Never give up on India growth Story

Friends,

  Am blogging after a long time . I promise to be more regular, at least once a month.  This time , I am going to devote some time on the India growth story which everybody including the big investment banks, FIIs , and our own domestic industrialists in their wisdom had almost given up.

I would refer you back to a blog I had written on 25th June 2011 on the topic

"Biggest growth story of the 21st century - Indian economy"

Here is the link :http://www.indiavalueinvesting.blogspot.in/2011/06/biggest-growth-story-of-21st-century.html

I  had clearly talked about why and how Indian economy is the biggest growth story of the 21st century just like how the US economy was the biggest growth story of 20th century. I talked about how and when the Indian economy is going to become the biggest economy by 2050(as per the projections of leading Investment banks and US Govt) .And how we can create huge wealth for us and our coming generations  in the next 40 years by investing in strong businesses with competent managements in India.

I still stick to my projections, forecast and advise . Never give up on India growth story . India will be the biggest growth story , despite our government and political leadership. There are many strong factors like Demographic dividends(the fact that Indian population is and would be the youngest for many decades), huge local entrepreneurship talent  , English language capabilities, very high savings and investment rates(34-38% of GDP), growing consumerism , huge middle class etc would ensure that we will continue to grow at an average growth rate of 8% for a few decades. This would translate into nominal growth rate(real growth rate + inflation) of 14-15%(assuming 6-7% of inflation) . This in turn would translate into about 20% sustainable growth rate for the best in class blue chip companies.

Do you know what can the magic of compounding(compound interest) do to your money growing at 20% in 10, 20 , 30 and 40 years?  Your I lac INR can become 40 Lacs in 20 years, 250 Lacs(2.5 crore) in 30 years and 1500 Lac(15 Crore) in 40 years. Remember ,Time in the market is always more important than timing the market . Right business/ stock selection and Right temperament( patience and conviction on your choice) are the biggest success factors here. Warren Buffet became a billionaire after 50 years of patient investing and not overnight.

In December 2011 and Jan 2012 , I discussed my top 10 business or stock pics with you . Those stocks have grown by 30% Year till date while sensex has grown by 21% Year till date with 3 more months remaining for the year . This is not a bad return for a volatile year like 2012 with so much of global and domestic crisis. I never gave up on India story . In fact , all these months , I steadily built up my investments in these businesses with every dip in the market. Remember that the market always over-reacts on both the sides for good news as well as bad news . We need to exploit the over-reactive and short sighted nature of the market and invest in strong businesses which get painted by the same brush of macro bad news though their specific or micro fundamentals don't go through any significant or lasting change. I have continued to invest in strong but beaten down businesses/ stocks like Axis Bank , Bank of Baroda, BHEL, L&T, Rural Electric Corporation, IDFC , M&M, GAIL etc with every opportunity presented by market or stock dips. Once you have invested in these great businesses with durable competitive advantages or economic moat (as Warren Buffet would put it), just shut your ears from the market noise and allow the earnings growth and time to take care of your money .Thats the biggest secret of success of all the great investors, especially value investors of the world.

Happy Investing . Cheers for the sustainable Indian growth story.

Amardeep

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Indian economy at cross roads -Time to bottomfish??

Indian economy is at cross roads today when its suddenly being compared with 1991 situation when India had to pledge Gold to borrow foreign exchange. The GDP growth rates have dipped down to 5.3% (the lowest rate in last 9 years) with high inflation rates at 7.4% , raising an unprecedented  spectre of stagflation in India. The current account rate is at 4% which has been one of the highest ever and Rupee has depreciated by > 10% in the year.

Why and how did we reach this situation? Should we "blame it on Rio" as the govt. is attempting to do by blaming Greece and Euro debt crisis? I  think that most of the causes start and stop at our doors . RBI's aggressive monetary tightening stance , Policy and reform paralysis of the govt., lack of proactive managemnt of fiscal and current account deficits, stubborn inflation are the key domestic reasons for the current economical situation . These domestic factors along with Euro debt crisis led to foreign investors turning risk averse and withdrawing their hot money to safer heavens which in turn led to stock markets crash as well as currency depreciation.

Should we invest in these times in Indian markets? Responses to the below questions would help us get clear answers to the question.

Are these root causes of the current situation temporary or structural in nature?
They are temporary in nature

Are the consequences or implications of these causes predictable & controllable?
The consequences of all the mentioned causes are predictable and controllable except the scenario of a disorderly Greece Exit from Euro-zone which can lead to a contagion on other PIIGS govt bonds and run on banks. Hopefully , it wont happen.

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 story of the 21st century.

Have we bottomed out or near the bottom in economical cycle?
We have nearly bottomed out as far as domestic factors are concerned. In case of Greece dis-orderly exit , we may go down by 10% or more . However its impossible to time the market and hence its still good time to invest.

Is this time to bottomfish?
Yes it is. Go for the fundamentally strong and profitable businesses with great management and strong balancesheets, available at attractive prices. The valuations/ prices of some of these businesses are very lucrative today and we can start buying them in installments at every dip for the next few months.

What are few of the sectors and stocks to watch out or invest?
My favourite sectors are the badly beaten down sectors like interest rate sensitive sectors , e.g.Banking and Finance, Auto, capital goods , infrastucture etc. In these sectors , one ought to chose the best of the breed businesses with strong business and financial track record, revenue visibility, strong balance sheets and competent managements. Some of these companies are the same ones I had called out in blog titled "my 2012 forecast and Top 10 stocks " . The key ones I would put my money right now are businesses like "Axis bank", "Bank of Baroda", "M&M", "BHEL", "L&T", "REC" and "GAIL".

The times ahead could be more troublesome with markets dipping by another 10%-15% if we have the Greece and Euro debt crisis going out of control. Hence we should be buying these businesses in installments at every dip in next few months , rather than putting all money in one go.

Keep your conviction on the Indian long term story and invest for long term.

Happy investing!

cheers
Amar

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Budget 2012 and implications on markets

  2012 Budget has come and gone as an non-event this Friday(16th March). And so has the critical RBI policy announcement a day earlier on 15th March and critical state elections results including UP elections. 

One interesting fact is that market had been anxiously waiting for these 3 events as  major positive / negative triggers for deciding the direction of the market this year.All these events came out with results which were negaitive to the market. While the budget was hailed as disappointing and non-reformist by most of the experts and analysts, RBI ended up not reducing the repo rates. The ruling UPA dispensation(mainly Congress) ended up as poor losers in the critical UP elections.Yet, the market(sensex) didnt tank in . It barely lost 3%(about 500 points) inspite negative results for all the 3 events. What does it tell us about the state of the market and economy?

Well , it tells us that the market didn't have very high hopes from the budget and RBI policy and had already priced in negative results. It also tells that market is building a strong launchpad for a new bull market and is not going to be easily shaken by these so called "big" triggers. It also tells that the state and fundamentals of macro economy is improving and Indian economy is getting into high growth path again . Thats a good news for retail investors like us.

Having said that , lets briefly talk about the positive and negatives of the budget. Following are my thoughts..

Negatives:-

•  The fisal consolidation - FY12 turned out to be a very bad year on fiscal deficit with 5.9% and FY13 seems to be no better as the projections of 5.1% deficit is not based on reliable and credible assumptions. This will lead to Govt. continuing to borrow heavily from the market , crowding out private borrowings as well as hardening  interest rates which in turn will not give RBI legspace to cut market rates enough
• "Tax and spend budget"- Govt. has increased the indirect taxes(excise and service tax) from 10% to 12% which can stoke inflation . While it has increased the taxes , it has done little to control its wasteful expenditures like subsidy etc. While it gave away some Income tax reduction, it was too meagre.
• Non-reformist budget -  It doesnt contain any new or big idea like FDI proposals on retail, insurance or pension or clear timelines for GST and DTC rollout or General amnesty scheme for foreign/ domestic located blackmoney.
• Retrospective amendment in law to reopen vodafone and related cases- This has been hailed as anti-FDI move which will dent the foreign investor confidence and faith in Indian system.

 Positives :-

• Power & roadways sector - Lots of good measures have been declared for power sector including exemption of power fuels(coal/LNG) from import duty, allowing cheaper foreign loans(ECB) access to refinance domestic loans, extending tax holiday for one more year. On Roads, NHAI road targets have been increased by 20% and acesss has been given for ECB funds
• Agriculture/ rural - Agricultural credit has been increased to more than >500,000 crores($100 Billion) and agriculture loan interest has been reduced . This should increase the demand for agriculture related products.  Irrigation outlay has been increased by 14% to >14000 crore. Sops have been given for fertilizer production, warehousing and rural infrastructure too
• Direct transfer of subsidies and NREGA payments in 50 districts through aadhar/UDAI  cards - Govt has supported UDAI project with sanction of aadhar cards for another 40 crore cards and has sanctioned payment of subsidies in 50 districts which will be ramped up to other districts. This is a very good medium term action as this will help in stamping out leakage and corruption.

In summary , the budget was dissappointing and an opportunity foregone to make a great impact to the Indian economy story and change the course of events . Now its on the corporate world to make the best of the situation and some positive budget provisions to improve their micro fundamentals. RBI definitely will be constrained to reduce the rates in a significant manner which is a negative for the market and corporate sentiments. Increased crude oil rates because of the geo-political tensions in gulf and Iran can be another negative for the market and economy.

Now onwards,  the market will not have any significant domestic triggers to take direction . It will take its own direction based primarily on the corporate India performance in the next  few quarters and global liquidity situation. I still continue to be positive about the market and economy in 2012 , though we have lost a  very good opportunity to kick start the economy and take the economy and markets to new highs.

  The fact that the markets have taken all the blows in a defiant manner shows that the foundation  of the  bull market  is much more robust now and we are on a strong wicket to achieve new highs , though the speed and momentum will be a bit slower now.

Happy investing and cheers
Amardeep

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What's in store for 2012?

       I had predicted a good year for equities in my forecast for 2012(published on 31st dec 2011) with sensex going to the levels of 20000 to 21000 by the end of the year.I also had predicted that some strong businesses(My top 10 stock picks in the same blog) in specific sectors like Banking&Finance,    power,infra and energy will do very well in 2012 and ahead . Both my forecasts have proved to be accurate till now ,though the bigger part of the year is still to unfold. 2012 has seen an eventful and dramatic start till now with Market index(sensex) showing a sharp gain of 14 percent in first 6 weeks of the year.  While the Market index has gained by 14 percent, my recommended 10 stock picks have gained by 21 percent in the first 6 weeks of the year.This is a handsome gain by any standards and is 1.5 times the gain by Market index.

      My forecasts were based on the simple fact that most of the negative news at the domestic and global level were also ready discounted in the Market prices like inflation, interest rates, policy paralysis, fiscal deficit at local level and US economy slow down, Euro recession & Euro sovereign debt crisis  at global level. The only factor it had not discounted was a disorderly default by Greece or Italy(Market can never discount such catastrophic events).In fact, Market had typically overreacted on certain issues due to it's inherent shortsightedness and myopic mindset.Indian Market index was quoting at forward PE multiples of 12 to 13 with respect to it's historic average of 16 .Many strong business were being quoted at very attractive prices as they had been hammered down by a brutal market due to macro economic concerns and FII money flocking to safer heavens.It's this overreaction due to it's shortsighted myopic mindset that has been traditionally exploited by legendary value investors like Warren Buffet, Benjamin Graham, Philip Fisher, John Templeton to create their huge wealth.

     The fact that my recommended portfolio of 10 stocks have gained 1.5 times the market index  is not to claim any win as the year has just started. But this definitely reinforces that we don't have to invest in high risk and high beta mid cap and low cap stocks to make decent gains and beat the Market.You can do so by investing in safe and strong blue chip businesses/stocks. The market and broker driven myth of "high risk and high gains" is a facade which has been created to lure retail investors like us to bet for risky stocks and lose our entire money.This myth has been broken time and again by legendary value investors I have referred earlier too. There is no quick way of making millions overnight in stock Market but many quick ways of losing your entire money if you don't play it safe and long term.

      Let's talk about how remaining part of 2012 is going to pan out. Here is my 2 cents ,though it's always risky to predict Market movements in short term.The rally till now has been driven primarily by 2 factors - global liquidity and hope for better local action at fiscal, monetary and policy level. As we speak ,global markets have been swamped by a big wave of liquidity driven by ECB, Bank of England and Fed pumping billions of dollars in last few months.ECB has pumped about 490 billion euros in recent weeks by extending short term loans to euro banks.Its planning to inject a trillion dollars more in near future. Some of this global money has come to the Indian markets through FII money(4 billion dollars in 6 weeks).There is also some hope that we will see some action at govt policy and interest rates. These factors have led to this sharp rally.

      Is this rally sustainable? The answer is both yes and no. It depends on how certain factors play out. These factors are mainly on what and how govt does on fiscal deficit front and policy/reforms front.It also depends upon what RBI does on the interest rate front.It also depends upon how the congress does in the recent state elections as good performance will strengthen Govt hands for doing reforms.Hence the govt and RBI have their tasks cut out for them in 2012 and ahead. They can't take robust economy growth for granted as it has already come down to 6.9 percent. However, am positive and hopeful after seeing recent trends on  inflation reduction, monetary actions by RBI on liquidity front and recent Govt urgency on power sector recovery.If these recent trends continue to exist in the balance part of the year, we should see a good and positive 2012.

I am signing off with this positive note. Happy and safe investing.

Cheers
Amardeep

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My 2012 forecast of Indian market & Top Ten stock picks

 Wish you all a very happy and wealth generating new year -2012.


2011 will definitely be remembered as one of the  forgettables years  for the Global stock markets as far as investment returns are concerned. While the US markets closed virtually unchanged with respect to 2010 closing level(0.4% down), Europe market closed at 12% down (STOXX Europe 600 index).Indian market was the worst performer among the major markets with Sensex down by 25%. A combination of domestic factors like high inflation and interest rates, slowing indian economy, Govt. policy paralysis,  high fiscal/ current deficit along with global headwinds like Euro debt crisis and US slowdown led to withdrawl of invested funds by FIIs leading to a bear market in India.


The Million Dollar question in all investors mind is "what is in store for 2012?”. It’s always very difficult to predict the short and medium trends in the market. However , taking into consideration all the factors and issues playing in 2011, I would like to put my bet on a positive 2012.


2012 should be a brighter and better year because of couple of reasons. Almost all the bad factors - global and domestic - have been already factored into the prices and hence market should start looking up by end of Q1. Inflation has already started coming down with food and primary articles inflation showing <6%. Interest rate cycle has already peaked with RBI showing signs to cut down the rates in near future. Govt. has started to move on reforms/policy, though the attempts on Retail FDI and Lokpal - didn’t produce positive results. Euro crisis will continue in 2012 with Europe going into a recession, though the immediate threats of sovereign defaults have blown away due to some recent actions and agreements like higher emergency funds for IMF and Europe Financial Stability fund and agreement on better fiscal controls in Europe. US economy is showing its inherent strength lately by bouncing back in the last quarter when it showed 3% growth with respect to 0.9% growth in first half of 2011. The unemployment rate has come down to 8.6%(lowest in last 3 years) and job market as well as housing market is looking up after a long time. The only event the market has not factored is a potential sovereign default in Europe in one of the PIIGS nations. Any market can’t factor such kind of catastrophe event anyway.


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 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. The sensex companies are available at an average of forward PE of 13 to 2012 earnings estimates and forward PE(Price Earning multiple) of 11 to 2013 earnings estimates. The average forward PE historically has been 16 for Indian market in last 2 decades. Unless we don’t have any catastrophical events in 2012, we should see sensex reaching levels of >20,000 by end of 2012, assuming forward PE of 15(>30% returns on the current levels). These investments should be made only with a horizon of  atleast 3 years so that we will get handsome returns of >20-30% annualized.

Next big question is which stocks to invest in 2012?

 I would stick to the same list of stocks which I had advocated in my last blog “Time to invest and build long term portfolio”. I  would recommend these stocks/ businesses( using my "Hi-Five principles/framework mentioned in one of my prior blogs)  in the high potential sectors of Banking & Finance, Infrastructure, Power, Energy and Agriculture/ rural plays.

Banking and Finance space - This has faced the brunt of market reaction and fear recently and hence have some solid buying opportunities.  With RBI indicating the end of interest rate cycle, Banking and finance sector will be the first to start rising. Bank of Baroda and Axis Bank are very attractively placed now.  Consistent performers with > 20% ROE and >25% growth rate in last 5 years with very attractive prices/ PEs. The NPA(net performing asset ratio) is <1%

 Infrastructure space -  L&T and IDFC - Solid and consistent performers with very attractive prices/ PEs. These businesses are the best proxies to India infrastructure story with solid growth track record and strong balance sheet and excellent revenue visibility of >2-3 years(L&T has order book of > 3 years of current revenue; > $25 Billion order book size.


Capital equipments/ Power space - BHEL and REC(Rural Electric Corporations) . Very strong performers with consistent growth track records(>20% CAGR) and >20% ROE . BHEL has strong balance sheet(almost debt free) and big order book( equal to almost 4 times current year revenue).  REC is very strong player in power finance and has monopoly in rural power programs . You could also consider Power Grid which has huge expansion plans with virtual monopoly in transmission sector


Energy space - GAIL and Reliance Industries . GAIL has huge pipeline expansion plans with strong performance and balance sheet . Virtual monopoly on gas transmission. Entering into profitable city gas distribution in a big way.  Reliance has been an underperformer for some time which makes it attractive as all the negatives have already factored in the price(<750) and it has huge cash surplus of $13 Billion which could be deployed productively.


Agriculture & rural space -   This sector is looking up due to big govt. planned expenditure on rural and irrigation space as well as potentially high growth rates in rural and agricultural economy. Jain Irrigation and Coromandel International are very strong businesses with attractive prices and long term growth potentials. While Jain irrigation is the market leader in micro-irrigation , Coromandel is the market leader in complex fertilizers and special nutrients. Both have shown high ROE as well as EPS growth rates of >25% for the last 5 years with manageable debts. Both of them  have corrected to attractive levels in recent times.


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 great prices now with respect to their intrinsic value or historic PE, providing a great "margin of safety" for the value investors.

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

Cheers

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Time to invest and build long term portfolio

This is uncertain but interesting times when the markets and Rupee are touching new lows . Fear is the all  pervasive emotion hitting all the market parcticipants with investors and traders triping over each other to sell their assets . In these uncertain times , what should be our investing strategy? Should be stay away from the markets are should be stay put? Should we be buying or selling? Should we be aggressive or passive? Should we time the market? Could the market go down further?


Its these times, when a short sighted and a manic-depressive Mr.Market(as Benjamin Graham would call it) would over-react and hammer the prices down , creating great buying opportunities for long term value investors. My answer is positively inclined towards staying put and investing in the market in installments with every fall .There is no need to panic as the market has factored and discounted almost all the negatives- both domestic as well as international. It has factored in high inflation , high interest rates and domestic growth slow down on domestic front . It has also factored in US slow down , European recession,orderly and managed default for Greece etc. Only thing it has not discounted is disorderly default of Greece or any other PIIGS country or collapse of Euro . It can never disccount or factor that kind of catastrophe ever.


 Yes, the market could go down further. It may probably go down by 10% further . But that probablity should never deter a long term investor as they never try to time the market . They have a horizon of atleast 3 to 5 years when they invest in solid businesses and look at medium and long term trends rather than short term trends . By the way,nobody has been able to predict or time the short term market variations with perfection till now including the biggest of investors and traders . If somebody claims to have a great vision, technology or tool to time the market in short term , he would be rolling in money instead of  lecturing on electronic media or earning his money out of advises.


One should use these times  of fear and uncertainty to invest in installments with every fall in the market to build up one's long term portfolio of strong businesses at discounted prices. The sensex is available at an attractive forward PE of 13-14 with respect to  FY12 earnings and forward PE of 12 with respect to FY13 earnings which is at a good discount to the historic mean for foward PE of 16.


So , which are the businesses one should invest in now ? Should we go for Top down approach or bottoms up approach? Well , this is the time for bottoms up " fishing" strategy using my "Hi-Five" framework I had talked about earlier ...


The "Hi-Five principles/framework" provides the following Five criteria/filter for picking up a solid business/company

- Proxy to the Indian economy growth story or strong co-relation with Indian economy growth
-  Excellent long term growth potential and durable competitive advantage ("sustainable economic moat"  as Warren would call it)
- Honest & competent management - transparent ,shareholder friendly
- Strong financial track record -stable profitability,high ROE & low debt
- Available at attractive prices with good "margin of safety


Few of the stocks I am investing now and would recommend using the above mentioned principles are the following in different sectors.


Banking and Finance space - This has faced the burnt of market reaction and fear recently and hence have some solid buying opportunities like Axis Bank and Bank of Baroda.  Consistent performers with > 20% ROE and >25% growth rate in last 5 years with very attractive prices/ PEs

 Infrastructure space -  L&T and IDFC - Solid and consistent performers with verry attractive prices/ PEs


Capital equipments/ Power space - BHEL and REC(Rural Electric Corporations) . Very strong performers with consistent growth track records(>20% CAGR) and >20% ROE . BHEL has strong balance sheet(almost debt free) and big order book( equal to almost 4 times current year revenue).  REC is very strong player in power finance and has monopoly in rural power programs . You could also consider Power Grid which has huge expansion plans with virtual monopoly in transmission sector


Energy space - GAIL and Reliance Industries . GAIL has huge pipiline expansion plans with strong performance and balance sheet . Virtual monopoly on gas transmission. Entering into profitable city gas distribution in a big way.  Reliance has been an underperformer for some time which makes it attractive as all the negatives have already factored in the price(<800) and it has huge cash surplus of $13 Billion which could be deployed productively.


Agriculture & rural space -  Jain Irrigation and Coromandel International are very strong businesses with attractive prices and long term growth potentials .


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


Hopefully , you will find this article interesting and useful as I have come out with the best 10 options I would invest in today's market with a long term horizon of 3-5 years. These options should be giving us atleast 20% annualized returns over a long term.


Happy reading and investing.


cheers
Amar

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Would Greece default? Consequences for others including India

   Its incredible and wierd to think that a tiny economy like Greece with $310 Billion GDP(<0.5% of world GDP) could threaten to engulf and freeze the world financial markets with the prospect of Greek default on soverign debt payments. The experts are predicting that the damaging impact of such an event could be more catastrophic than Lehman bankruptcy due to the contagion effect it will unleash on european banks and PIGS nations like Italy and Spain.

Why is the prospect of Greece default such a big nightmare when we had bigger economies like ASEAN nations and Arzentina going the default way earlier and recovering strongly?

The answer lies in few factors like world economy and financial markets becoming much more integrated than ever before and Greece being an intergral part of the European Union with one single currency.

The financial markets have never been more integrated and coupled because of seamless flow of information, hot funds(hedge & FII) and cross country investments. A sneeze in US markets leads to pneumonia in European and emerging markets and Vice-versa. Whenever there is a big negative event , these floating funds and investments become risk averse and flow back to so called "safe heavens" like USD($) and Gold. This in turn leads to havoc for all the asset classes and markets , especially equity markets.

European union is a wierd amalagamation of nations which has achieved currency and monetary union with no poltical and fiscal union. The nations are practically free to persue their fiscal plans with high budget deficits and debts without much restrictions from the European Union or ECB. Consequently many nations(Primarily the PIIGS - Portugal, Ireland, Italy, Greece and Spain) spent their way to prosperity for many decades till they landed up in the current situation. All these expenditure was funded through sovereign debt issue which was readily lapped up by European banks. For example , Greece debt of about $400 Billion is being held by Greek banks, French and German banks. Hence if Greece defaults , all these banks will have to writedown their Greek govt bonds and would not be able to borrow using the bonds as collateral. Also,there could be an attack on Italy and Spain sovereign bonds(by short sellers) leading to sudden increase in yeilds for these bonds to the level of junk bonds. All these events could lead to meltdown of Euro financial markets which in turn would lead to meltdown of world financial markets.

Thirdly , Since Greece shares the same currency as other Euro nations , it is not free to devalue its currency to emerge out of this situation strongly like ASEAN nations and Arzentina . Neither  it can exit from EU so easily to launch its own currency.

So , whats the solution?

Greece Default is an inevitable event due to hopeless situation in Greece - economic depression, high unemeployment, lower tax collection, high labor rates and non-competitive economy.

Disorderly Greece default is not a feasible solution as it will lead to the above mentioned catastrophic situation of Euro zone meltdown . The only solution is a managed and or orderly default. EU leaders like Germany and France are trying their best to find a way for orderly default , e.g. debt restructuring of Greece debt when banks/lenders may have to write off half the Greek debt of $400 Billion, recapitalizing the Euro banks so that they could withstand the partial writedown of Greece as well as other PIIGS nations debts.

The time is running out on Europe and next 3-4 weeks are very crucial for reaching a conclusion on the blueprint of orderly default and start executing the same. EU leaders like Merkel and Sarkozy(Gernan and French leaders) have pledged to come out with a blue-print on Euro banks re-capitalization in next 3 weeks today. However , this may solve the Euro banking crisis but is not going to be the silver bullet for solving Greece and other PIIGS sovereign debt crisis. That could be done only through Greek debt restructuring and making the Greek economy competitive through rationalization of Euro currency exchange rates and Greek labor costs or through orderly exit of Greece from EU. Similar steps along with reigning in fiscal deficits and spends needs to happen in other PIIGS nations too.

Whats the implications for other emerging markets like India and retail investors like us ?

These are very uncertain times for the equity markets all over the world including India , especially October and November. Its impossible to predict the market moves in next 4-6 weeks. It could go either ways sharply depending upon how the Euro leaders behave and execute their plans.

Indian economy is also getting saddled with new problems , apart from inflation and high interest rates like collapse of new capital investments, Industrial production(measured by IIP)slowing down ,downgrades of earning estimates for leading blue chip sensex companies and policy/ reform paralysis at the central govt level.  However , these are short term hiccups with silver lining already appearing in the dark clouds like inflation predicted to go down with better monsoon and commodity price cotrrections as well as Govt. planning to come out with reforms/policies in winter sessions. Long term India growth story with 14-15% nominal growth rates(7-8% real growth rates) in the next few decades is still very much intact.

Value investment gurus like Graham and Warren say that the time of uncertainties are the best times to invest in equities. This is an opportunity to buy fundamentally solid businesses with sustainable competive advantage with competent management as most of the quality stocks are available at attractive prices. Fundamentally solid companies like BHEL , REC(Rural Electric corporation), Bank of Baroda, Axis Bank, L&T, GAIL and Jain Irrigation are trading at near 52 weeks lows at an excellent discount to their intrinsic long term values . Invest with 3-5 years horizon to get handsome gains.

In short term(next 3-4 months), market could  get worse (due to unfolding global events in Europe) before it gets better .Hence , keep some funds(15-20%) in cash or other liquid investments over the next few months so that you could buy selective stocks at every dip, using those funds .  Invest with 3-5 years horizon as the prices are attractive which will ensure good "margin of safety

Happy reading and Investing.

Cheers
Amar

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Developed world at the cusp of recession - Implications for Indian markets

  The first world consisting of developed nations  - US and west Europe - are at the cusp of recession again . This time not due to recklessness and greed of private sector (mortgage companies and investment banks) but due to profligacy and extravagence of the goverments. Unthinkables like developed and rich nation governments teethering at the edge of bankrupties are happening these days. These are interesting times for everybody as these changes herald the beginning of the new pecking order when the economic power of the developed world is waning and that of new emerging economies is surging.

As we speak , Greek govt. could be at the edge of default again just after a year of being bailed out by European Union. The yield of 2 year Greek govt. bonds shot up to a new peak of 57% as Euro-zone threatened to stop the next installment of emergency loans this month if Greece doesn't meet the conditions set for these loans. Next 2 months-Sep and October- would be critical for survival of Greece. Any Greek default could have have a snowballing or contagion impact on other european nations at similar brink of debt crisis like Spain and Italy.  Lately Italy, one of the G-7 nations has surprised the market by its debt woes as it struggles to service its $3 Trillion debt(>150% of GDP).Even France would be hit very badly as the leading French banks like BNP Paribas and Societie Generale have huge exposure to Greek bonds and Greek banks.  All these nations including Greece are too big to fail because of the contagion effect. The future of Euro and European Union is at a big risk with a good chance of weaker southern european economies like Greece, spain, Portugal and Italy shown the door on Euro.

US has its own set of economic woes which is not showing any signs of abating. S&P recently cut its debt ratings to AA+ from AAA which led to a market shock. The enonomic growth in the last quarter(Q2 of 2011) was almost zero at 0.3% and payroll/ employment generation in August was almost nil . Some of  leading economic indicators like ISM's(Institute of Supply Management)manufacturing and production index showed that these sectors were is at the edge of contracting. Conference board's Consumer confidence index has plummeted to the lowest level after April 2009 levels which is bad for a consumtion driven nation. Obama proposed a spirited $450 billion job creation plan.However,the impact of the same would not be seen till mid 2012

These two risks - slowing US economy and Euro zone debt crisis are the two biggest ones which could lead to world economy going into a double dip recession again.

Whats the implication for Indian economy and Indian market?
Well, its short term pain and long term gain. Lets understand how?

Indian economy is unfortunately not isolated from the shock impacts of the potential recession or debt crisis of the developed world . Its primarily because of two reasons . 15% of India GDP is still tied up to exports- IT, Textiles, Gems and jewellary etc. Secondly , FIIs who have become the biggest players in the stock market become jittery and risk averse when we have any world crisis and start shifting their funds into safe havens like dollar or Gold. This could lead to short term shocks in Indian markets when market could go further down.

However, in medium and long term(within 6 to 9 months), Indian markets should show a robust rise again as no other economy(except China) is showing such a steady growth of 8% in these conditions too. Good news about India is that inflation should come down by Nov-Dec due to food prices coming down after a good monsoon and commodity/ oil prices coming down due to global slowdown. Govt seems to be awakening from Policy and reform paralysis as its is trying to shove a few key economic bills through the monsoon session. The interest rate increase cycle has almost come to end with RBI not set to increase the interest rates by more than 0.25% this year. Most of the domestic bad news of inflation and interest rates have already been baked in the current stock prices. All these good news coupled with the fact that there are not too many options(fast and steadily growing economies like India)will pull back the FIIs towards India in medium and long term.

Whats does it mean for Indian retail investors??

In short term(next 3-4 months), market is definitely going to get worse (due to unfolding global events in Europe) before it gets better .Hence , keep some funds(10-20%) in cash or other liquid investments like Gold ETFs  over the next few months so that you could buy selective stocks at every dip, using those funds . Investing 10% of your portfolio into Gold ETFs(exchange Trading Funds) which are mutual funds tracking to the price of gold and very liquid, would be a wise idea as Gold is considered as safe haven in times of uncertainty and hence shows steady appreciation.

In medium and long run , we should continue to be very bullish about Indian economy and Indian stock markets. This is an opportunity to buy fundamentally strong businesses with sustainable competive advantage with competent management as most of the quality stocks are available at attractive prices. Buy in installments at every dip over the next few months .Invest with 3-5 years horizon as the prices are attractive which will ensure good "margin of safety".

Reminding again what  Warren said " Be greedy when everybody is fearful and be fearful when everybody is greedy". Be selectively greedy over the next few months.

Happy investing

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