Get ready for the mother of all bull runs - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Get ready for the mother of all bull runs 

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In this issue:
» Look'll see the bull!
» Some scary predictions
» Is China India's biggest economic challenge?
» Time to buy auto stocks?
» ...and more!

"India will see the mother of all bull runs in the next four or five years, boosted by double-digit economic growth and increased investment by domestic investors, including pension and insurance funds." These are the words of Rakesh Jhunjhunwala, whom Forbes termed (in March 2008) as India's Warren Buffett. He believes that Indian stocks are very attractively valued at the current juncture but there will be a period of great uncertainty before we see the potential re-emerging. "The malaise of the West isn't a problem India is facing; we don't have overextended banking systems or overextended credit," he said.

Incidentally, Mr. Jhunjhunwala joins a score of experts who have indicated that the worst seems to be over for Indian stocks. As we had mentioned in the 5 Min. of 28th November, Mark Mobius (fund manager, Franklin Templeton) thinks that the Indian economy is still quite vibrant and that stocks are trading at some of the cheapest valuation levels in years vis-a-vis the earnings. "India will rise from this and prosper," he believes.

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After the excitement, here comes the scare. Fortune magazine has compiled views on the global and US economy from some of the leading experts in the field - the likes of Nouriel Roubini, Bill Gross, Jim Rogers and Wilbur Ross. And the outlook mentioned by most of them seems frightening.

While Dr. Roubini believes that the world is "in the middle of a very severe recession that's going to continue through all of 2009," Jim Rogers thinks that "right now US stocks are down a lot, but they're still very expensive by that historical valuation method. I'm not saying it will fall that far, but it could very well happen. And if it gets that low and I'm still solvent, I hope I'm smart enough to buy a lot. The key in times like these is to stay solvent so you can load up when opportunity comes."

Bill Gross, the founder of debt fund management firm Pimco believes that "investors need to recognize these titanic shifts in market and public policies and be content with single-digit returns in future years. Stick to high-quality companies and asset classes. The road to recovery will be treacherous."

Incidentally, these three experts were crying foul by the middle of last year that the US and world economies were going to suffer a serious downturn due to bursting of the credit and housing bubble. The rest, as they say, is history. Trouble has now, in fact, moved from the financial markets to real economy. There has been a worldwide slowdown in economic activity, with some countries like the US, UK and Japan having entered recession.

The impact on the Indian economy is also starting to show, as economists are revising the GDP (gross domestic product) growth estimates downwards. In the latest instance, RBI governor has predicted that the next financial year (2009-10 or FY10) is likely to be difficult for the Indian economy.


The 5 Minute WrapUp: CBoE's VIX indicator
Source: Yahoo Finance
So how scared are investors? Lesser than they were in the past two months. The Chicago Board Options Exchange's (CBoE) volatility index - VIX - which measures the degree to which investors think stocks will swing violently in the next 30 days, has dropped to 55.73 from its peak of 80.86 attained in November.

As a matter of understanding, the higher the VIX, the bigger the expected swings - and the index has a good track record. It spiked in 1998 when a big hedge fund, Long-Term Capital Management, collapsed, and after the 9/11 terrorist attacks.

After some good and some scary predictions, here are some that were made in the field of technology, and turned out to be gaffes -
  1. "Nobody would ever need more than 640 KB of memory on their personal computer." - Bill Gates in 1981

  2. "No need for a computer in the home." - Ken Olsen, founder of Digital Equipment Corp in 1977

  3. "Spam will be solved." - Bill Gates in 2004

  4. "The iPod will never take off" - Sir Alan Sugar (English businessman) in 2005

  5. "TV won't last because people would soon get tired of staring at a plywood box every night." - Darryl Zanuck (American producer, writer, actor and director) in 1946

China isn't India's biggest economic challenge. India is. This is what Jack Welch, the indomitable former chief of General Electric believes. Mr. Welch, in his weekly column in Business Week, expects Indians to rally behind the government's anti-terror measures. But he doubts whether the Indian government will provide the way in the first place. He is of the belief that "the way India responds to the Mumbai attacks will tell the business world what it wants and needs to know. Not just whether to pull back from India but how risky pushing forward will be."

For a country that shunned global capitalism until very recently - IBM and Coca Cola chose to leave India in the late 1970s due to excessive interference from the government - and was seen as a paragon of inefficiency, the last few years have seen a remarkable, even ironic turnaround. The current slowdown and the handling of the crisis situation by our elected representatives have the potential to turn the tables on us.

We shall overcome
We shall overcome
We shall overcome some day
Oh deep in my heart
I do believe
We shall overcome some day.

Thus goes the protest song, which became a key anthem of the US civil rights movement (1955-1968). Now, with India being tested by terrorism and an economic slowdown, the question is - 'Can India overcome?'

Sixty years usually signals the onset of old age in humans. But it is in fact a relatively young age for nations. And for young India, it definitely is an age to believe - "We shall overcome some day."

Is it time to buy auto stocks? The way one auto company after another is announcing production cuts to match the waning demand one might be tempted to say 'No'! But think again.

The two factors that have hurt Indian automobile manufacturers over the past few months - higher interest rates and raw material prices - have more or less peaked. In fact, price of key raw materials like steel, aluminium and plastics have corrected massively and hence, should benefit car companies on the profitability front. Furthermore, as inflation eases, interest rates are also likely to come down, making cars more affordable and reigniting the enormous latent demand.

Source: Equitymaster Research
Last time such a scenario occurred was way back in 2003. So, how have some of the companies performed since then. Maruti witnessed a huge 8 fold jump in its market cap from lows of FY03 to highs of FY08 before falling to the current levels. Tata Motors' surge in market cap was even more impressive, growing a mind-boggling 17 times from its lows in FY02, before leveraged buyout and difficult economic conditions saw it falling by the wayside.

Do similar returns await investors in the future? Maybe not of a similar magnitude but fundamentals do point towards high odds of attractive returns from a 2-3 year perspective.

And what about realty stocks? As per an article written by R.N. Bhaskar for Mint, real estate prices in Mumbai have already fallen by around 25% from their peaks and are expected to fall another 25%. In addition to that, the writer has quoted a recent report from Goldman Sachs that speaks of a gross oversupply of commercial and residential property in the entire country. It has pegged the supply in Mumbai and Delhi at 4 times and 2 times the demand respectively. Simply put, the report proclaims that for every 1 flat that is demanded by someone in the city of Mumbai, there are 4 flats that are on offer.

Source: Mint; msqft - million square feet

With such a grim outlook, even a reduction in home loan rates might not be of much help. If a majority of consumers are expecting a further fall in rates, it is highly likely that they will wait for the fall before they think of buying a house. If things do turn out this way, real estate developers are surely in for one helluva rough ride.

Detailed analysis of demand, supply and inventory of crude oil is made for each major country and region. Over the past year and half, predictions of oil prices based on such analysis have proven to be precisely wrong. Why? The rapidity of the rise of crude oil prices- especially from US$ 100 per barrel to US$ 147 per barrel - should have vaguely indicated a bull run, detailed analysis aside.

Similarly, the precipitous fall in crude prices - especially from US$ 75 per barrel to US$ 43 now - indicates excessive pessimism. The question to ask is, do we really expect the developed world to give up hydrocarbon intensive lifestyles? Do we really expect the emerging countries to have small per capita carbon footprints?

Can prices be at US$ 43 when the marginal cost of production from deep shore projects ranges from US$ 60 to US$ 90 per barrel? The answer is no! Hence, our estimate of oil price is - HIGHER!

Stocks in India closed weak today, as the benchmark BSE-30 index ended with marginal 10 points decline. Among other key Asian markets, while gains were seen in Hong Kong and Japan, China and Singapore markets closed in the red. Shares in Europe have also opened the day under selling pressure.

04:52 Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch
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