Has the "Great Indian Bull Run" started?

 Hello readers,

Victor Hugo - the most famous French writer once said" All the forces in the world are not so powerful as an idea whose time has come".  

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Indian economy growth story: Is it over??

Hello readers,

      This is testing times for Indian economy, market and the growth story. Some of the leading economists, market experts and industrialists have written off India growth story and its potential to become a super economic power in next few decades. These experts who had been so bullish about Indian growth story till yesterday have suddenly started giving very bearish and gloomy forecasts about India GDP for next few quarters and few years - talking about sub 5% growth rates . Some of the experts have proposed that India in BRIC should be replaced by Indonesia as India story is over. It has been declared that 8-9% GDP achieved for many years, before 2008 is not sustainable, was just a flash in the pan and the real potential of Indian GDP growth rate is about 5%.

Most of these experts and doom day predictors of Indian economy are Indian or Indian origin scholars and industrialists. There is a widespread gloom in the country because of the lack of economic growth and investment opportunities. Though I understand the frustration to a large extent and am equally frustrated with the will power deficit and lethargy shown by our political ruling class as well as babus, I don't understand the extreme pall of gloom  as if everything is over for the India story. Are we over-reacting to a short term down? Have we become a nation of  self -critical and over pessimistic people who can't see the long term strong fundamentals of this economy which can't be damaged by any political dispensation? Have we become a nation of ever-green cynics who like to shoot their own foot by crying hoarse to the world about our "demise" when the whole world is in a bigger mess? While countries like US and Japan which are in a bigger mess (with 1.8% and 1.4% GDP growth rate in 2013) can see green shoots in their fading economy, why can't we see the recent green shoots in our economy(E.g. Current account deficit for Jan-Mar 2013 coming down to 3.6% from 6.7% of earlier quarter, inflation(WPI) coming down to 4.7% in May from 9-10% last year , Fiscal deficit for 2012-13 coming down to <5% and Govt. finally showing some action in terms of recent approval for FDI in Retail, aviation and Insurance, RBI starting to reduce the Repo rates).

We keep on harping about 5% GDP growth as a very dismal growth rate. Do we really understand that even with 5% GDP growth rate , we are the second fastest growing economy(behind Indonesia) among all the major nations with >$500 Billion GDP size and fastest growing economy among nations >$1 Trillion  GDP including China, Brazil or any other nation?

Are you surprised?  But this is true.

 The reported  GDP growth rates are the Real GDP growth rates after adjusting the Nominal GDP growth rates with inflation rate. The nominal growth rates are the actual GDP growth rates in INR or Dollar terms. We reduce the inflation rate from Nominal growth rates to come out with reported and published GDP growth rates. As per the latest forecast, India is the fastest growing mega economy(among  nations  with >$1 Trillion GDP) in terms of Nominal GDP growth rates. Even at current 5.7% GDP growth rate, Indian economy is growing at 11.6% Nominal rate(as our WPI inflation rates are very high at 5.9% than other countries like US, Europe or China). China will grow at 11.1% nominal rates(7.8% Real GDP rate +3.3% Inflation). Other BRIC countries like Brazil and Russia are growing at 8.8%(3%+5.8%) and 9.2%(2.8%+6.4%) respectively. US would be growing at 3.2% only(1.8%+1.4%), Japan at 2.1%  and Euro region would grow at paltry 0.7%.The only major country which is growing faster than India is Indonesia at 13.5% Nominal growth rate(6.2%+7.3%). The only other major nation growing at double digit Nominal rates is Turkey at 10.1%(3.8%+6.3%). Hence, we have only 4 major national economies (India, China, Turkey and Indonesia) with GDP size>$500 Billion growing at double digit Nominal rates and only 2 mega national economies (>$1 Trillion GDP size) with double digit Nominal growth rates(India and China).

(Source of information: 2013 Global GDP forecast of a leading Canadian Bank)

Why are we still shedding so much of crocodile tears at 5% growth rates? Do we really appreciate that we still are the fastest growing mega economy? Do we appreciate that we still are growing faster than any other BRIC or major emerging economies? Do we appreciate that at 11.6% nominal growth rate(for $2 Trillion GDP size economy), we will add $230 Billion to our economy size in 2013(as big as Iraq, Nigeria or Philippines economy)? Do we understand that with 11-12% Nominal growth rates, the Indian economy with still double up every 6-7 years? Do we understand that global liquidity (FDI + FII investments) is waiting at the sidelines to invest in India story as they don't have too many such stable, big size and consistently growing economy options? Would they invest in China which is going through a major churn like credit squeeze and slowing down economy (not to speak of non-independent judiciary and unaccountable political regime)? Would they invest in Japan or Euro region with dismal or negative GDP growth rates? Would they invest in Brazil and Russia with 3% GDP growth rates and very heavily dependent on commodities? Where would they go?

Just to prove my point, in May 2013 itself, FIIs poured a record $5.2 Billion into Indian equity and debt market with respect to $25 Billion in entire 2012. They poured this much liquidity as they were desperately waiting for some positive signal from Indian Govt. which finally came when FDI reforms were notified by Indian Govt on Retail, Insurance and Aviation. Similarly, we had a big ticket FDI investment from Unilever in HLL(Hindustan Lever) of > $5 Billion this month. Now there might be some sudden variations in these flows in short term due to global events, e.g. recent US Fed bank announcements about tapering off Quantitative easing led to FII outflows out of India and other emerging economies in June. But the point is that in medium and long run , there are very few options available for Global money. No other economy has so many long term fundamentals going for it like stable political and democratic set up, independent judiciary and regulators, rapid and consistently growing economy, sizable economy($2 Trillion GDP) with 200 Million strong middle class, strong demographics with major proportion of youth hungry for prosperity and better life, sizable English speaking population , huge local entrepreneurship talent  and very high savings and investment rates(32%of GDP). 

Implications for the Indian retail investors

Is there any permanent dent in the Indian long term growth story? Not at all. The Indian Tiger has been freed and it will run fast irrespective of the governments. Indian growth story will continue to remain the key growth story of the 21st century. You have to shut your ears from the pessimistic noise around “demise” of the Indian story, keep your conviction and keep investing with a long term perspective.

The current economic woes of low growth rate are not going to last long with Indian Govt. desperately trying to re-start the economic engine by policy and legislative reforms and trying to cut the fiscal and current deficit. With fresh elections in 2014, the new Govt. would have the will power, urgency and resolve to carry out project approvals and policy/ legislative reforms to attract investments. With inflation coming down, Reserve bank would be having further space to cut down interest rates.

Markets may see a lot of churn and variation in short term because of global and domestic factors in 2013. It may not show a significant upside for many months till we have a new Govt at New Delhi with 2014 elections, ready to take key and crucial decisions on key reforms and project clearances/ approvals. However, we may see some good and quick upside in 2013 if the current Govt. suddenly wakes up and carries out urgent actions and reforms to create public goodwill for the 2014 elections.

One should use these times of fear and uncertainty to invest in staggered manner with every fall in the market in the next few months/quarters to build up a long term portfolio of strong businesses at discounted prices. The market prices for most of the blue chip stocks/ businesses are attractive and are available at good “margin of safety” to their intrinsic values. These investments should be made only with a horizon of atleast 3 years so that we will get handsome returns of  20-30% annualized.

Happy investing

Cheers

Amar

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Is the market stupid or intelligent enough?

Hello readers!

This is interesting times for Indian economy and stock markets, post the budget.

People (including me) had high expectations out of Chidambaram's budget which failed to deliver on many counts including bold moves to grease the economy and markets. For example, it was negative or absent on clear timetable for GST and DTC roll out, bold moves to encourage/ de-bottleneck investments in infrastructure, power and real estate, Reduction of Income Tax exemption or deduction limits to improve savings rate /investment rate, giving incentives to divert savings from real estate/ gold to financial savings, mandating PSUs to step up investment using the cash pile they have etc. The only good thing about the budget was Chidambaram's delivering on FY13 goal on 5.3% fiscal deficit and his plans to reduce the fiscal deficit to 4.5% by FY14 end.

Though the budget was positive for news on fiscal deficit, it was largely disappointing and an opportunity forgone in terms of urgency/ speed of reforms and bold moves. However, even more interesting and disappointing was market's reaction post the budget in the last 4 weeks. Firstly, the market over-reacted on the Mauritius related confusion  when market players assumed that Govt. is going to change the rules of the game for investments routed through Mauritius( in the form of the Tax Residency Certificate (TRC) being no longer just a necessary and sufficient condition).Govt. tried to clear the air few days later on the issue. After that, the global markets including India over-reacted on the Cyprus debt crisis issue. Just imagine the world markets over-reacted on a small economy contributing to $24 Billion of GDP(< 0.1% of world's GDP), perhaps because it’s a safe haven for routing investments and perhaps because hyper market players thought that the bank run in Cyprus could trigger a bank run and collapse of European union. Then, market over-reacted a few weeks ago on some allegations of money laundering on some employees of 3 top private banks (ICICI bank, Axis bank and HDFC bank).Last week, Indian stocks fell because of weak global cues in U.S. and Europe. US stocks had the biggest weekly decline of the year for the Standard & Poor’s 500 Index, after data showed the nation added less than half the number of jobs economists forecast in March.

Now all these events were temporary bad news (facts or perceptions) which could not impact the sound business models of the best businesses in India. Yet the prices/ market valuations of the stocks of all the businesses (including blue chips among the large caps) were hammered and butchered. Cyprus & Mauritius related news or employee related money laundering allegations can never alter the business model or the fundamental economics of sound companies in India. So, why did the markets react so badly on these news and pulled down the prices of some of these blue chips by 10-20%.

 Benjamin Graham (Warren Buffet's mentor) and Warren Buffet were great fans of the over reactive markets and made their best investments during the times when market was reacting to temporary bad news and hammering solid businesses down without any fundamental changes in their businesses economics/ potential.

Graham once said that "market was a voting machine in short term and weighing machine in long term". That means markets are unpredictable in short term but eventually prices the value of the assets right in the long term.He likened market to "manic depressive" guy who had frequent bouts of extreme mood swings and was either very ecstatic or depressed on a given day. He called the guy "Mr. Market". He taught his numerous disciples that if you get carried away by Mr. Market’s wild mood swings, you are doomed as an investor. However, if you learn to exploit his mood swings in a wise manner, you would be a winner. 

Efficient market theory is one of the key theories of modern finance. .Widely taught in all Ivy league universities, it says that its impossible to beat markets consistently as markets  are super-efficient in capturing all the relevant and latest information and events Therefore no living mortal can achieve better returns than market consistently. Many of the big investment gurus have scoffed at the efficiency of the market .Warren buffet once said that "if markets were so efficient as the academicians would like us to believe, then I would have been a bum sitting with a tin cup"

Warren buffet discovered that because 95% of all participants try to beat each other out of the quick buck, markets are very efficient in the short term and hence its impossible to beat the market consistently from a short term perspective. However because of the same short term orientation/ shortsightedness and over reactiveness, markets are not very efficient from a long term perspective - sometimes grossly inefficient  That’s why Benjamin Graham also used to call Market as "manic depressive" who is either too happy or depressed due to short sightedness and over-reactiveness. Warren once said famously " Be greedy when  everybody is fearful and be fearful when everybody is greedy" . The best investments which these investment gurus made were in these uncertain times and "temporary bad news" events when the market irrationally painted every business (even the best blue chip businesses with strong business model and strong balance sheet with durable competitive advantage) with the same brush and hammered them down. 

Now coming back to the best Business or stock picks in India, available at mouthwatering prices, in the current over reactive situation, following are my Top 10 recommendations out of my 2012 and 2013 recommendations.

 Business                                       Current price(INR)

Axis Bank                                           1229

ICICI bank                                           998

BOB                                                     655

M&M                                                   837

Coal India                                             309

REC                                                     211

Power Grid                                           104

L&T                                                   1349

IDFC                                                   140

LIC housing Fin                                    223

All these players are dominant or big players in their sectors with consistent growth, robust business models with negligible impact from these temporary bad news or events, well managed companies by competent management teams & strong balance sheets with sustainable competitive advantages in their areas. And they are available at good prices now with respect to their intrinsic value or historic PE. We should invest in these businesses at every dip(as the market might dip further) and sit tight on them for few years(3-5 years of investment horizon) to realize the true growth potential of these businesses. If you don’t have that investment horizon, then you are wasting your time on my blog.

Happy investing!

Cheers

Amardeep

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Budget 2013 expectations and its implications on Indian economy and markets

Hello Readers,

  Mr.Chidabaram is coming with the last budget of the UPA-II government on 28^th Feb and he would be carrying a high burden of expectations from the investors, industrialists and common man. Whether he will be able to deliver for all would be something which everybody is waiting with held breath.

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My 2013 Forecast of Indian markets and Top 12 Stock picks

Hello readers,

 Wish you all a very happy and wealth generating New Year -2013.

 How Indian markets performed in 2012 vis-à-vis my 2012 Forecast:

Before we get into 2013, let’s look back and see how the Indian markets performed in 2012. The Sensex was up by 26% with respect to 2011 closing levels (from 15454 to 19426 levels). This was in line with my 2012 forecast (Pl refer my blog on 31st Dec 2011"My 2012 forecast and Top 10 stock picks) when I had predicted the Sensex to touch 20,000 by 2012 end. It almost touched and missed 20,000 by a mere 500 points (2.5%). The Indian Sensex did better than the world markets and US market(S&P 500 Index) and was one of the best performing markets, justifying my bullishness on Indian economy and market. The MSCI All-Country World Index of equities increased 16.9 percent in 2012 & S&P 500 Index increased by 13% in 2012, while Sensex increased by 26%.

How my 2012 portfolio performed(Top 10 stock picks) :

Pl refer to the same blog (dated 31^st Dec 2011) where I had mentioned my top 10 stock picks for 2012. In order to put my investment ideas to test, I invested in the same stocks in 2012 with great results (as shown below). My portfolio showed gains of 36% versus 26% of Sensex gains. I was more bullish on stocks like AXIS bank, BOB (Bank of Baroda), REC (Rural electricity Corp), BHEL, IDFC etc and hence put more money (higher weight) on them. The 4 top gainers were Axis bank (56%), IDFC (78%), REC (66%) and L&T(57%).The only 2 big disappointments were BHEL and GAIL . However, am still bullish on these 2 stocks and strongly think that market is being short sighted and not fully pricing their long term earnings potential and durable competitive advantages.  Hence I am going to hold them on for 2013 when they will show excellent gains.

2012 Portfolio results:

Company	Weight	Gain%
Axis	19%	56%	10.4%
BOB	15%	30%	4.6%
BHEL	14%	-3%	-0.4%
REC	13%	66%	8.7%
GAIL	10%	-6%	-0.6%
IDFC	9%	78%	7.2%
L&T	8%	57%	4.7%
Reliance	8%	18%	1.4%
Jain Irrigation	2%	-3%	-0.1%
Coromandel Int	2%	-14%	-0.3%
Total Gain%			36%

My 2013 forecast of the Indian markets:

Though I am a long term investor who focuses on long term trends and predictions of the economy/ market and the businesses, I would dare to venture into the medium term forecast again and predict that India economy and the markets are at the threshold of starting a big and long bull run.  The Sensex could be touching 24000 by Q2/Q3 of 2013 calendar year (16 X FY14 forward PE). This is about 25% gains from the current levels. This means that if we chose the right businesses/ companies (fundamentally strong businesses with competent management at attractive prices), we could potentially make 30-40% of returns in 2013. I am most bullish on interest rate sensitive sectors like Banking & Finance, Automobiles, capital goods/ infrastructure etc as they have been battered badly in recent times and will benefit from the Govt. policy reforms, investments and RBI impending actions on interest rate reduction .This market forecast might get battered only if we have sudden upheavals or catastrophic events like US fiscal cliff not getting resolved and US getting into recession or severe Euro sovereign default or Indian Govt falling etc. 

My 2013 Portfolio of Top12 business/ stock picks:-

I am going to retain many of the stock picks of 2012 while dropping 4 of them and adding 6 more new businesses/ stocks.

I am retaining BOB(Bank of Baroda), REC(Rural Electricity Corp), BHEL, GAIL , Jain Irrigation and Coromandel International while dropping Axis Bank, L&T, IDFC and Reliance. These 4 dropped businesses/ stocks are still great businesses/ companies but they are no longer available at great prices which can provide enough margin of safety and returns for me. In case they drop by 20-25% anytime, I will invest in them again. Apart from these businesses, I will add 6 more businesses as they are best in class in their sectors with great financials, business growth track records, excellent ROE, strong balance sheets with very competent management available at attractive prices. They are ICICI bank, M&M, Bajaj Finance, LIC Housing Finance, LUPIN (pharma) and Power Grid.

The final 2013 portfolio looks like the below

Businesses/Stocks                           Sector

1)   ICICI bank                                   Banking & Finance

2)   BOB                                            Banking & Finance

3)   Bajaj Finance                              Banking & Finance/Retail

4)   REC                                            Power

5)   Power Grid                                  Power

6)   BHEL                                          Capital Goods

7)   M&M                                           Auto

8)   GAIL                                            Energy

9)   LUPIN                                         Pharma

    10) LIC Housing Finance                 Construction/ Real estate

    11) Jain irrigation                             Agriculture

    12) Coromandel International          Agriculture/ Fertilizers

 

All these players are dominant or big players in their sectors with consistent growth and profit performance, robust business models, well managed companies by competent management teams & strong balance sheets with sustainable competitive advantages in their areas. And they are available at attractive prices now with respect to their intrinsic value & historic PE, providing a great "margin of safety" for the value investors.

Wish you a very happy New Year again and Happy investing,

Cheers

Amar

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