If India, China and Russia were stocks, which one would you buy?
(Dec 11, 2014)
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In this issue:
» Which countries have the highest brand value?
» Why the fall in crude & local petrol price will never be in sync...
» Solar power is a panacea to India's electricity problems?
» ...and more!
We are a big fan of checklists when we have multiple options in terms of stocks to recommend. And we believe the process brings to light the factors that we may have otherwise ignored while analyzing the stocks. Now, given the volatility in currency and crude markets, the global fund managers are these days contemplating on which markets to invest in. Hence, we thought why not run a short checklist to see if there is any potential multibagger economy?
We have counted out the US, Eurozone and Japan from the list of probabilities for the time being given that the only thing stocking these economies is money printing. And it would be rather impossible for us to guess the number of trillions that central banks here would be willing to print in order to keep stock markets buoyant.
Hence we zeroed in on India, China and Russia to evaluate which of these would appeal to global fund managers the most from value investing stand point.
So considering these three economies as stocks, we reckon the three critical factors, as highlighted by noted financial commentator, Dr Steve Sjuggerud, which they would have to pass in order to showcase multibagger potential are:-
This reminds us of our recommendation on Tata Motors in December 2008. The company, then perceived to be on the brink of bankruptcy, qualified brilliantly on each of the three parameters. Needless to say, the stock turned out to be one of the biggest multibaggers in subsequent years.
- Is it cheap?
- Is it hated enough?
- Is it at the start of an uptrend in fundamentals?
Now, India certainly does not qualify on the first two parameters too well. The valuations though away from the peaks are certainly not very attractive. And sentiments in the stock markets have never been so good in the last 5 years. As far as upturn in fundamentals is concerned, we definitely do see enough upside in the long term. Especially in terms of GDP growth, India could outperform the other BRIC economies by a wide margin. So India is like our favourite FMCG stocks that we would look for every opportunity to buy whenever the valuations offer some margin of safety.
Chinese markets are relatively cheap as compared to India's. The economy has attracted enough bad press in recent times with the possibility of bubble burst in the real estate and banking sectors. And it seems the government is bringing in reforms to open up publicly owned companies. Hence the economy pretty much qualifies on all the factors and may appeal to investors willing to take calculated risks.
Russia may prima facie seem to be a value investor's dream come true with its dirt cheap valuations. Also the economy can easily be called one of the most hated in recent times with socio political headwinds threatening its stability. But are these accompanied by an improvement in business environment and corporate performance? Well, that certainly does not seem to be the case. So Russia could well be your value trap stock like the real estate or infrastructure ones that may never really create wealth despite cheap valuations.
This explains why fund managers like Marc Faber prefer China over India these days. However, since valuation is the only factor holding back investors, a good performance on economic and corporate front, can turn the tide.
As far as we are concerned, we would love to have a situation like we did when we recommended Tata Motors. But even if we don't, a relatively cheap and fundamentally strong India is a good enough stock pick for us.
If India, China and Russia were stocks which one would you buy from a long term perspective?
Let us know your comments or share your views in the Equitymaster Club.
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We just saw how the three emerging nations namely Russia, India & China are placed on a relative scale of fundamentals and valuations. Out of these 3 nations, India & China, undoubtedly the heart of BRICS, have made it to the list of ten most valuable nation brands as well.
As can be seen in today's chart, the US is at the top of the list with a brand value of US$19.3 tn. China is a distant second with a brand value of US$ 6.3 tn. As far as ranking with respect to previous year is concerned there is no change in the top 5 hierarchy (depicted in the chart) except for India. The Modi effect has helped India to move a spot ahead to number 8 in 2014 with a brand value of US$ 1.6 tn. It appears that the steps taken by the Modi government in improving the ease of doing in business has led to a jump in the ranking for India.
It may be noted that the rating is assigned by combining the brand strength index score with the GDP data of any country. Approximately 100 countries were ranked with this proprietary methodology. Thus, the fact that India has ranked 8th in the list is certainly noteworthy. However, if India aims to climb the ladder even higher and move into top 3 it shall certainly have to strive harder.
The most valuable nation brands of 2014
Even as the US continues to lock horns with the OPEC members for superiority in the energy markets, there seems to be a possibility for India to explore alternative energy sources. India gets 70% more solar radiation than European countries. This means the same solar panels yield 70% more power in India. In addition, peak demand in India coincides with 70-80% of the time during which solar energy is harnessed. Hence in the absence of solar energy, the peak demand is mostly met by diesel. The cost of diesel is currently almost double that of solar electricity (Rs 6-7 per kWh). So while solar energy is considered to be an expensive fuel, considering the fact that it will replace far more expensive imported fuel and coal, makes the proposition very attractive.
As per International Energy Agency (IEA), green energy will receive almost 60% of the US$ 5 trillion expected to be invested in new power plants over the next decade. Solar energy's requirement is less than 2% of this amount. Keeping this in mind, the government has unfurled plans to build 100 GW of solar power by 2022. Well, the plan seems ambitious not because of its viability in terms of costs. But land acquisition for solar power plants is itself a politically sensitive topic. And without this concern getting ironed out, we believe the dream that solar energy will be for India what shale gas is for the US, will remain a dream!
Talking about energy and solar power let us shift our focus to crude. Prima facie the citizens of India are happy over falling crude prices which has resulted in a decline in petrol & diesel prices. However, a cursory look at the fall in crude prices and a subsequent fall in prices of petroleum products reveal that not all the benefits of falling crude prices have been passed on to the consumers.
Fathom this. Over the last 18 months the Indian crude basket has fallen by 23% in dollar terms and 19% in rupee terms. However, the local petrol prices have come down by only 4% during the same period! Why such divergence?
Well, for that, one needs to understand the structural mechanism of arriving at local petrol prices from international rates. For instance, there are a host of price elevators like exchange rate, excise duty, dealer commission, the mark up (profits on sale of petroleum to dealers) of OMCs, VAT etc that increase the local cost of petrol.
So, what happens is when crude prices fall, OMCs keep their mark ups intact in order to recoup past losses. This is exactly what is happening now. Also, when crude prices fall, government gets an opportunity to raise excise & VAT as was done recently. This further makes the fall in local price a gradual phenomenon.
The Indian stock markets are trading negative today. At the time of writing the BSE-Sensex was trading down by around 130 points, while the NSE-Nifty was down by 31 points. Losses were largely seen in oil and gas stocks. Most Asian stock markets were trading in the negative. However, European markets have opened the day on positive note.
"The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time." - Charlie Munger
|| Today's investing mantra
|This edition of The 5 Minute WrapUp is authored by Jinesh Joshi and Tanushree Banerjee.
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