Have you missed this stock's rally? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Have you missed this stock's rally? 

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In this issue:
» India's power woes continue unabated
» Dubai debt - A major sovereign default?
» Recovery is fragile, believes RBI Governor
» RBI strikes gold with 'gold'!
» ...and more!!

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Have you ever blamed yourself for missing a stock after seeing it multiply in value over the next few months or years? For sure, it hurts a lot to see this happen! In moments of gloom and fear, thoughts do get clouded and one is not able to take rational investment decisions.

This is despite the fact that during such times, good quality stocks are available for dirt-cheap (as we saw at the start of this year). "But since everyone else is selling, so must I," is the general thought! And this leads to investors missing out on some great wealth creating opportunities.

Tata Motors is one such missed opportunity. Several concerns clouded the company at the start of this year (incidentally, this was when we first put out a 'Buy' recommendation on the stock).

Markets had in fact priced the stock for bankruptcy! Investors dumped it. The impact of all this was that the stock was trading at just around 30% of what it was worth in our view.

Then the tables turned. As we stand today, nearly a year later, the stock has already multiplied over 4 times! Tata Motors was a good business and well-managed company in January, as it is now in November. Nothing has changed in terms of the company's inherent strengths. What has however changed is the markets' perception towards it.

We are not making a case for buying Tata Motors. What we are trying to show is how investors (even those with long-term perspectives) get lost in a maze of gloom and dump quality stocks. This is when it is time to load up on such stocks given their attractive valuations!

01:07  Chart of the day
Today's chart of the day reiterates the grim situation that India's power sector faces. The chart shows the combined losses of all state electricity boards. The fact is that despite the electricity reforms that started in 2003, losses of the state electricity boards remain very high. While another aspect as seen from the chart is the improving return on investment (though still in the negative), the fact is that no big investments have taken place in the power distribution segment.

Data source: Statistical Outline of India

When one talks about the global financial crisis, the countries that come foremost in mind are the US and Europe. After all this is where the crisis first began and pushed the developed economies into recession. What is more, as far as the global recovery was concerned, it was the emerging markets that were touted to lead the way. The reason? These economies were expected to grow much strongly than their developed peers in the next two years.

But that was saying it too soon because the focus of the crisis has now shifted to the Middle East. Dubai's request yesterday to extend the payment of its debt by a further 6 months struck a chill in the emerging markets as it did in the rest of the world. But this is probably just the tip of the iceberg. If Bank of America is to be believed, Dubai's debt woes may worsen to become a 'major sovereign default'that could roil developing nations and cut off capital flows to emerging markets.

In our opinion, this just shows that the global credit crisis is far from over. In fact, the huge thumbs up that investors had given to these economies (stock prices having run ahead of fundamentals) was already sending jitters that the groundwork was being laid for asset bubbles to be formed.

Even the RBI Governor Dr. Subbarao considers the recovery to be fragile. He cites the export figures that have declined for 12 months in a row. He also reasons that a poor kharif production and inflationary pressure can act as a hurdle for recovery. However, he credits the vibrant rural economy for upholding decent consumption levels. No doubt, initiatives like NREGA and farm-loan waiver have restored some money in the hands of rural India.

He also hints that one should now be ready for tighter government policy as it might withdraw some stimuli. This will happen slowly, in phases though. Nevertheless, he says, "India's recovery would be 'swift and sharp' once the global recovery started." We hope he proves to be right and soon enough.

Do you think 12% returns (from any investment) within a span of just three weeks are good? We think these are fabulous as these suggest annualised returns of almost 207%. In simple terms, such returns are enough to multiply an investment three times in just one year! Ask the RBI that has seen its recent investment in IMF gold churn out 12% returns in just three weeks. Yes that's right! India's central bank has gained almost US$ 800 m on its recent US$ 6.7 bn investment in IMF gold, duly helped by a surge in gold prices to nearly US$ 1,200 an ounce. A perfect timing we must say!

Corruption is the bane of any country. This is especially if it wants to grow at a strong and more importantly sustainable pace going forward. The reason is obvious. If money that goes into the pockets of politicians and bureaucratic officials instead goes towards ramping up infrastructure and providing basic services to the population (for which it was meant for in the first place), the growth of any economy will be tremendous.

In this context, picture the BRIC economies (acronym for Brazil, Russia, India, and China). These are currently amongst the fastest growing economies in the world. Not surprisingly, these also have another factor in common - high corruption. In fact, as per a report from The Economic Times, the cases of fraud, corruption and bribery is the highest among the BRIC nations. What is more, it is estimated that US$ 20 to 40 bn was paid as bribes to officials last year.

In India especially, corruption is so deeply ingrained in the psyche of individuals that in some sense it has become a 'way of life'. Whether we ourselves care to remedy this ill is a million dollar question and more likely a rhetorical one at that.

Global markets closed this week amidst losses. China was the worst performer with a 6.4% decline. Gold once again emerged as the best performer. Investors accumulated the yellow metal on fears that the global financial problems are far from over. Reports that India was planning another huge buy from the IMF also propelled gold prices.

Source: Yahoo Finance, Kitco

As for the Indian stock market, these fell by 2.3% over the previous week. This was led by large losses in stocks from the realty, IT, and banking sectors. FIIs invested nearly Rs 4.8 bn (net) this week. Domestic mutual funds, in contrast, booked profits by selling investments worth Rs 1.6 bn (net).

04:58  Weekend investing mantra
"I constantly see people rise in life who are not the smartest -- sometimes not even the most diligent. But they are learning machines; they go to bed every night a little wiser than when they got up. And, boy, does that habit help, particularly when you have a long run ahead of you." - Charlie Munger
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18 Responses to "Have you missed this stock's rally?"

singh amrik

Nov 30, 2009

i wish i had started earlier. how do i invest in gold.is it the proper time now or i should wait for sometime for the skyhigh prices to come-down a bit.


Paresh Valia

Nov 30, 2009

Dear Sir,
You have written RBI has taken a decision of buying the Gold from IMF at right time & got excellent return. But do you know whether the said Gold,has been delivered to India or not? Can You check from your sources?


Rishabh Jain

Nov 29, 2009

Excellent article. This article applies perfectly to my current state. One one side I keep thinking that I have missed the boat during this rally, but on the other hand, I feel stronger that I am sitting on pile of cash safely placed in FDs and waiting to be invested in personal property when the market corrects.



Nov 29, 2009

updated and knowledgeable article



Nov 29, 2009

Not just TATA MOTORS, but several stocks have multiplied in the last one year!! you want to mention TATA MOTORS as it was your reco??


mukesh ghael

Nov 29, 2009

grass rout levels report


mukesh ghael

Nov 29, 2009

crises in Dubai will follow Abudhabi ?? more pain yet too came



Nov 29, 2009

Yes, I appreciate EM team for the right catch 'Tata Motors' really dumped everone with it and I think it might be discounted further can wait for two trading session to bank the stock. It's wonder how RBI's Mr Subba rao expect as he said "India's recovery would be 'swift and sharp' once the global recovery started." but the question how soooon, is there a measurement of time ?, lost and recovery of kharif production ?, inflation ? every body knew what the figures are, farm-loan waiver a political false commitment, a farmer hardly get anything these price's and inflation. Corruption, I believe might have a resulted from the E=MC2 where the reversal almost impossible especially, on the Indian soil.


chacko k c

Nov 29, 2009

I realistic approach- all the best.



Nov 29, 2009

well, i have been to this for just 4 days,but very interesting and close to my thinking.i am richer in knowledge @ cofident by ur association. thanks for all information & analysis

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