exports. But all depends on the nature of their hedging strategies. Given the volatility in the exchange rate, many IT majors are considering entry into long term hedges and dynamic hedging strategies to defend their earnings. This includes entering into option contracts besides futures. For these companies, hedging is a continuous process and the hedges could run for periods ranging from 18-24 months or even lesser. Since most companies have not entirely hedged all their earnings, they would be able to take advantage of the current exchange rate where the rupee has tumbled to Rs 52/US$. At the end of the day, taking a call on the rupee is not easy and whatever the hedging strategies adopted by IT companies, there are bound to be large forex losses or gains as the case may be especially when the currency is highly volatile.

The month of November witnessed a huge sell-off in the Indian equity markets amidst rising global uncertainties. In the current onslaught, while one set of investors (FIIs) has been pulling out the money from Indian markets, another set of investors (private equity) is gearing up to cash in on the current pessimism. With valuations coming down, US private equity firm Blackstone is looking forward to invest US$ 500-720 m a year in India over the next few years. Increasing willingness to commit funds into India by these vulture investors signifies that markets are perhaps in an oversold territory. Further, with liquidity being tight in such times one can also expect to get good cash bargains. Thus, while PE funds are gearing up to make fortunes once sanity returns, even retail investors can focus on investing in sound companies during these irrational times.

Indices in Indian stock markets fell sharply to a two-year low today as FIIs, spooked by a weak rupee and global economic turmoil, sold in droves across the market breadth. Before a recovery later in the session, the benchmark index had plunged 586 points. At the time of writing, the BSE Sensex was trading lower by 425 points (down 2.6%). While consumer durable stocks were the only ones to fetch some buying interest, stocks from banking, metal, IT and energy sectors were the biggest losers. Indices across other key Asian markets also closed lower while Europe has opened on a negative note.

04:50  Today's investing mantra
"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Philip Fisher
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4 Responses to "Market crash offers opportunities beyond stocks..."

kishor mehta

Dec 3, 2011



Anupam Deva

Nov 23, 2011

Excellent articles with a lot of genuine content. With
so much business news floating around, getting precise
and relevant news and opinion is valuable. Pls keep up
the great work. Anupam Deva, Varanasi



Nov 23, 2011

investor can wait for some more time before starting investing.lot of bad news still to come.wait and watch would be correct strategy now.
vinod kumar


Narasimha Rao

Nov 23, 2011

Very good analysis.Many thanks.
Appreciate your giving an extract of the cities cities where property prices have corrected, (though this is not your area) for the benefit of readers.

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