»5 Minute Wrap Up by Equitymaster

On This Day - 30 DECEMBER 2014
Is this why you don't benefit out of any Sensex rally?

In this issue:
» Top wealth creators in 2014
» This could be the biggest risk to Indian economic recovery!
» Will this be an end of 'Made in China' era?
» and more....

How many times during a discussion with your friends or relatives have you heard someone say "Stock market is like a casino, stay away from it"? If not in 2014, for the sheer rally in equities, you may have heard this adage at least once from someone.

He would then cite examples on how few speculators/operators are running the show on Dalal Street and poor investors like him have lost money in the process. You may think he has an equity phobia and would blame his negligent approach for the losses. But considering the rampant trading that happens under the garb of insider news in stock markets you would certainly empathize with him once. And here we are not talking about the unknown names with low liquidity that are relatively easy to manipulate. We are talking about frontline stocks that constitute Sensex!

Finding it difficult to believe? Then check this out. As per an article in LiveMint, nearly Rs 3.5 bn worth of stock of Infosys changed hands just a day before Narayana Murthy announced that he shall be rejoining the company after his retirement. This is not an isolated case. Both the Sun Pharma & Ranbaxy as well as the Kotak Mahindra & ING Vysya bank mergers saw tens of millions being played on the exchanges just before the official announcement was made. This indicates that trades were made on price sensitive information which was not public.

Such instances speak volumes about the insider trading practices in India. Apart from duping innocent investors, the unethical practice of getting access to sensitive information ahead of everyone else has done more harm by creating an environment of distrust in equities. And hence it is no surprise that an average Indian is averse to investing in equities. You would be surprised to know that India's household equity exposure is under 2%. And this is when the country boasts of domestic savings rate in the region of 28-30% of GDP.

Trust deficit is the primary reason for low investment in equities. While we are basking in our growth story, the true beneficiary of India's boom are FIIs! That's because you cannot benefit from a growth story by investing less than 2% of your household savings into equities.

So, how can one rebuild trust in stock markets, and thereby divert more savings into equities?

Well, we reckon SEBI needs to take a stand here. As a proactive regulator, it should crack whip on errants without any fear. Not only that, it should enforce strict rules on insider trading and punish the guilty so as to create an environment of trust that is conducive for investment. Merely reprimanding or imposing measly fines won't work.

However, it is not that by enforcing stricter regulations money would suddenly start to flow into equities. Educating investors is equally important. Unlike other asset classes, equities are more diverse and risky in nature. Hence, one needs to carefully understand the pros & cons, else it may result in a phobia if losses occur at an initial stage.

This is where we reckon our newsletter The 5 Minute Wrap Up comes handy. Over the years, through this newsletter, we have made an honest attempt to educate our readers about equities, economy, gold etc. We hope it has made a difference in the way you approach equities and helped alleviate the fear that has been robbing investors of the India growth story.

Which is the biggest worrying factor that keeps you away from investing in equities? Let us know your comments or share your views in the Equitymaster Club.

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  Chart of the day
Talking about the fear of investing in equities, let us see what investors would have missed had they not invested in these business groups in 2014. The groups we are talking about are top wealth creators of 2014. As can be seen in today's chart, the Kalyani Group leads the pack of wealth creators with gains of 150% in 2014. Bharat Forge was a major contributor for this rally. Gains are calculated based on the change in market capitalization of all the group companies in question. Absence of Tata's and Birla's from the list indicates that a sizeable appreciation in market cap has taken place in the mid & small cap spaces. Thus, investors who had invested here would have raked in decent gains in the year gone by.

Top Wealth Creators in 2014

While a mood of optimism pervades the economy, there is one factor that could take the steam away from the recovery story. What we are referring to here are the indiscreet lending practices by banks. The same is the prime reason for the rising asset quality risk. If things go worse, the impact will be compounded. This is because around 32% of the Sensex remains exposed to the finance sector.

As highlighted in Business Standard, one of the key issues that deserves attention in this regard is double leveraging. These are the cases where holding company raises debt and infuses it as equity in special purpose vehicles (SPVs). This practice concentrates the debt risk for the SPV. However, the banks seem to be failing to assess and capture this risk. Further, share pledging facility in some cases is getting abused as promoters have been using such funds for the company itself instead of outside ventures. With limited liability, the promoters do not mind losing control when shares fall in value since by then the funds are already diverted. Needless to say, this can have a severe impact not just on minority shareholders and markets, but the entire financial system as well. The loan restructuring facility also seems to be failing in its aim as more bad loans continue piling up. Banking and finance sector is the backbone for any economy. If the prospects of this particular sector remain risky, any economic recovery, if at all happens, is unlikely to be stable.

Even as the Government makes a fervent pitch for 'Make in India' campaign, an interesting trend is unfolding in the neighboring economy in this regard. China, often referred to as global manufacturing hub, is likely to see the exit of some of the key manufacturing firms. A case in point is China's largest steel manufacturer that is planning to shift 11% of its capacity abroad. As per an article in Bloomberg, this is further likely to be followed by players in the cement and glass sectors. So what is driving these players away? One is the saturated market in China. The huge investments in the growing Chinese economy in the past have now resulted in spare capacities. And the outcome in the terms of falling commodity prices is for all of us to see. Further as anti pollution drive in China and anti dumping duties in the other economies get stronger; the road ahead within China seems further risky.

However, this does not mean lesser competition for India. With limited opportunities left in China, these Chinese firms are ready to go global now. And China is glad to assist them financially with an aim to make these firms globally competitive and to earn higher returns on its forex reserves. Yet, as China slows down a bit, it is time for India to make the most by speeding up the reforms that will ensure successful execution of' Make in India ' plan.

Meanwhile, Indian stock markets slipped into the negative territory after opening the day on a flat note. At the time of writing, the benchmark BSE Sensex was down by 41 points (0.2%). The sectoral indices were trading mixed with the stocks in the metal and oil and gas space leading the losses. However, stocks in the consumer durables and power space were trading firm. Barring Indonesia, the Asian equity markets were trading mainly in the red with markets in Hong Kong and Japan leading the losses. The major European markets opened on a weak note as well.

 Today's investing mantra
"Risk comes from not knowing what you're doing." - Warren Buffett

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