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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Foundations of the great Indian Bull run are being laid now

 Hello readers,

I continue to be a big and unabashed fan of the long and medium term potential of Indian economy to beat all the other nations hands down in the coming few decades , despite our political leadership and bureaucracy. 

As we speak the foundations of the great Indian Bull run are being laid now in our economy and markets. Where in the world do we find so many bullish factors together- 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. These factors  would ensure that we will continue to grow at an average growth rate of 8% for a few decades, which will translate into nominal growth rate(real growth rate + inflation) of 14-15%(assuming 6-7% of inflation). This in turn would ensure that the Indian economy would double up every 5-6 years (@12-14% Compounded Annual Growth rate(CA GR) for next 2 decades. This will make the Indian economy a $20 Trillion by 2030 (>10 times the current size and bigger than current US economy size@$15 Trillion). These numbers and trends are almost unanimously agreed now by various studies of the big banks as well as international agencies.

Though I am a long term investor who focuses on long term trends/ predictions of the economy/ market and the businesses, I would dare to venture into the medium term forecast now 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 35-40% of returns in 2013. 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. 

The current economic woes of low growth rate(5.5% growth) , high inflation etc 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 this, the “best of class” businesses in India , especially in rate sensitive sectors who have been badly beaten down  in last 2 years (like banking and finance , automobiles, capital goods, infra, etc) will do very well in terms of earnings growth. Certain businesses in domestic market centric sectors like retail , pharma and energy will do very well too. Most of my investing companies/ business , like the ones mentioned in my 2012 forecast article(published on 31^st Dec 2011) are from these sectors(the best and bigger ones among the sectors). They have already given me 30% YTD returns which is not bad, considering the uncertain environment domestically and internationally.

The secret behind making money in next 2 decades in simple. Select the best few among the fundamentally sound and long term potential companies/ businesses (10-15 companies/ businesses) with durable competitive advantages, aligned to the India growth story, run by competent and trustworthy management and available at attractive prices. Keep on investing in them in every significant price dips so that you could create a market beating and low risk portfolio. Another key secret would be to do your own homework and not depend upon the market intermediaries/ brokers’ for their advises. Lastly, play among the large caps(> $2 Billion or Rs 10,000 crore of market cap/ turnover) as they have the potential to weather economic storms and sail through market tempests.

Happy investing .

Cheers

Amardeep

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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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