Where has all the music gone? - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Where has all the music gone? A  A  A
2 JUNE 2008

I visited the musical town of Salzburg, Austria in 1988.
That was 20 years ago.
The memory I have of Salzburg is one of music. I recall seeing a lot of young people walking around with musical instruments in black cases.
Salzburg is where the famous Wolfgang Amadeus Mozart was born in 1756. This quaint city is also the home of the Universitat Mozarteum Salzburg set up in 1841 which trains musicians, amongst other things.

But, 20 years later, I walked the cobble-stone streets and - there are no musicians.
Maybe they are on holiday.
Maybe, over the 20 year period, they all became bankers with CFAs and MBAs.
Maybe some of them set up hedge funds.
Maybe they all started buying Indian stocks and became rich and bought villas on the lakes in Austria.

Investing in India: ending on a bad note
But wait a minute that cannot be possible.
If all the musicians in Salzburg had become investment managers with investments in India, I don't see them on the streets of Bombay either!
And, more importantly, I don't see their money sloshing around the Indian stock markets anymore.

If you know where the individual stocks are going, buy those,
If you don't know? buy the Quantum Index Fund. Click here to know more.

Alas, what is true of the musicians turned investment managers from Salzburg is true of many of the foreign investors.
Since CY 2003 (see Table 1), they have been buying approximately USD 10 billion worth of shares in the Indian stock markets.
And their buying drove the markets wild.
And more wild.
Then in a mad frenzy between mid-September 2007 and mid-October 2007, the foreign investors pumped in USD 6 billion.
Pause and review that number.
From an average of USD 0.8 billion of buying every month (a 5 year average), they bought USD 6 billion in one month. That is 8x the normal monthly inflow.

But the music stopped - it must have been the cold winter and the desire to stay home huddled up in blankets. Heating oil is expensive these days.
In January 2008, the foreigners sold USD 3 billion.
They bought small amounts since then.
But now in May they are out of the door again - the foreign investors probably sold USD 800 million worth of stock.
And the Indian markets are not in the best of health.

Table 1: Foreign investors run away from India in CY 2008
Period Foreign Activity
(US$ m)
Local Mutual Fund
Activity (US$ m)
(US$ m)
Change in BSE-30
TRI in that period (%)
CY 2003 6,940 93 7,033 + 86.0%
CY 2004 8,958 -261 8,697 + 23.7%
CY 2005 10,896 3,089 13,985 + 41.8%
CY 2006 7,994 3,442 11,435 +53.3%
CY 2007 17,235 3,121 20,357 +68.5%
Cum Total till CY 2007 52,023 9484 61,507 +742.1%
YTD May 2008 -3,928 1430 -2498 -18.6%
CY = Calendar Year; YTD = Year to Date

Investing in India: tired of waiting
So I asked a few foreign investors: don't you like India any more?

"How can we like it", exclaimed one investor, "the Indian market has done nothing."

"It is the worst performing country in my portfolio", yelled another, "I am tired of waiting."

And we are not even in a bear market.

It seems like it has been many years since foreign investors could not get enough of India.
But - as Table 1 indicates - it was only a few months ago when the foreign buying of Indian stocks was 5x the buying by local mutual funds.
For every one rupee the local Indian put in the market via the mutual funds, the foreign investor pumped in five rupees.
The poor Indian investor is still putting his money in but the foreign investor is tired of waiting and is heading home with the cash.

The price of a share is determined by many factors, some of which are:

  1. The business prospect of the company - how profitable is it likely to be?
  2. Does a company borrow from banks or issues more shares to fund its growth?
  3. Will the managements of these companies share the wealth they create fairly with the non-family members (what we call "minorities" - the people like you and me who don't run the companies but are shareholders)?
  4. Are there many IPO's about to hit the market - will the supply of shares increase?
  5. Is there anyone willing to buy the shares - is there a demand for shares?

Well, by the sounds of the noises made by some foreign investors I spoke to, the demand for Indian shares seems to have dried up.

That is not to say that India is bad; or that the Indian businesses will do badly; or that Indian managements are not worthy of investing in (some definitely are to be avoided - but that is a global phenomena!).

All that it means is that the foreign investor is not buying because he or she is not buying.
Like the spouse who says: "abhi mood nahin hai".
That is also - by the way - a global phenomenon.

Investing in India: keep at it
No one has a clue when the foreign investors will come in.
Or what will make them jump back into India.
Just like no one has any idea why they pumped in USD 6 billion into the Indian stock markets in September/October 2007.
Or sold USD 3 billion in January 2008.
And no one has any idea when India will no longer be the worst performing market in someone's global stock portfolio.

You should not worry about it.
Don't brood on it.
Keep on buying into shares you like or mutual funds you like (have you made an investment in Quantum Long Term Equity Fund? You should consider it!).
Don't borrow money to invest.
Don't try to hit "sixers" - or you will be bowled out.
Just go for the steady batting.
A regular rhythm of strokes, taking every ball as it comes.
Seek professional help to confirm what you are investing in matches with what you should be investing in.

India is on sale. And it may be for some more time, who knows.
But we were on sale in March 2003 when the BSE-30 Index was at 3,000 levels then.
And in June 2006 when the BSE-30 Index was at 9,000 levels.
So even at these "low" levels of 16,500 on the BSE-30 Index there was a lot of profit to be had if you had invested - and continued to invest - in the stock market.

Graph 1: The BSE 30 Index stays above the 100-day, 200-day, and 300-day moving averages. The future may be a less upward sloping curve - but upward slope it should be.

Source: Bloomberg

Invest in Indian stock markets - with no mistakes
The biggest mistake people make is letting their emotions tell them what to do.
The second biggest mistake is that they listen to their friends, neighbours, relatives - who are many times led by their own emotions. They don't mean to harm you, but they speak with charged emotions.
And the third mistake is that everyone thinks the foreign investors know more about India than we do. So if the foreign investors are buying, something must be right. Conversely, if they are selling, something must be wrong.

"Profit is the difference between perception and reality" is a quote I jotted down in my diary 25 years ago (sadly, no source of an author).
Foreign investors may have bought the "India" story on a perception of an annual rate of growth of 8% in the Indian economy.
Now they may be speculating that the 8% number is not a certainty and are running out of India.
In actual fact, the reality of a 6.5% annual growth rate in the Indian economy should give investors in the Indian stock markets ample opportunity to make decent returns over the long term.
Keep investing.
Stop speculating.
And teach your children to play a musical instrument: it is more meaningful than being an investment banker or a hedge fund manager or a regular fund manager.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.

Other Views on News:

» ...and financial planning for all
Mention financial planning and the reactions it will generate are likely to be about as diverse as they can be. With magazines, newspapers and television channels spreading the gospel of financial planning, one section of investors is likely to give it a thumbs up. Interestingly, there is another section that continues to be indifferent to financial planning; their rationale being that financial planning isn't relevant to them. Read on...

» Analyzing companies the Sun Tzu way (Part II)
In the earlier part of this series, we had discussed about one of the two important elements (the terrain and the ground) mentioned in the Art of War to understand the industry and market condition. We briefly discussed about ‘terrain', which is identical to the type of industry that a company is engaged in and where situation is fixed. In this sequel we will discuss about the second element ‘ground'. Read on...

Read our Privacy Policy and Terms Of Use.
Get The Honest Truth directly
in your mail box.
Just enter your e-mail address» 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Where has all the music gone?". Click here!