Well let us look at the Indian market from a foreign investor’s point of view:

Indian markets (as also China) is down by 18% over the past one year. If you are a foreign investor add another 14% of currency depreciation. It is not a pretty picture, correct?

It must have been quite a shocker for people who thought India was a domestic consumption driven market – and actually runs a small trade deficit. The Indian markets peaked in Nov last year and then has been on a ride down. From 21000 to 16000 now.

What caused this UNEXPECTED slump? It is not clear. Indian politicians have always been corrupt – however some new social changes – of wanting to punish the corrupt suddenly found ground support and has been shaking the governments. This movement has had an impact even on a few local elections. No major polls have been announced after this movement gained momentum. Also there was a Telecom scam where the Minister in charge of the licensing process was even jailed. Jailing corrupt businessmen, their executives and even a Minister that too for 180 days is unprecedented in India.

The FII cash flow into India in the year 2009 was US $ 17 billion and they invested US $ 29 Billion in the year 2010. In the year 2011 there has been a withdrawal – of about US $ 325 Million. In a country with very poor retail participation (there are no accurate figures for this – it varies from 1,000,000 to 10 Million!) exit of foreigners’ money was bound to have an impact.

India has many problems – the rate of inflation is in double digits. The RBI would love it if the economic growth rate and the inflation rates were to trade places, but there are no indications of that happening! The Indian growth rate of 6-6.5% is not bad, but when the expectations were in double digits, such a low figure of 6-6.5% (with a downward bias) does not look good at all.

If US $ 30 billion were to come in – and that too quickly what would happen? If retail FDI was really allowed what could happen?

These are difficult to handle. However a 7% growing economy with a beaten down market and a beaten down currency is very difficult to ignore. So money will come in. Will the markets scream its way to the top? No. Frankly there are no great triggers for the market to RUSH up all the way to 21000.

However we all know that triggers for a bull market or a bear market are not visible TILL THEY HAPPEN! So suddenly you might see cash flow coming in, quarterly results being good, interest rates coming down, a feel good factor – and the index could be at 21k in no time at all !

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She said “The world has not seen such a turmoil ever. You can say keep investing in a SIP for 2-3-5 years, but where is the evidence that with so much of volatility, for equities to do well – is it not better to put money in debt instruments like PPF?”

Very fair question – and since I could not ask a woman her age, let me guess – she must be less than 25 years of age.

When equity markets are low one needs more confidence to be in the equity markets. To be in cash or debt markets seems to be the more sensible thing to do now. Why? Because everybody is doing it….right?

Well the market is a funny animal. It is also a slave of the earnings and another multiple called the ‘price earning ratio’. Without getting into too much of detail let us look at why does a person buy equities?

It is for 2 reasons:

- dividend income (not easy to predict, but at least an attempt can be made) and

- speculative income ( change in price earning ratio – far more difficult to predict).

Now let us take the example of a good company quoting at a price of Rs. 100. Let us assume that this company is T and has an EPS of Rs. 10 and has a price earning of 10 (Rs. 10 X 10 = Rs. 100).

Let us also assume that historically this share used to sell at a higher price earning – of say 15, but as the markets are down (i.e. the people do not want to pay a higher p-e for the market as a whole).

Now over the next 3 years – 2012, 2013 and 2014 the EPS of the company are 12, 18 and 20 respectively. What will happen to the price of the share?

Assuming that the companies future looks bright…etc. the likely scenario are as under:

Market remaining depressed ( i.e. p/e remaining at 10) the prices would be 100, 120, 180 and Rs. 200 over the next 3 years.

Market getting better (i.e. p/e remaining at 15) the prices would be 150, 180, 270 and Rs. 300 over the next 3 years.

Market clearly is a slave of these 2 numbers – there is no escaping at all.

Then why is everybody not buying? Just because of the following fears:

- what if it gets worse than what it is now?

- what if the price-earning ratio goes down?

- what if the earnings of the company go DOWN instead of going UP as you are saying?

- nobody is buying…why should I buy?

- FIIs are selling, why should I be buying?

- Every expert in the media is saying ‘do not catch a falling knife’ – is it not scary?

Frankly there are no easy answers – nor does any one person have an answer to all these questions. I am very comfortable answering these questions POSITIVELY for a large number of listed shares – just as I know that many companies will do badly! So answering for individual companies looks difficult, but as usual I am optimistic on a group.

A SIP in a good mutual fund (or an index if you wish!) over the next 3-5-7 years should see a return better than a debt fund. If you are more scared stick to a balanced fund (like say Hdfc Prudence – 65% in equities) and sit through the troubled times. Like Peter Lynch says one of the factors needed for making money in the markets is the ‘stomach to see churns’…

Answering her question of  ‘Is it the worst time in world affairs’…No my dear girl, no. This is the worst churn that YOU are seeing. Markets have seen famines, depressions, tsunamis, wars, riots, world wars, cold war, epidemics, bankruptcies, insolvencies, cheating, frauds, over optimism, over pessimism, …etc. etc. See a long term chart of say 150 years of the stock market existence – each of these events look like a blip.

The most important thing for an equity market to do well is DEMOCRACY – so next time there is an election – get off your butt and vote. No democracy no markets  – no wealth

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We actually need the RM to activate her broking account – it is easier than transacting on the phone – and give delivery by physically going to the bank.

So when the bank RM called me I said ‘Thanks, can you please re-activate my BROKING account’. He clarified saying “Sir I am from the bank’ – to me it sounded like ‘Jerk do you not know the difference between a bank and a broking company?’. I said, I know, but can you send somebody from….the brokerage arm’. He reluctantly said yes.

However, I realised from his tone that nothing will happen. Well nothing happened.

He called again. Same story repeated. No action again.

One day I was talking to the HR of the same bank. I asked the HR person about the Targets and Incentive structure for the RMs. They have targets of revenue for the BANK. They had targets for BROKERAGE ACCOUNTS OPENED…but, alas, no incentive for activating or re-activating brokerage accounts. They have no revenue targets from the brokerage accounts too – so if my wife gave the broking arm say revenues of Rs. 50k a year, it did not matter to the RM – he got nothing from that you see.

The best part of the story is I told this to 3 bankers – all of them asked me ‘Is it our bank’. It was one of them, but I did not tell them which bank.

Then one BROKERAGE firm called me for training – SALES TRAINING – and I did sales training for their SENIOR MARKETING AND SALES people. About 30 of them attended a 2 day training. I told them I had an inactive account. The zonal head, regional head and the local head ALL promised to ‘re-activate’ MY ACCOUNT (I and my wife have broking accounts with different bank brokers). Training over, no response.

Thank God I do not do trainings promising the client ‘If I do training, your sales will go up’. Sorry it will not.

The sales guys have to go out and actually WORK. Training is useful only if they go out and DO.

No I am not naming the banks – A, B, C or H, I, J, K – does it really matter? LOL….

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Obviously all the money is not borrowed at 4% nor is all the money lent at 25%. The latest RBI directive of freeing savings bank account interest rates is also likely to increase the cost of the so called ‘cheap’ funds – (CASA balances as bankers refer to it) more expensive.

Then why do we need so many new banks? Simply because in this age of specialisation all our banks look alike. It is high time we had specialized banks – catering to rural rich, rural poor, urban rich, urban poor, urban middle class, traders, manufacturers, long term funding, etc. etc. For those who have done some research it is amazing to see the kind of financial costs that the poor pay. For example it is common to find among the poor – safekeeping charges of 20-30%p.a. for their cash! They still find it CHEAPER because in the house it might get stolen or ‘used’ by a brother, sister, father…etc!!

Unless the RBI takes its ‘development’ role seriously it will continue to tinker with the CRR, SLR, SB account interest etc. but India will continue to be terribly under banked for 90% of the population, and terribly over banked for 10% of the population. High time that RBI brought back the VRS for banks (the pension and the VRS are very, very attractive for the existing employees), created new banks – with differential net-worth requirements depending on what they want to do, monitored the mis-selling of non bank products, ….and not just rest on the laurels saying ‘we have managed the economy better than many other countries’. No doubt they have. What we will not know is how much have they missed.

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So today let us look at the issues:

A stagnating Europe and USA will mean bad news for China (for its exports), Brazil (commodities not being in great demand), India (inflow of investments) Russia (falling oil prices will hurt).

Let us make no mistake. A declining EU and a stagnating US cannot be good for rest of the world. The EU and US will try to continually try to maintain their political hold even as their economic hold is fast dwindling. Political fallout of all this ‘dadagiri’ apart there will be huge economic fall out also.

Indian businessmen and other Indian asset buyers are used to benign interest rates. However the ever increasing interest rates by the RBI will start hurting. As the quarterly results start coming you will see earnings eroded by rising interest rates. Funding for infrastructure projects will not be easy to get in a world where money keeps going to the ‘safe haven’ . Rising interest rates will also dampen fresh investment in infrastructure – even guaranteed returns will not mean anything unless the guarantees are by the Central Government. The guarantees of payments will not mention the delays that the government machinery is capable of doing!

All this does not abode well….Here I am not predicting doomsday, but clearly Apocalypse is not really built into Indian prices. Well not yet at least!

All the best!

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http://www.narendramodi.in/news/news_detail/1687

no comments..but the numbers are speaking loud are they not?

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Money is raised by auctions, floating of fixed coupon loans, private placements, as well as other open market operations…etc.,

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To me the answer is NO. I am not saying that you should wait for the bottom – I have my shopping list and have already bought some shares, but no we may not be at the bottom. Friday was a shopping day..and I did buy..

Am I not happy with the 7.5% growth rate? You got to be joking – it is one of the best in the world.

What is worrisome is the way the great MMS is ‘managing’ the economy. If India grew at 8% for 5-6 years, and US grew at 1% during this period, why is the Re-$ rate at 1=45? why not 1=35? Simple. Our internal fiscal discipline is ZILCH. Of course there is the macro explanation of wanting to keep the $ at that rate so that our exports do not look too expensive…be that as it may..

The US market has many shares available at 2.5% yield – remember their Gilt is giving you <2%. Very few good quality Indian shares are available at 2.5% yield – and we have SBI bonds available at 10%p.a.

Let us take the growth argument – Exxon, Chevron, Goldman Sachs, …will all grow at 17-18% + rate – I would be surprised to see Goldman Sachs growing at anything less than 25% for 2012. All these shares are available at a low p-e, double the gilt dividend yield, and with zero currency risk for an average American investor. You have to be very stupid to look outside of the US for investing – at least till the end of 2012.

Having said that, 2012 will be a tough year for the global economy. India might be able to weather it better than other countries, but the price earning ratios, dividend yield ratios, etc. are not mouthwatering. MBA colleges are still able to place all the people – even 2008 was more difficult. Salaries are still going up in double digit numbers, banks and life insurance companies are still opening branches.

Brokerage houses still have targets for account opening – but the number of active accounts may not be going up. The turnover at the exchanges are not going up – and frankly the FII should be able to find more lucrative markets abroad.

Let there be a few thousand job losses, let interest rates go down (somebody is still borrowing at 12% for industrial use, right?) and let builders repay 28%p.a. loans……then I would be willing to say ‘markets are at mouthwatering levels. Currently I am a nibbler, not an eater. And nibbler I always will be – at 9000, 18000, 21000 as well as 59000. After all I bought even when the index was 100, did I not?

Moral: do not wait for the waves to stop if you hope to take a dip in the ocean.

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If you believe that all salaries are market determined, it is not true. Not true at all. Many people get protected because companies want to say ’44 MBAs have stayed with us for the past 12 years’ – typically called the Dog and Pony show.

At board meetings and VC funding meetings it is necessary to show some longevity…so it helps

Some people move in a group – they take their ‘friends’ along and pay them different from the market. Of course when the ‘main person’ falls – all the others fall, but in the 10-20 year run that some careers run, the salaries are much greater than deserved.

To the manor born! – those kids whose parents can place them in high places (or even low places but high salaries) will make an attempt to do that. Such kids just have to go and get a ‘qualifying’ degree (once upon a time it was a Bcom, now it is an MBA) and that ensures that they get a good job..and a high salary and life is great.

Branded jobs vs. unbranded jobs: Those people who are able to break into highly paid jobs in companies with less stress get the ultimate combination – a few public sector owned (but called private sector) banks, national stock exchange, recently SEBI,….are such examples. Once you are there and are not very ambitious….life is a good work- home balance.

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Let us see the life history of a typical government or a bank employee.

They join for service after a competitive exam – after that they are happy to hold on to that job for life. They earn money, pay taxes and keep the money in a bank / government scheme. For the next 30 years or even greater.

At the highest slab they pay 30% tax. Like all of us.

However since their money is in bank fixed deposit, the government rips them off (like it rips off the senior citizens) by printing notes. Inflation kills their money. They earn 8% p.a on their fixed deposits and on this they pay 30% tax (Tds from banks forces them to pay tax you see!). That in a country where inflation on an average is always at about 10-12% for the aspiring middle class. So over a long term their PF contribution (which is so crucial for running the government) and their bank deposits (14 lakh crores) are all helping the Suresh kalmadis run the CWG.

Then this person retires and all his money is again in bank fixed deposits….so the game continues. If somebody did a study of the total salaries paid to the government employees, the tax deducted and their capital (adjusted for inflation) you will see this class as the MOST TAXED class of people…L O L.

Then they teach their children “All private companies are bad. You will have to please your boss even if you are good in your work..and he / she can throw you out …because of your bosses fancy…” so please write our office exam, I will ensure that you get a good posting….and history repeats itself”.

Conspiracy of the Rich…Mr. Kiyosaki would say.

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