On This Day - 7 SEPTEMBER 2016
Buys High and Not Low- That's the Indian Investor for You
- In this issue:
- » Indian cement makers costliest globally
- » More challenges in the offing for Start-up companies?
- » ...and more!
Most of you are already familiar with Vivek Kaul's Diary. It's arguably the best column out there to read about the unknown and hidden facts and data driven views on the economy. Vivek has also simplified complex regulatory implications like that of Goods and Services Tax.
For today's issue of The 5 Minute Wrapup, we requested Vivek to talk about the data that he is tracking from the perspective of investing in stock markets. You will find it an interesting read.
But before you proceed, there is something more I want to tell you...
Of late, Vivek has been working on a project on Indian economy, with his mentor, Bill Bonner. Bill has predicted the major risks to the US economy, with eerie accuracy, over past three decades.
And Vivek wants to make sure as many Indians as possible receive the same warning that he got from Bill some months back...and have time to prepare.
Therefore, he has offered to ship a hard-copy of his mentor's book to you free (other than the postage and handling charges). The book is Hormegeddon. And you can send for it right away...
Tanushree Banerjee (Research Analyst)
"Buy Low, Sell High," goes the old stock market wisdom.
But like most stock market wisdom, this is easy to mouth, but difficult to implement in real life. It is very difficult to buy when others are selling and vice versa.
The tendency is to go with the herd because there is safety in numbers. And if things don't work out as intended, one has someone else to blame as well. "I only did what Mr Singh's son recommended," goes the argument.
The question is how do numbers look on this front? Do investors actually buy when market levels are low and sell when market levels are high. Or are they doing exactly the opposite?
Take a look the following chart. That is how the Sensex has looked between April 1, 2011 and March 31, 2016. As can be seen from the chart, the overall trend of the Sensex has been in the upward direction, though it did fall during the course of 2015-2016.
Now take a look at the following table.
|Year||Shares and Debentures|
(as a % of GNDI)
Source: Annual Report of the Reserve Bank of India
The table shows the portion of gross national disposable income (basically the GDP number adjusted for a few other things. For a detailed treatment click here) made up for by investments in shares and debentures, which are a part of the household financial savings. In 2011-2012, shares and debentures made up for 0.2 per cent of the gross national disposable income. By 2015-2016, this had jumped up to 0.7 per cent. The household financial savings comprise of currency, deposits, shares and debentures, insurance funds, pension and provident funds and something referred to as claims on government. The claims on government largely reflects of investments made in post office small savings schemes.
What the table clearly tells us very clearly is that a very small portion of Indian retail investors invests in shares and debentures. In fact, these numbers also include the mutual fund numbers.
What do we learn from the chart and the table? As the Sensex went up, so did the investments in shares and debentures.
The trouble is that for some reason, which actually makes no sense, the RBI puts out the data for shares and debentures together. A breakdown of the total amount of money held in the form of shares (or debentures for that matter) is not available. But with the help of some other data we can prove that the Indian investor basically follows the policy of buying once the stock markets have rallied.
As on March 31, 2011, the total amount of money held in equity mutual funds in India had stood at Rs 1,69,754 crore. By March 31, 2016, this number had stood at Rs 3,44,707 crore. The assets under management increase in two ways. The first is because the value of the shares held by the mutual funds goes up. And the second is because of the fresh money being invested into the mutual funds.
As we can see the assets under management have more than doubled in the five-year period. On the other hand, the Sensex returns during the period stood at 30.5 per cent. Hence, it is safe to say that the major part of the increase in assets under management was because of new money coming into the mutual fund schemes.
And this new money kept coming in as the Sensex kept going up. Take the case of what happened between March 31, 2015 and March 31, 2016. The Sensex fell by 9.3 per cent during the course of the year. The assets under management of equity mutual funds on the other hand, went up by 12.8 per cent.
In fact, during the period, the Sensex achieved its highest level on January 29, 2015, when it closed at 29,681.77 points. Between then and March 31, 2016, the Sensex fell by 14.6 per cent. At the same time, the assets under management of equity mutual funds went up by 14 per cent.
This is a clear indication of the fact that investors actually invest in equity mutual funds only after the markets have rallied. Once the market has rallied, the investors probably assume that it will continue to rally.
Hence, I guess, it is safe to say that a similar behaviour is on when it comes to direct investing in stocks as well. And that (along with increase in mutual fund investments) explains why the share of shares and debentures has increased from 0.2 per cent of gross national disposable income in 2011-2012 to 0.7 per cent in 2015-2016.
Of course, one would be able to say this with much greater confidence if the RBI gave an exact breakdown of shares and debentures. I hope that this anomaly is corrected in the days to come.
02:30 Chart of the day
Commodity stocks like cement, are proxy for recovery in housing and infrastructure sectors. And good monsoons have boosted probability of recovery in earnings, with superior growth prospects of Indian cement companies. This has helped companies to command premium valuations, so much that they can buy out their Chinese counterparts for all stock deals. This is despite the fact that the Chinese companies are much bigger in size as compared to the Indian firms. The top 5 cement companies of India is less than third of Chinese Industry combined revenues.
Valuations Stretched for Indian Cement Companies?
And if one were to go by the numbers as reported by Business Standard, the valuations of the Indian cement companies are obscenely expensive.
Globally, cement makers are valued at 26x their latest annual earnings and 1.6x times their latest book value. The corresponding ratio for Chinese players is 23x and 0.95x respectively. On the other hand, Indian cement makers are valued at 48 times their net profit in the last financial year.
There is no denying the performance of the cement companies have shown improvement off late. However, the current valuations certainly warrant a caution. For readers who are looking forward to commit their money in cement stocks should factor in realistic growth expectations. One would do better to look into long term growth for every cement company. And then judge whether the valuations are reasonable enough. If not, then it is best to stay away from the sector.
Crowdfunding - as the name suggests is the use of small amounts of capital from a large number of individual to finance a new business venture. And its emergence has allowed start-ups or entrepreneurs to get their business ideas financed easier than ever. This source has been gaining popularity as an important capital raising facilitator, largely operated through websites. Just like stock exchanges, they largely act as link between investors and companies. While the exact amount mobilised by these players remains unknown however, these platforms have empanelled hundreds of investors and start-ups.
But now funding an idea may not be few clicks away. As reported in Business Standard, the Security and Exchange board of India (SEBI) has sent notices to around 10 crowdfunding firms, questioning them on their business models. These operators are also asked as to how they are not in violation of the securities law.
With the existence of this route of funding, many start-ups received easy money without regulatory intervention. Its better the regulator comes up with final regulations, else given the negligible regulatory involvements, days may not be far when we see emergence of crowdfunding scams.
In the meanwhile, after opening the day on a flat note, the Indian stock markets have continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks from the realty and metal sectors leading the gains. Telecom and oil & gas stocks are trading in the red.The BSE Sensex is trading up by 36 points (up 0.1%) and the NSE Nifty is trading up by 7 points (up 0.1%). The BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading up by 0.6%.
04:50 Investing mantra
"If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards". - Peter Lynch
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