Should investors fall into election trap? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should investors fall into election trap? 

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In this issue:
» CDO's make a comeback
» RBI proposes new rules for too big to fail banks
» Divestment not the only option to raise money
» Why bitcoin is no gold?
» ...and more

Indian equity markets tend to react sharply to two set features of New Delhi politics- the budget and the general elections. This time is no exception. The election season is in full swing. The poll bugle has well and truly been sounded. The results of the four state assembly elections (seen as semi finals before the next year's general election) will be announced later this week. Opinion polls and election pundits have all started to give their predictions.

Even the brokerages are not far behind in predicting who will form the next government. CLSA, Goldman Sachs has said that Indian markets are rising on hopes that Narendra Modi, if victorious in the upcoming elections, can revive the economy. Infact many brokerages have started to bet on sectors which will perform well if the Modi-led government is formed at the center.

According to Economic Times, most brokers feel that if Modi comes to power post elections next year, a few sectors to benefit the most will be capital goods, infrastructure and banks as the new government's priority would be on infra spending. Some believe that he will focus on agriculture as well and that agri stocks can be regarded as a good investment opportunity. Since the announcement of Modi as the BJP prime ministerial candidate, the BSE Capital Goods and BSE Power index have outperformed the BSE Sensex. So what should investors do? Should they fall into the election trap? Should they join the bandwagon and buy stocks from these sectors?

The current market conditions present a classic dilemma before investors in Indian equities. There are reasonable indications to suggest that the US Fed will continue its stimulus program till the start of next year. This means more foreign money flowing into the stock markets. Because of this, Indian markets may show strength notwithstanding the fact that the trends in macro fundamentals of the Indian economy may not suggest any improvement in first half of 2014. The actual corporate performance has been better than expected in the September quarter, but to sustain this in the coming quarters is going to be difficult.

Ultimately, we believe that investing in equities based on a change in government is highly speculative. A change of the ruling party would only lift sentiments and stock prices in the short term but would do nothing to solve India's long term problems. For that we need real, tough reforms. And if the new government is able to implement reforms, then there is no reason why growth should not improve thereon.

Should one buy stocks because of hype around a new government? Let us know your comments or post them on our Facebook page / Google+ page

01:12  Chart of the day
A lot has been written about the slowdown in the Indian economy and weak sentiments plaguing the investment climate. However, as per the statistics from Department of Industrial Policy and Promotion (DIPP), things seem to be taking a turn for the better. The data suggests that in the first nine months of the year 2013, the value of the investment projects under implementation stands at around Rs 618 bn, up by around 140% as compared to the corresponding period last year. These are the projects for which domestic and foreign industrialists have signed industrial entrepreneur memoranda (IEMs) with various State governments in January-September 2013.

What is even more interesting is the regional division of these projects. Gujarat, much glorified for being investor friendly, has slipped from being the number one state in 2012 to third position this year. The state wearing the crown for being the most attractive state for investment is Odisha. Odisha now claims more than 21% share in the project proposals for which IEMs were signed in the first ten months of 2013. And what is more heartening is that these projects are across the sectors such as fertilizer and power and not just limited to metal and mining segment. Madhya Pradesh comes close on the heels of Odisha with around 18.5% share in the project proposals. And Gujarat now stands third with a share of 17.1%, as compared to a share of 22.2% last year. Overall, the picture gives some hope as far as future of the Indian economy is concerned.

States which attracted highest investments

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Looks like the financial industry has not learnt its lesson from the 2008 global financial crisis. Otherwise, what would explain the fact that it is once again focusing on risky products such as collateralized debt obligations (CDOs)? In an era when interest rates are very low, investors are looking for high yield opportunities. But whether CDO is the answer to this is highly suspect. But big banks are leaving no stone unturned in capitalising on this opportunity. The irony is that synthetic CDOs were produced in abundance in the years leading to the crash and in many ways were responsible for the global crisis in 2008. What makes these products particularly risky is the use of leverage to enhance returns. Too much borrowing ultimately causes a lot of pain. As per an article on Financial Times, Citigroup appears to be on the forefront in this regard. Whether investors and institutions will be convinced to buy these products remains to be seen though. It goes without saying that if CDOs do make a strong comeback, it would certainly be a trend to worry about.

The ghosts of 2008 are revisiting Indian financial and realty markets. Not just the possibility of job cuts and crash in asset prices but also the fear of a run on banks is on the minds of investors. The banking regulator (RBI) is not oblivious to this. And hence it has proposed some stringent norms for banks that are systematically important. Ones that can also be called 'Too Big to Fail'. Banks in this category will be required to hold additional capital in the range of 0.2% to 1% of their risk weighted assets. Effectively they will have to arrange for higher equity capital than their smaller peers to comply with Basel norms. As per RBI, the norms will be effective from April 2016 and would be implemented in phases until 2019. The higher capital requirement, though necessary, may not be the key solution for 'Too Big to Fail' banks. Particularly PSU banks in India. The government owned banks typically have ready access to capital despite poor management of asset quality. Hence the RBI should keep a close watch on not just the capital but also deployment of the same.

If you recall, the Indian government was planning to raise Rs 400 bn this fiscal by divesting stakes in PSUs. The government was hoping that the proceeds would help to plug the high fiscal deficit. But so far, there has been hardly any success on this front. So far it has managed to garner just Rs 13.25 bn. That's a mere 3.3% of the targeted amount. The weak economic environment and poor market conditions have played spoilsport. It's almost impossible that the government will manage to meet its divestment target by the end of March 2014. So now, the government seems to be considering other options to raise the targeted amount. As per an article in Livemint, it may consider share buybacks by the PSUs and dividend payments to the government. It appears that the Finance Minister is quite worried about achieving the fiscal deficit target. It remains to be seen whether he will be successful in raising the targeted amount.

Looks like gold's been put on the backburner for some time now. After all, its price movements in recent times haven't been particularly head-turning. Instead, the attention has moved to another alternative currency, of the virtual kind to be precise. We are indeed talking about Bitcoins. Barely a few years old and Bitcoins have already polarized opinions in the investment world. While the bulls point to the currency's virtues of limited supply and a global fan base, the bears think of it as nothing short of a bubble. In fact, a gentleman even went to the extent of calling it a fool's gold rush.

Indeed, its price rise in recent times would want to make anyone call it a bubble. However, we believe the rise of Bitcoins is another grim reminder of the dangerous times we live in. The time of an unprecedented printing of money and its subsequent devaluation. As a result, it is all but natural for people to flock to alternative currencies to prevent their purchasing power from eroding. Is Bitcoin the safe haven they are looking for? Well, we are not so sure. We would still root for gold and ask for it to form at least a small part of the portfolio.

In the meanwhile, Indian stock markets have recovered partially and are off the day's low. At the time of writing this, the benchmark BSE-Sensex was down by 32 points (-0.16%). Capital Goods and FMCG stocks were trading weak while Metal stocks were trading strong. Asian stocks were trading weak. Japan and Hong Kong stocks were the biggest losers. The European markets have also opened on a negative note.

04:55  Today's investing mantra
"The extravagance of any corporate office is directly proportional to management's reluctance to reward shareholders." - Peter Lynch
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5 Responses to "Should investors fall into election trap?"


Dec 7, 2013

UPA now knows what the electorate think and how unlikely their success in 2014 elections is. SO the remaining 5/6 months they have little incentive to take tough measures to revive the economy . Instead they are likely to spend on populist subsidies and make the incumbent govt's task a long uphill struggle.Good time for investors to get out and invest in short term funds.



Dec 5, 2013

'And if the new government is able to implement reforms.....'.This exactly is THE OPERATIVE word for anybody who will be taking charge NEXT. As you had very rightly written a few weeks back on the kind of doomsday scenario for the country based on facts on infaltion etc etc........., the same govt 'of change' expected in my view -on only sentiments- and which on one pretext or the other has been opposing reforms, will it have the people's support to increase diesel prices etc which the people are opposing now ? So we are destined in our lifetime only for old wine in a new bottle after every election.



Dec 4, 2013

You are right.Investor should not fall into election trap.Markets react temporarily to political news, but fundamental news is more important and has far lasting impact.


Rasikbhai Gandhi

Dec 4, 2013

Looking at the 5 assembly election survey BJP is sure to win
Loksabha election with good number of seats. And Shri Narendra Modi has fairly good chance for becoming P.M.. And as his prestige goes the Indian Economy will surely benefit and which will be a benefit for Stock Market too.



Dec 4, 2013

I strongly feel and hope that Mr.Modi only can revive the growt and economy. Then India will be in safe hands.

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