Category: Economy, Markets and Macro Views

In a recent report by Citigroup, they estimate that office and commercial property price may not melt down as their is still huge demand for the same. However, the returns are also not likely to be exuberant from current levels. Yields are liekly to be around 15% on development projects.

Trammell Crow Meghraj adds that, In the current scenario, it makes sense to go for long-term investing. Short-term investing is not advisable given the economy’s inflationary pressures.
In the contest of Indian Comemrical Real Estate, short-term means an investment horizon of 2 years. Medium-term means a period between 2 to 7 years. Long-term is more than 7 years.

I had an opportunity to participate in a conference call with HDFC funds manager, Tushar Pradhan. Excerpts from the call are as follows.

• Tushar feels that the larger extent of sell off in India compared to other emerging markets is not justified. Hedge funds are supposed to be the party spoilers with large sell offs after US interest rate hike. They are looking for short term gains just like GREEDY investors. They can’t hold the stock for years, for example, Hindustan Lever., took a while for the company to turn around. More on HLL later.
• HDFC fund conducted a review with 220 odd companies and none of the companies have changed their guidance or earnings estimate. (Courtesy: Milind Barve). Tushar also held the same view.
• Bear market ? What ? Are you crazy ? What is a bear market ? Falling corporate earnings, falling GDP, high inflation & double digit interest rate. Do you see them in India ? No. Loud and clear, we are not heading towards a bear market.
• Equity investments are for long term only. In the context of Indian economy, long term is a minimum of 3 years. In the context of American economy, long term is 7 years. For lumpsum investments, HDFC had launched a fund with 5 years lockin period, HDFC Long Term Equity fund. However, I advise you to go for SIP.
• HDFC hasn’t seen significant fund outflows.
• Corporate Profitability for 06-07 & 07-08: What has happened is, in 2001 the Indian markets bottomed out as corporate earnings hit a new low. From 2002, the situation started improving and was clearly visible in 2003. So that financial year, you might have seen a company grow 75% to 100%. In the next financial year they again grew by 50%. But that was only possible because their earnings had decelerated in 2001. From now on you won’t witness the same growth, but a modest growth of 20% is achievable.
• On HLL: It is an excellnt company with professional management. Worldclass products and highly efficient distribution and logistics channels. During weak economy, the company suffered a lot. Took a while for it to turnaround. But with retailing boom insight, the company is well poised to take advantage of its Brands and Distribution channels. HLL is a long term story. He didn’t specifically mention to BUY or SELL this stock, but quoted as an example how Hedge Fund managers were in a hurry to dump it.
• To a question by a MF sales person, Tushar asked them to look for a return of 12-15% over next 5 years, but I am confident they will outperform that. I expect atleast 20% compounded return. So once again, have long term view and INVEST, INVEST and INVEST on Dalal Street.
• The overall underlying tone of Tushar was very bullish and confident for any investor who is looking from long term perspective. Also Tushar holds the opinion that Equity is the only asset class that can give superior returns in long term.

Thanks & Happy Investing!

Hello:

Now I would like to discuss something related to valuation of stocks.

Jay’s model for analyzing a scrip:
He follows DCF(Discount cash Flow) model for analyzing a scrip. He also asked investors to look at Return over capital Employed(ROE). Rising interest rate will eat into the bottom line of the company. Jay if you are reading this, kindly tell us what impact rising interest rate will have on debt free companies 😉

• Do not believe in what a fund manager or broker says. Jay further adds that gone are those of doubling your money in a month. Anybody who directly talks about BUYING or SELLING a particular stock has vested interest in it.
• Kotak Mahindra has researched 1300 companies’ annual results available till 18-05-2006 and has found that those companies have grown by 23.5% YoY and expect to grow atleast 17.7% next year.
• Forward P/Es of emerging markets are China – 25.4% , BSE Sensex 18.2%, Russia 14.7%, Nifty 16.2%, Hong Kong 12.3%, Korea – 11.2% and Brazil 10.7% at the end of May-2006.
• Currently June 14th, 2006 forward P/E of Sensex is 15.5 for 06-07 and this makes India look attractive again.
• Jay wants all the investors to follow some disciplined investment, like SIP or STPs by mutual funds or research on your own and hold those stocks for long term. He specifically asked investors as to why they were chasing Unitech constructions and why they are now dumping it as if their is no tomorrow ?

Finally, Jay concluded by saying in his research of Real Estate, Gold & Stock Market over a period of 10 years, Stocks have always yielded the best and will continue to outperform the rest of the investable instruments. Invest, Invest, Invest on Dalal Street. Now or Never.

Thanks Jay!

Hello:

I happened to attend an inevstor meet headed by Jay Sinha, Research Analyst @ Kotak AMC. This meeting has helped me change a lot of my own practices. Here is a brief summary of Jay’s persentation.

Why did the Markets fall ?
Evereybody knew that the correction was long overdue, but why such a drastic fall ? Is it the beginning of a bear market ?
Jay has dismissed in the past and still is of the same opinion,

India is NOT heading towards a Bear Market. Loud and Clear 🙂

The correction was more than expected because of the following reasons.

• India is no more a secluded economy, it is globalizing and hence dependant on global factors.
• Indian economy is now driven to a considerable extent by FIIs. If FII pulls out money of our system, then our markets collapse. FIIs pulled out around USD 2 Billion and that action eroded the wealth on Dalal Street close to USD 65 Bilion.
• Why did the FIIs pull money out of India ? Mainly emerging markets valuations were overstretched. Then the US raised interest rates by 25 basis points. Jays explaination of this helped me clear lot of doubts as to why the inverse co-relation exists between rising interest rates and falling stock markets. Say you manage a fund. 10% is your money and 90% is borrowed money. We all know that Debt funds or Deposits are risk free. When the yield for such instruments rise, then managers and investors look at those instruments and hence some sell off was triggered.
• Indian short terms rates were also raised by 25 basis points to fight inflation. 1 of 3 CEOs were of the opinion that their CAPEX is now a bumpy ride and has to be managed very carefully. Check out my earlier post, I had told that all the companies will now go for CAPEX and only the sound ones will execute rest will die. This will make borroing of funds little bit difficult and also eat into corporate profits thus bringging the EPS down. All though to a minor extent.
• Then the retail investor started selling in panic (no where near to the extent that FIIs have sold). All these factors had a ripple effect and the markets corrected further.
• All of a sudden India’s current account deficit begin to bother FIIs. This is around 2.8% and has always been over 2%. Jay’s thoughts were this contributed to larger fall for SENSEX.

NOTE: Jay is extremely bullish on India. The growth story is intact. Jay spoke about two factors, Indian economic growth and Indian economic flexibility (Political and other Policy matters). Both are sound enough to attract foreign investment. Have a long term view and stay invested. He also spoke that no matter how much the manufacturing & services sector strive and grow, it is actually the Agriculture growth which is mere 3% which requiers thrust and Government of India is all determiend to provide the same.

To be continued …

On Thursday(June 8th) the market closed at 9295. Last time the market closed at these levels around mid December 2005. I bet a lot more people were buying at that time than they are today. Same index levels, different reactions. The simple rule of winning in the stock market is to Buy low and Sell high. Most investors may find that they have been Buying high to sell higher or Buying high and Selling low when the market reverses its trend.

Have a look at the following HDFC Growth Fund spreadsheet. It is self explanatory on how SIP(Systematic Investment Plan) helps an investor gain in the longer run.

• Comparision between SIP & NON SIP returns in HDFC Equity Funds – Growth.
• Comparision between SIP & NON SIP returns in HDFC Top 200 Fund – Growth
• Comparision between SIP & NON SIP returns in HDFC Long Term Advantage Fund – Growth
• Comparision between SIP & NON SIP returns in HDFC Tax Saver Fund – Growth

It has been proven since the past 10 years in the context of Indian stock market and it will probably be true for the next 25 years on Dalal Street. You shop and spend at those fancy malls and don’t you want to earn from the same malls ? Yes your mutual fund manager will invest in those retail companies and make money for you while you spend.

Check out this SIP calculator to calculate how much money you want after 10 to 25 years and how much you can invest monthly. Kindly invest small amount of money in Equity Growth Funds for the next 10 years. Check out what MoneyControl.com expert has to say about SIP here.

I had the following recommendations for my group and blog readers. This has been backed by Killol Karia of HDFc Asset Management Company. He has attached a word document whose contents are as follows.

In the past 31 days, the Indian stock market, represented by the BSE Sensitive Index, has fallen very sharply, from 12671 to 9200, or a fall of 27.73%. This is a significant fall, and at this time we wish to share our thoughts with you on this matter.

Please do not panic: The worst thing that any investor can do now is to panic and try and sell his/her holdings.

It is the basic law of economics that when prices fall, demand rises, and vice versa. The caveat here is that all market participants have full information, and that all market participants are rational in their decision-making. In the stock markets, more often than not, when there is a fall, there is an initial reaction to sell and get out. Is this not irrational behaviour? When something that one considered as purchase-worthy has just become 20% cheaper, should one sell, or buy more of it?

Have the fundamentals weakened? Can the fundamentals of an economy weaken within 11 days? Just 11 days ago, almost everyone was so sanguine about the economy. Certainly, there was an element of hype and speculation at that point, but can anybody deny that the fundamentals are still good? Corporate profits have risen by 26% in FY 2006; interest rates are still within reasonable levels, operating profit margins for corporate India are at a healthy 17.6%. Many sectors continue to report good numbers.

This is not the first time the market has corrected sharply. Let us refresh our memories a bit, and look at the instances where the BSE Sensitive Index corrected sharply.

From 11/05/2006 12671 to 08/06/2006 9200 27.73% fall
From 05/10/2005 8821 to 28/10/2005 7656 13.21% fall
From 23/04/2004 5905 to 17/05/2004 4227 28.42%fall
From 10/09/2001 3224 to 21/09/2001 2594 19.54%fall
From 14/02/2000 6150 to 23/05/2000 3831 37.71%fall

Therefore, this is not the first time that the market has fallen. For each time, the reason was different, and all these reasons seemed very pertinent at that point of time. Ultimately, we have to remember that in the long run, the intrinsic business strength of the company concerned, and the profit growth of that company is what will determine its stock price growth. All other points pale in comparison.

Why didn’t the fund managers foresee this? After all, aren’t they the experts?

We are willing to go on record to say that nobody (absolutely nobody) can predict the movement of the stock market in the short run. This is because in the short run, the market is governed by thousands of variables (economic, political and emotional reasons, human emotions of fear and greed) over which we have no control. For all we know, the market can correct a bit more before it recovers, or it can recover straightaway. The job of a fund manager is to identify businesses that are expected to do well over a period of time, and at prices that are not extraordinarily expensive, and then stay invested. Time is the best friend of a long-term investor, as it helps in compounding the returns.

What should one do now?

If one is already invested in equities, and in companies where one is confident of the future prospects, the best thing to do now is not do anything at all.

If one is not invested in equities, or if the exposure to equities is low, then this may not be a bad time to invest in the stock market now.

At 10481, the Sensitive Index is quoting at a P/E multiple of 15 on estimated FY2007 earnings. This is significantly lower than the 19 P/E that we saw just 11 days ago. With the earnings growth for corporate India estimated to be around 16% for the next few years, this correction has provided a good opportunity for persons who are not adequately exposed to the stock market to do so.

For those whose exposure to the stock market is already adequate (the adequacy of the exposure should be judged by each person individually in consultation with a good financial advisor), this is a good time to realign the portfolio and concentrate holdings into businesses that one is more confident about. This is a good time to prune the marginal holdings and buy more of the stocks that one is more confident about.

In conclusion, the best way to participate in the growth of the economy is to stay invested in good quality businesses. When these businesses grow, the investor’s wealth grows along with it. Please ask yourselves these questions. If the answer to these questions is yes, then you should stay invested in equities.

(1) Do I have faith in the economic prospects of this country, and its private sector?
(2) Do I have the ability to withstand the fluctuations in the stock market, and am I in it for the long haul?
(3) Can I spare this money invested in the stock market without it making any impact on my Standard of Living?

Finally, in times like these, what better learning can one get than the teachings of the great masters? It is impossible to put it better than this quote from Benjamin Graham, the father of modern investing:

“ The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. This man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgement. ”

Do we bother about the prices of the houses that we have bought on a daily basis? Do we bother about the prices of the other assets on a daily basis? Why then should we be bothered about the prices of stocks on a daily basis?

Please stay invested in good quality businesses. That is the best thing to do. Please do not panic. That is the worst thing to do.

Happy Investing !