Friday, December 30, 2011

Stocks 2012

(My annual piece for the year end issue of the Dalal Street Journal) 2012- A long year for stock markets 2011 will go down as one of the most frustrating years for the Indian markets. It also is a year when the India story started to sound less than convincing, to global investors. It is also the year where the supply side constraints have kind of imposed a lingering consumer price inflation which is stubborn and the RBI has tried to hold it down with over a dozen interest rate hikes. Alas, the interest rate hikes seem to only have added fuel to the fire. A panic stricken RBI has freed interest rates on savings bank accounts leading to a free for all within banks to grab deposits. Liquidity has dried up so much that even SBI is offering near eight percent returns on deposits for just one week! The PIIGS problem in the Euro has awoken the world to the evils of living beyond one’s means. However a conclave of the wise men of the Central Banks of Europe and a few countries are putting up a brave front and offering to pump in more of the printed currency. Is this going to turn the markets around or is it a golden opportunity to exit? Reason supports the latter and hope supports the former. Now, Central Banks are resorting to window dressing! There is a fair chance that the world is heading to a kind of stagflation (with Central Banks printing more money and producers not producing more). It may take a long time to unwind, but looks like we are headed out there. Every country’s finances (barring maybe a China here and a Russia there) are in bad shape. Political survival worldwide seems to be the excuse for fiscal profligacy. Indian economy continues to grow on the back of strong consumer demand. Consumer still has his pockets full thanks to services growing at a decent clip and rural India enjoying the benefits of high farm produce prices. In addition, government freebies (whether it is NREGA from the Centre or other state sponsored freebies) give more thrust to consumer muscle. The banks have also joined the party, with auto loans being given at ridiculously low interest rates of six to eight percent when SME’s are paying over fifteen percent . Add to that the liquidity crunch and the weakness in capital markets, supply bottlenecks grow whilst demand continues to keep rising. A natural outcome is inflation. Over a dozen successive doses of misguided interest rate hikes by RBI has only fuelled inflation rather than taming it. Indian politics has done nothing to encourage investment, being hit by one successive accident after another. Commodity prices will remain soft so long as global economic growth is weak. Gold and silver continue to shine as excess money chases safer havens. The US dollar is the ‘last man standing’ when it comes to currency, thanks to the Euro tottering. In all this chaos, our stock markets have held up remarkably well, with valuations still in excess of fifteen times earnings (that will perhaps fall in the next year). Whilst a one year picture does not look very good, the Indian market show, if we measure it from the bottom of the Lehman crisis, is fantastic. Yes, traders have not had a good time and luck with market timing perhaps had more than its fair share in the way we measure our gains from investing. Fixed income instruments are offering interesting returns of eleven to twelve percent on AA rated paper. SBI is offering eight and a half percent returns on one week money! Short term money is as expensive if not more as long term money as companies postpone projects due to fund raising constraints. Perhaps, one to two year returns on these will beat stock market returns. For stock market returns to be good, we need falling interest rates. This gives us a great option to buy tradeable fixed income paper now and sell it when interest rates fall (will they fall significantly is a debatable issue).I will stay invested or add to Gold. Equities are yet to turn interesting. Perhaps a decline to BSE Sensex levels of around 14000 or so would make it more value investment than now. In the absence of long term leveraged options, trading in volatile markets is going to be tough. I will still remain invested in stocks of companies focused on domestic demand and having high (preferably over thirty percent per annum) Return on Equity (ROE). The upside seems capped for a couple of years at least. Fixed income returns at eleven or twelve percent per annum look all set to beat equity returns over the next couple of years. Unless of course we have a great fall and can then buy in. R. Balakrishnan (balakrishnanr@gmail.com) December 6th, 2011

Saturday, December 17, 2011

Financial Planning-

(An article in the Economic Times, by an 'expert' set me thinking... Financial Planning sure is complex.. The article went round in circles and ...) This article appears in the latest issue of Moneylife FINANCIAL PLANNING OR ADVISE? CHOOSE CAREFULLY.... Recently I was reading an article by an expert on ‘Financial Planning’. It was amazing and an eye opener for me. Apart from talking a lot of gas, his expert advice stunned me. In brief, he said that everyone must save one third, spend one third and the balance one third (all of “NET income”) can be used for meeting debt repayments. Suddenly it struck me. No wonder I can’t plan for myself. In all my years, I struggled with such a poor income that I had to foolishly spend almost ninety percent of my “NET” income on useless day to day things. Only if I had received this sound advice when I started my career? By now I would have been filthy rich. Whether I would have physically survived is a different issue, considering that most of my expenses were towards daily needs. Of course, if you earn enough just to make ends meet, you are of no use to anyone in the financial services industry, since you cannot generate enough money. I also did not have enough borrowings to meet the criterion of having to use ‘one third of my net income’ to be used for repayments of loans. I borrowed very late in life (since in my early days, I did not have enough of margin money to put up as my skin in the game). Also, to keep my expenses within one third, useful hints included “Keeping a limit on unavoidable expenses”, “negotiating”, “bargaining” etc., In “Negotiating” it included such day to day expenses like “room tariff’ in case of hotel bookings etc., The piece also included some hints on using online shopping. By inference, financial planning appears to be a tool for the very high income earner only. Spend restricted to one third of ‘Net’ monthly take home pay. Save at least one third of ‘net’ take home. Does it mean that in reality I save more than one third of my gross? Also, what about my personal situation? Does the one third rule hold good whether I am single, double, have kids, no kids, have house or not, ..? What if I cannot live within one third of my net salary? Does it mean that financial planning is not for me? I always think that if you have to ‘plan’ something with a calculator, it is not worth planning. Salaries and prices keep changing, needs keep changing. So, savings for me is actually a residue. If you earn enough, then you put away something regularly. Now we have a plethora of choices, so I make mine depending on my greed and stomach to take risks. Of course, I have goals. Those goals certainly depend on what I earn and what I can spare. I think one cannot have a goal and then work out the finances. Things have to move from the realm of possibilities to certainties. Only then will I aspire for something. Surely, if I do not save enough, no planner can help me reach a dream. A dream has to be within the boundaries of probabilities. Yes, maybe I may need help in choosing a reasonably good path to get there and a financial advisor may help. Should I make a distinction between the role of a financial planner and a financial advisor? I think it becomes absolutely necessary. My planner should not be compromised because he is also an authorised seller of some product and he gets a commission from that. It is essential that I pay my planner a decent sum so that I get good help with my finances, rather than rely on some “one third” nonsense that I read in the papers. A good financial planner will start with what I have, what I can expect to earn and save rather than ask me what I want and pre-decide what I should save. If he listens to me, prods me and guides me, he has done his work. I can always turn to an advisor for choosing a product or do it myself. In this way, I do not dilute the quality of advice my planner gives me. I think this is extremely important. I do not like those planners who offer ‘planning’ for a fee of nothing to a thousand rupees and then send me forms of mutual funds and insurance products or bonds etc., I want a planner who does not use a silly template and then classifies me as ‘moderate’ ‘aggressive’ or ‘foolish’. I want him to spend time with me, understanding what I have and what I need and giving me paths to choose. That would be the best thing a ‘planner’ can help me out with. I clearly think that the planner and advisor should be separate persons, in order to avoid any conflict of interest. It may be worth having an annual contract with an advisor, where we pay him an annual fee for spending some time with us, holding our hands in money matters and then guiding me. Here, I have to change my mindset about getting ‘free’ advice. The person, who gives me free advice, has no commitment and I cannot hold him responsible for anything. But one thing is clear to me. Financial planner and financial advisor are two separate persons, not from the same organisation and I need them both, perhaps. November 26th- 2011

Sunday, November 27, 2011

Buying the BEAR-

(an edited version appeared in today's Asian Age/Deccan Chrnomicle) GETTING BULLISH I do not know if we are in a bear market in the ‘technical’ sense of the word. However, it does seem that people think so. In the last two to three years, post the Lehman crisis, retail participation in stock markets has been diminishing and there is a marked shift of new money to gold, fixed deposits, bonds etc., Stocks and real estate seem to have been pushed to the corner. We tend to ignore equity investing and resume only after the market appears visibly to be in a bull orbit. By then, we would have missed many opportunities. It is said that bear markets correct not only stock prices, but also attitudes and philosophies. People always want to ‘get rich’ NOW. Stock markets used to be the favourite place for attempting this. People are now looking for the next Holy Grail, having burnt fingers in real estate and stocks. The boom in silver followed by a sharp correction shook off a lot of hangers on. Gold has its faithful, but is more a repository for capital protection and an insurance against a shrinking economic globe. As Indians, in addition to the loss of any viable investment options (that can help us to ‘get rich quick”) we are also socked in the gut by inflation which hits us each time we open our wallet. Recognising that, the government has reduced the size of the new one rupee coin so much that you mistake it for a fifty paise coin. It is symbolic of the erosion in the purchasing power of the rupee over the last three years or so. So, having resigned ourselves to below inflation returns from bonds or fixed deposits, we have now turned our attention to our spending habits. We look at where we can cut or totally eliminate expenditure. We are either worried about preserving our money or, sadly, in many cases, reconciling ourselves to a diminished lifestyle. Many are also sceptical about “SIP” in equities, not having seen much return or simply because of the phase of investments they are in. On top it, the wall of worries is brick-lined with falling political and economic stability. Some people I talk to seem to be smug about the stock markets not having ‘bottomed’ yet. I wonder if these people hear someone ringing a bell at the bottom. Everyone seems to be an expert at timing the market. If you are one of those, then read no further. You know when to buy and when to sell and I am sure you are sitting with a pile of money to invest at the right moment. This is for those of us who want to build a ‘core’ portfolio of high quality equity shares for the long term. By long term I mean anything beyond ten years. Does it matter when you buy, if you are going to hold it for ten years? I think it does. For example, if I buy something at Rs.100 and it becomes Rs.1000 in ten years, it is great. I think it is even greater if I could buy it at Rs.60 or Rs.80. At Rs.80, I can buy 25% extra shares in the company as opposed to a price of Rs.100!! Similarly, if we measure the performance of mutual fund schemes from, say, 1996 to date, they have surely done better than the broad indices. So, let us not waste much time wondering whether the markets have bottomed out or if there is a long way to go. Maybe when this decade is over, the Sensex may still be at 22000 or so. We just have to check the prices of some quality stock like Hindustan Unilever or Cummins or Colgate etc a couple of years ago when the markets were at 21000 and today when the markets are at 16000. For example, Hindustan Unilever was Rs.214 when the Sensex was 20,325 in end January 2008. At the point of writing this, the Sensex is around 16,000 and Hindustan Unilever is around Rs.390. Do the math yourself. Please do not think that Hindustan Unilever is my top pick or that I own the stock. I am giving a couple of names of what I think are high quality stocks, with consistently high return on equity (ROE). I am sure that you can give me a list of stocks that have also destroyed wealth over time. The thing is that equities are the only asset class that can deliver long term value. Real estate or gold give far lower long term average returns. What happens in gold or real estate is that we see sudden spikes of sharp appreciation and very long periods of stagnation. If we take the long term averages (let me say thirty years as an example), stocks would definitely have given the best returns. In a bull market, we trade prices and our chances of success are fifty percent. In markets like these, we can actually ‘invest’ in stocks of companies we believe we like and will remain profitable over the next decade or more. Even if the economy grows at five percent and inflation remains at ten, there is every reason to believe that domestic spending grows at fifteen percent. Consequently, companies that cater to this demand should grow at this pace. Do not shy away from this asset class. R. Balakrishnan (balakrishnanr@gmail.com) November 22, 2011

Don’t shy away from investing in equities | Deccan Chronicle

Don’t shy away from investing in equities | Deccan Chronicle

Saturday, November 26, 2011

Company ShareholdersRobbed (CSR)

C S R - Three dangerous alphabets in India. The recent move by the government to coerce companies to contribute compulsory amounts to vague charities in tne name of something called 'corporate social responsibility' a term created by parasitical elements in society. “Altruism is the doctrine which demands that man live for others and place others above self. “No man can live for another. He cannot share his spirit just as he cannot share his body. But the second-hander has used altruism as a weapon of expoloitation and reversed the base of mankind’s moral principles. Men have been taught every precept that destroys the creator. Men have been taught dependence as a virtue. The above passage is from Fountainhead, by Ayn Rand. A listed company belongs to thousands of shareholders. The government cannot pick the pockets of all of them by passing a law on CSR. Let each shareholder get the full payout and he will decide whether he wants to give to some parasite or not to give. It is his money and the government has no right over it. Taxes are already a burden on the efficient, that go to help the parasites in the name of altruism or social responsibiity, for which the person who pays any tax, gets nothing back from the government in return. Nothing more than what a person who pays no taxes, gets from the government. In fact, the person who pays no taxes, often gets more out of the system than the honest tax payer. CSR also has its other problems. Charity in Indian companies is used by owners and CEO's as a tool for personal reasons and nothing else. Often, you find the spouse of the promoter actively engaged in some charity, at the expense of the corporate shareholder. All that the promoter/CEO wants is coverage on page three or whatever as a lionheart. He may not lift a finger to help a dying employee, but will espouse the cause of saving some wild animals. I have seen companies force business associates to donate to the favourite charity embraced by the promoter/CEO. If the associate does not give, he gets not business! CSR will be grossly abused the the CEO/Promoter. CSR should not become law. It is daylight robbery of the shareholder whose pocket is picked by the government. I urge people to raise their voices on this issue. The government is trying to force the private sector to do things that it should be doing itself. There is income tax which is collected by the government by force of law. That is more than enough CSR. Why is agriculture income tax free? And there is no cap on agriculture income. Similarly, people who make money on the stock markets (genuine unearned income) get their money totally tax free and are not forced to give anything. The Indian shareholder gets another kick in his undersides through the evil of CSR.

Monday, November 21, 2011

Liquid Funds RIP??

(Had written this piece for Moneylife, which got published today. Interestingly, SBI has fired the first big canon, with an 8.5 percent return on a daily basis, for deposits over a crore of rupees) For corporates, it marks the end of having to put money in liquid funds. And of course, it screws up bank balance sheets, since in addition to high interest rates, these deposits will attract statutory liquidity demands) The RBI will now become like the dog that ‘did not bark’ in the Sherlock Holmes story. Thirteen back to back nudges and inflation is still strong. And we have the funny situation where a car loan is cheaper than a personal loan which is cheaper than a farm loan. It seems that the banks know that farm loans generally run the risk of remaining ‘outstanding’ for times to come. The RBI has done another dangerous move by freeing up the interest rates on Savings Bank Deposits. In an earlier argument against this, I had said that the RBI should have in fact made this zero. Now, RBI has ensured a rat race amongst the banks, to fight for the savings bank moneys. This is great for the individual who keeps his money with banks in savings banks. Unlike in the past, we must now ‘shop’ with banks for higher and higher rates. Yes, the RBI has said that for identical amounts, the banks cannot differentiate in the interest rate offered. That does not mean that we cannot get extra freebies from the bank. We should club our accounts together and use it as a bargaining tool. In case they refuse higher interest rates, we can always bargain for some other freebie. Now we will also have to be more combative and watchful with banks. They will try to make up for the higher interest rate by imposing a charge for virtually everything. Perhaps, this is where we should be alert. It could mean imposing charges for anything- from number of cheque leaves to imposing charge on a visit to the branch for anything. Perhaps, they will also start delaying clearing credits in order to enjoy a ‘free float’ on our money. While it looks good for the depositor, what about the investor? Not very good, I think. They will perhaps put up a brave front and say that they will hike their lending rates also. But, wait. Why would any blue chip corporate borrow at usurious rates? Maybe they can borrow elsewhere. This would force the banks to extend credit at high rates to riskier customers. Generally, when interest rates are high (both ways) the net spread a bank makes is higher than when interest rates are in single digits. So, initially, it would seem as though the banks would make higher profits. However, my call is that the banks will be in a rat race to mop up deposits and end up paying high costs for the same. Lending will deteriorate in quality as the banks will seek to deploy the high cost funds and earn a spread on it. I would generally keep away from bank stocks for some more time, till RBI gets its act together. A high portion of Savings Bank and Current account deposits (CASA as is popularly known) gives some banks an edge. For instance, SBI and HDFC Bank have CASA deposits of nearly 48% of total deposits. Now, the interest costs for these two banks will rise much higher than for banks which have a lower proportion of CASA. What will be interesting is to see what happens if and when the liquidity in the domestic markets ease out. Today, tight liquidity has pushed up short term borrowing and lending rates so high that there is not much gap between the interest rates on a thirty day loan as opposed to a ten year loan! Liquid funds give returns almost in line with yields on ten year government securities! Once liquidity eases, will the return on liquid funds crash? Logically, they should. Then we will have the funny situation of savings bank returns beating liquid fund returns! And with banks being forced to pay interest on ‘daily’ balances, the savings banks should replace the liquid funds, for the individual investor. We need not go to liquid funds at all. It saves us the bother of filling forms for purchase and redemptions. Now, interest rates are going to play an important role in all financial advice. We are perhaps entering a phase where fixed returns are going to be more tempting than equity returns, as companies struggle to grow in the face of weak capital markets, flagging demand and high resources costs, combined with run-away wage costs. The RBI has set in motion a run up in interest rates that will benefit the saver in the short term. I only hope that the lending rates do not go so high that it kills borrowing and borrowers. For the PSU Banks, given their stupid system of evaluating themselves based on the size of deposits, the RBI has put them in to ‘interesting’ times. R. Balakrishnan October 26th, 2011 link to the moneylife article http://moneylife.in/article/regulations-high-cost-of-higher-interest/21578.html

Saturday, November 19, 2011

EUROPIGS

(Had written this for a friend's magazine about three weeks ago) When an individual borrows beyond his ability to repay, the impact is perhaps limited to the person who lent him the money. If a large number of individuals default to someone, it could set off a chain of defaults, especially if the lender in turn is not able to meet his commitments. So far, we are talking about localised problems. A solution can be found by the local bank regulator. However, what happens when a nation defaults on its sovereign debt? And the buyers of the debt (lenders) are banks and entities spread across the globe? And what if the borrowing nation is a part of the unique set up called “Euro”? Greece has just defaulted. Portugal, Italy, Spain etc are in queue. The lenders have been forced in to a ‘settlement’ where they have to forgo fifty percent of what they ought to collect from Greece. The balance has been ‘rescheduled’ and everyone hopes that Greece will be able to manage. Will Greece manage even this renewed promise? Looks tough, indeed. A nation that has spent money that it does not expect to have and where tax evasion is rampant, will find it difficult to generate any budget surplus. At best, they have bought some more time. If they cut down drastically on public spending or on public sector jobs, it would cost continuance for the existing government. Deficit budgets are addicting. Giving freebies to public, to win votes, looks like an easy option for those in power which is not strong or solid enough. The Euro, as a currency looks very shaky. One of the tenets of the countries joining the Euro was that each member country would have financial discipline ensuring budget deficits within a limit of three percent or so. In a world that is looking down the barrel of a recession, countries like Portugal, Greece, Italy and Spain (Collectively referred to as PIGS) have borrowed beyond their means. Domestic economies were on a bubble of real estate and now are facing problems of inflation, unemployment and very weak economic growth. Under such a situation, it is unlikely that fiscal discipline can be maintained unless public spending is curtailed. It is a Hobson’s choice. If governments spend, then fiscal discipline is shaken and if they curtail spending, domestic economy looks shaky. Presently, Greece has been ‘bailed out’ by other members of the Euro, like Germany and France. It is doubtful whether these countries can continue to support wayward fellow Euro nations. Economic consequences are but one aspect. The other scary fall out is one of return of ethnic boundaries, with the Germans wanting to have nothing to do with the defaulters and the German citizens opposing their government bailing out irresponsible fools who have spent recklessly. If that happens, it could lead to xenophobia, trade boycotts, manned borders etc., And surely it could mean a curtain call for the Euro as a currency. Sure, none of the 17 members want this to happen, but here we are dealing with fragile emotions and not long term thinking. The defaulter would nurse a grouse that he was bailed out at the cost of someone else monitoring his nation’s finances and that bailed out nations have lost their ‘economic independence’ to the Euro. For the nations that bail out their fellow members, the stakes are high. If PIGS default and shrink their economy, where will Germany and France find outlets for their produce? It is a vicious cycle. I produce more and sell to you. You borrow and prosper. When you cannot repay, it is up to me to see that you are still able to have money to buy my goods. Therefore, I have to bail you out, otherwise I also suffer. Wonderful, isn’t it? One big outcome that can happen is a global contraction due to fear of breaching economic discipline. People with money will not take risks. Risk capital will become scarce. If further bail outs are called for and do not happen, there could be a banking collapse. If there is a bail out, then there could be contraction because of forced budget constraints. Neither option looks good. The Euro crisis is far from over. No one knows how it will play out. Side shows could be strengthening of the dollar and gold relative to the Euro. The one ‘X’ factor in this drama could be China. Sitting on a pile of money, they can step in to the aid of the Euro defaulters with stiff trade demands. This would hasten Chinese economic growth. China now faces the problems of the rich. To keep prosperity growing, you got to help the poor so that they can spend it on you. For India, it is not a good development. It would mean shrinkage of availability of risk capital. If global trade shrinks, it could dent the rising export growth. As the Chinese say, we are headed towards ‘interesting’ times.

Tuesday, November 15, 2011

SEBI vs. MUTUAL FUNDS

http://www.business-standard.com/india/news/investment-advisors-rap-draft-sebi-regulation/455133/ SEBI has taken on the mandate from the Insurance industry to kill the mutual fund industry. The investment advisors are soft targets and the regulator screws them.

Saturday, November 5, 2011

Hastinapur in Argentina!!

This is amazing..... http://latinamericanaffairs.blogspot.com/2011/06/hastinapurcity-of-wisdom-in-argentina.html

Sunday, October 30, 2011

(This is from today's Deccan Chronicle / Asian Age) FIGHTING INFLATION Protect returns from inflation Oct 30, 2011 - By R. Balakrishnan . .. The government is finally admitting that inflation is a problem that is likely to stay with us for some time and that it expects relief only by 2013. But the government also chooses to tell us that the ‘real’ interest rate is ‘positive’. Yes, if we believe that inflation is less than the post-tax interest return of around seven to eight per cent, we get on most fixed income (fixed deposits, bonds etc) options. For the individual investor, inflation is a post-tax impact. Hence, I will knock off the tax component of the interest income. At this juncture, the RBI has completed its 13th consecutive fiddling with upping interest rates. This would erode the value of my existing investments in fixed income paper. There is also a possibility that if inflation stabilises somewhat, there would be a hike in diesel prices, which would once again lead to an all round price hike. So, there is a constant fear of having to pay higher prices for the same goods. At the same time, investment confidence seems to be lower. This means that output may not grow much. Are we poised to enter a period of ‘stagflation’? Stagflation means rising prices with no growth in supply. This is scary. Suddenly, I find that there is no ‘real’ return but actually a painful erosion of wealth that is taking place. My daily expenses are galloping at a rate higher than the return I can get from fixed income investing. The broad market indices seem to be faring even worse. I keep reading about how quality US stocks are available with a dividend yield of five to six per cent. I do not see any Nifty or Sensex stock giving me that kind of a return, yet. So, should I put my money in to global stocks? The temptation is high. Global stocks would mean that I also take on the risks of the strength and weakness of the Indian rupee. Presently, the Indian rupee is at a low point. How low will it go? I think that as the world economy slips, the relative strength of the rupee should be higher. In other words, I am likely to get fewer rupees for a dollar. Will the global stocks appreciate enough for me to get a return that sufficiently protects the rupee return? The government does permit an annual limit of $200,000 per individual to be invested in any global market. This is a substantial limit (almost a `1 crore per head). Yes, gold has given positive returns, but how far will it go? Yes, gold and equities ought to have an inverse relationship. If economies do well, we would like to own equities and enjoy the growth. So I do not have to ‘run away’ to buy gold. Of course, there are many other commodities like copper or silver where also one can invest. So many worries are due to uncertainties caused by global economic turmoil, Indian economic slowdown and inflation. In the domestic markets, I will stick to companies which have high consumer driven growth. Consumer non-durables and couple of private sector banks that do not have the PSU culture and have consistent grow-th, clean balance sheets and low level of problem loans. In fact, even some of the large NBFCs look good. Unfortunately, we cannot have a play on food prices due to absence of producing companies in the listed place. That would be the place where I want my money to be. Depleting res-ources, increasing activism and rising prices are a potent combination for sharp gains.

Saturday, October 29, 2011

THE DAY OF THE PIGS

The Greek can continue their wayward ways. The write off of half the sovereign debt is proof that the world want's to pretend that all is well. Lend the Greek more money. They can buy more stuff produced in China and elsewhere. If you call their bluff, make them default, then their buying could grind to a halt. Not very good. How wonderful! Mortgage finance all over again. Lend so that they can buy. Lend more and they buy still more. Finally when they cannot repay, write off some. The balance? Well, we will reschedule it for tomorrow. Now, there is clear hope for the other PIGS that they can continue with their wanton borrowing and not worry about default. No one is going to take them to the poorhouse. So what does it matter whether the credit rating is C or D? Investment bankers in search of bonuses ensure that sovereign paper can be placed with some sucker or the other. You hold my hand, I hold yours and we play ring-a-ring-a-roses. Germany is worried. To Euro or not to Euro? How long will they continue to pay for the excesses of their euro brothers? UK is breathing easy. No PIGS to bail out. Of course, their bankers will want to get in to a piece of the action. The famed "City" paychecks have got thinner. Play East India Company all over again. China is watching and wondering. How long can they keep their riches to themselves? If their buyers go bankrupt, what happens to the factories that keep shipping goods under every label? Publicly they say that they will lend only to Germany. But, if Italian paper or Spanish paper comes floating around, with everyone having had their fill, it is a Hobson's choice. Banks who bought the lovely Euro paper, now find that they will need a Basel III and IV to bring capital adequacy to the levels which the Japanese originally wanted (zero). The funny regulations will make you take a hit if there is a default. But, if you take a forced hair cut (there ought to be a better term for a 50% robbery) then the accounting rules let you remain healthy. If you have terminal cancer, all will be well if we change it's name to 'flu'. That is what the banks are doing. John Maynard Keynes had famously said : "If I own you a pound, I have a problem: but if I own you a million, YOU have a problem". India has a big lesson to learn. Default is fashionable and in fact if we default, we get better terms from the world. There is no need to pledge gold with someone to meet some stupid financial commitment. After all, the investment banker who made money when he arranged for the loan, is now looking for another fee when he restructures the loan. And if we default, we can cut our external debt by half! Think about it. Greek have a new anthem. Courtesy Bobby McFerrin- "Don't worry, Be Happy..."

Tuesday, October 25, 2011

Selling a college

A business house was faced with a dilemma of whether to keep its business or give it up to the bankers who were ready to hang it. The business house also used to run an engineering college with high capitation fees. The sick unit was being eyed by a rogue politician. Finally, the businessman 'sold' his college at ten years estimated capitation fee to the politician. The politician got a college. The businessman retained his 'sick' unit, squared off his loans cheap and is trying to revive the company. And all of them lived happily, except the bankers who wrote off debts and now have to give new debts that will again go bad. Thus, the cycle of business goes on. One fine day, the college administration will change for the worse. The reputation of the college would take a beating. Unless of course, the politician realises that running a good college is more important than the business of politics, which is ephemeral. Students and faculty are on tenterhooks , wondering if the reputation of the college may be negatively impacted. Let us wait and watch.

Of SBI and other PSU's

(This is from the latest issue of Moneylife. Was written before the downgrade of SBI ) If I own one hundred percent of a company, it is completely my prerogative to what I please with the company I own. However, the moment I invite someone else to become a part owner, then I have no right to do anything that does not enhance shareholder value (in other words, there is no right to do any act which results in the shareholder suffering a loss in value). We have our PSU Banks, where the main shareholder / promoter continuously and consistently destroy value. Right from appointment of a CEO to forced lending money to sectors from which there is no hope of recovery, the main shareholder has been abusing the other shareholders who have foolishly piled on board. I call them foolish, because their expectation that the government will get out of business, is a long way from happening. Of course, investors and brokers say that ultimately privatisation will happen. So, buy it today in anticipation of freedom tomorrow. My thoughts are the opposite. Let freedom happen. Then we can take a call. No one really knows the health of the PSU banks. Each time there is a problem, the RBI bails them out by changing the accounting standards. Investments are categorised in to nebulous buckets called “Hold to Maturity”, “Available for Sale” etc., If there is a valuation problem, it is simply re-labelled. Norms for recognition of bad debts keep changing. Loan re-scheduling is common. Banks like SBI do not recognise pension liability, and instead account for it as and when paid! And our wonderful members of the Institute of Chartered Accountants sign the balance sheets of banks without any qualifications! Their job is to make a comment if there is divergence with generally accepted accounting practices. They cannot keep quiet if there is a deviation and not comment simply because the RBI permits it. The auditors have been appointed to opine if the books are true and in conformity with accounting standards. The rules of the RBI are merely a labelling exercise for the banks. Our RBI thinks that by changing the name of the disease, the state of health is changed! I am also amazed at how a bank like SBI with its few thousands of branches gets audited at all. And to top it all, SBI has a list of auditors, most of whom are not known (whether they have the size and skill sets to audit a bank is another question) who come together and one auditor signs everything! The audit process at SBI should surely be amazing. We all know that SBI owns a few subsidiaries. From the schedule, I can neither make out the number of shares that SBI holds or the value/cost of its investments in different subsidiaries. Banks do not give a list of the investments they hold. Apart from the SLR investments, the banks have a lot of investments that are lumped together in one line. So, how does an analyst make sense of it at all? Automation and technology have made visits to the banks redundant. In this, the private sector banks have clearly taken the lead and they have also learnt to do what it takes to keep the affluent customer happy. Private Banks have dedicated relationship managers, who are there to help you out with virtually anything to do with your account. Many private banks also help out by sending people to your home / office if the relationship is commercially significant. Here is where a bank like State Bank of India has no hope. It will be left with the poor un-remunerative customers in the big cities. The cream of the affluent are unlikely to give the bank a look see unless there are compelling circumstances. Of course, the fact that the government of India uses SBI as its main bank enables SBI to be the largest bank without any effort or a business strategy. All PSU’s, state and central treasuries keep SBI in the pink of health by keeping large balances in the current account. This is evidenced by the high CASA (Current Account and Savings Account Balances that carry no to low interest as opposed to fixed deposits) of nearly 50% that SBI enjoys. It also shows the incompetency of the PSU’s and government departments in keeping money idle and enriching the bank. Private sector today does not keep money idle. They keep money in liquid funds, even if the surplus cash is for a couple of days at a time. So, here we have inefficient government machinery feeding the inefficient banks. In addition, SBI is always at the forefront of any politically inspired financial giveaways, which no self respecting private sector bank would do. Any bank which has issued shares to the public has no right to give away anything for free. We always see SBI at the forefront of all political drama when it comes to loan waivers or opening of branches in unviable locations. The interesting thing that is going to happen is of the merger of the subsidiary banks. Logically, one would expect a huge amount of cost savings, reduction in headcount as well as selling of surplus real estate. It is not happened yet and given that SBI is a bank that even has a union of ‘officers’ it is unlikely to materialise. So, the large ‘hidden’ values are not getting unlocked at all. The bank continues as inefficiently as ever. It is only because of freebies in the form of high CASA, assured government business etc, the Return on Equity (probably the only measure of how shareholder money is used) is in double digits, though below the large and efficient private banks. The other thing that I look at is the “executive” pay at the PSU Banks. If someone is good, why should he work for that pay? Is he driven by a sense of public service? It is time that the pay for senior executives is on par with private sector. In the absence of parity, I am afraid that either an idiot will run the bank or the corrupt will. This factor is compounded by the presence of unions (including unions for officers” – the management team!) which will not allow one officer to jump ahead of another. I have worked in nationalised banks and have friends who still work. There is a set of people who work hard but cannot make any decisions. There is set of people who shirk work and don’t care a damn about anything and the management of the bank cannot do a damn about them. Then there is a set that lines their own pockets by selling out to businessmen who see corruption as an easy way out. Of course, the CEO is subject to all kinds of political pressures in lending decisions. None of the PSU banks have a long term strategy for business and the CEO generally gets appointed at the fag end of his career. His decision making would be screwed up. If he is honest, he is worried about his pensions and will play it safe. If he is corrupt, then he will go berserk and lend to all kinds of sectors. He simply will not be allowed to execute a ten year vision plan. In short, is it worth investing in to the shares of the PSU outfits, simply in the hope of their being unshackled? R Balakrishnan

Saturday, October 15, 2011

Shattered Accounting

(This was published in the latest issue of Moneylife) There is a body called the “Institute of Chartered Accountants of India” (ICA). It is supposed to set standards for fair accounting, transparency in communication of financials to anyone who reads an audited annual report, apart from being obliged to make written comments on any aspect that they find unreasonable or not satisfactorily explained. In law, they are supposed to be appointed by the shareholders. In practice, it is the promoter who appoints and at every AGM there is a routine resolution that is approved by the shareholders. The shareholder is not given any information about the audit firm, its capabilities or its size. The shareholder in reality, has no control or clue about who his auditor his. Over the years, there has been total laxity and dilution in accounting standards in India, in the guise of ‘conforming’ to International Standards. I have been analysing balance sheets over time and I can see the disclosure standards falling dramatically. Let me start with subsidiary companies. In the past, the annual report would have the full accounts, with schedules, of the subsidiary companies. Today, it is missing. If the company is somewhat liberal, it may put up the subsidiary companies’ accounts on its websites. This presumes that every shareholder has internet access. However, unless you sit down with a detailed paper report in your hand, the net does not allow one for a friendly read or enable you to move from page to page, quickly. Companies have abused the internet to upload accounts in various formats that are difficult to read and engage in cross references. Now, one understands that there is a move to make reporting in one uniform language, but it seems unlikely that things will get any better. Why not continue with the practice? I see that the companies have managed to lobby the government, in the garb of ‘green’ movement and move to electronic delivery of annual reports. I do hope that this will not be mandatory. I still love the old fashioned printed annual report. To tell you what the disclosure standards have come down to, let me take the annual report of Reliance Industries Limited, one of the most widely followed companies in India. I read from the P&L account that the sales for the year 2010-11 were Rs.248641 crores. However, what product/s the company sold cannot be fathomed from the accounts. There is no schedule that gives the break-down of the sales. Of course one schedule gives “production meant for sale” listing different products and quantities, but no value. Whether it was sold and what it contributed, the accounts do not tell me. Same is the case with purchases. Manufacturing & other expenses were Rs.211823 crores. The explanatory schedule gives one line saying “Raw Material Consumed” Rs.193234 crores! Wonder what it was? The language used is in the singular, so it must be one mighty raw material indeed! A small item of Rs.68 lakh of lease rent is detailed in this schedule but something that is ninety percent, is dismissed in one line! If I go to the balance sheet, it is very impressive indeed. Net worth of Rs.151548 crores! The net block of fixed assets is slightly larger than this. Investments made by the company is Rs.37,651 crore. If I go to the “Consolidated” accounts, this figure drops to Rs.21596 crores. I see that the company has listed 142 ‘related parties’! It will take expert scanning and working to fathom out how much money is invested in any associate, what stake the company has etc., Also, different year end dates for many subsidiaries / associates add to the chaos. There are three pages in small print which give ‘financial information’ of 120 subsidiaries! The print size bothers me and I give up on the balance sheet. I am sure that RIL discloses everything to the research analysts or on its websites. But the fact of the matter is that in 200 plus pages, the financial disclosures that are mandatory, are not enough to tell you what the company does. This is so different from the past, when there would be detailed schedules from which one could work out the unit costs, unit realisations etc., Today, in the name of saving on postage, printing etc, reporting standards have gone to the dogs. About accounting standards, the less said the better. Companies are allowed to follow different standards if they go to a court of law. Even if they do, it should be the job of ICA to qualify and quantify the issue. They rarely do. The balance sheet of Tata Steel also throws up an interesting thing in so far as accounting standards are considered. The notes to the accounts (page 160 of the annual report) show an ingenious accounting of the interest on ‘perpetual ‘debentures. “c) The Company has raised Rs 1,500 crores through the issue of Hybrid Perpetual Securities in March 2011. These securities are perpetual in nature with no maturity or redemption and are callable only at the option of the Company. The Distribution on the securities, which may be deferred at the option of the Company under certain circumstances, is set at 11.80% p.a., with a step up provision if the securities are not called after 10 years. As these securities are perpetual in nature and ranked senior only to share capital of the Company, these are not classi´Čüed as ‘debt’ and the distribution on such securities amounting to Rs 4.54 crores (net of tax) not considered in ‘Net Finance Charges’.” When the company has an option to repay at the end of ten years, how can it not be considered as not debt for the first ten years? Or is the company so sure of its abilities that it assumes the entire amount to be never repaid? And how can the interest on that not be classified as something else? The company distorts its financial cover ratios if it does not include the amount under interest. Who knows? Maybe after ten years, the entire debt can be converted in to ‘other income’! The other thing that is happening in the name of ‘green’ or ‘eco friendliness’ is the emailing of balance sheets. This is a retrograde move. Unless I have a printed annual report, it is impossible for me to analyse a balance sheet. I would have to take a printout of the soft copies in any case. And the companies do print fancy and glossy annual reports for giving to the fund managers and the media. The above are two broad examples of what our disclosure standards are coming to. Balance sheets are getting difficult to read and understand. This is surely not the road to increased transparency. The ICA seems to be on a mission to help promoters to bring in opacity in the only formal communication that is made to the shareholders. And to think that under law, it is the shareholders who appoint the auditors! I would urge that SEBI look in to the accounting (sub)standards that are currently being followed with regard to listed companies. The ICA ought not to be trusted to bring transparency in reporting. R Balakrishnan September 16th, 2011

Thursday, October 13, 2011

The Colour of Money

(GREAT NEWS: WROTE THIS YESTERDAY. TODAY'S PAPER REPORTS THAT PROPERTY SALES THROUGH POWER OF ATTORNEY NOT VALID. MUST LOOK AT FINE PRINT) WITH A LITTLE HELP FROM THE TAXMAN.. The government rules are cleverly drafted with the support of lobbyists who ensure that black money generation and storage is not disturbed. Gold has been a traditional place to park one’s unaccounted money. Gold, diamonds and other items of jewellery have been the eternal favourites of anyone searching for a way to dispose of the bundles of cash. Apart from money under the pillow not earning anything, cash is also unwieldy. Of course, one can buy land, finished property etc., Land can be easily bought under a Power of Attorney from the seller and never registered. It can change hands several times before it is finally registered. This is a convenient way to park black money. It is not too difficult to keep the document in safe custody with a lawyer (hopefully the lawyer will not diddle your successors out of it, should you cease to be) and ensure that the taxman does not get his hands on it. And land is a ‘state’ subject. It is unlikely that any state government will make Powers of Attorney invalid beyond a time limit when it comes to land dealings. If the tax authorities want, they can plug this loophole simply by saying that the last registered name continues to be the owner for all purposes and that powers of attorneys for land sales are not valid without the attorney holder being registered as the legal owner for all purposes. Most of us today find it difficult to invest even a rupee without a PAN card issued by the tax department. The tax authorities require you to have a PAN card reference if you invest more than fifty thousand rupees in mutual funds. Till May 2011, there was no requirement for anyone to show a PAN card for buying gold or jewellery. One could do the entire transaction in cash. Some jewellers would ask for some name/address and you could write anything there. He was more interested in completing the sale rather than finding out about who you were. And dealing in cash had its advantages. No taxes or levies. No income tax on profits that the seller made. If the tax department ever tried to match the gold purchases with the invoiced sales and tax reference numbers, the results would be interesting. If you hold any gold or jewellery, you are supposed to pay wealth tax on it, subject to some exemptions. Wealth tax is wonderful. If you have any assets (gold, jewellery, automobiles, second or third homes etc) in excess of Rs.30 lakh, the government gets one percent of the excess over 30 lakh because you are ‘rich’. Of course, financial assets (stocks, shares, mutual funds etc are exempt from this). Of course your accountants know more than fifty ways to leave your taxman (with apologies to Paul Simon). You can always get ‘gifts’ from friends and relatives on various occasions and if you have some overseas so much the better. You could even ‘buy’ a prize winning lottery ticket! Now, the tax department has cracked the whip. It says that if you purchase jewellery or gold for more than rupees five lakhs (500,000 Rs) in one go, the seller must have a copy of the PAN card of the buyer. The wordings are very clever. It (Sec 114B of Income Tax Rules)says Every person shall quote his permanent account number in all documents pertaining to the transactions specified below, namely (many things are listed) and the operative one here is: payment to a dealer,— (i) of an amount of five lakh rupees or more at any one time; or (ii) against a bill for an amount of five lakh rupees or more, for purchase of bullion or jewellery: The other thing is that you can buy it in CASH. So, if more than five lakh, if possible you could split it in to convenient amounts. Indian gold imports in this fiscal could be anything between 800 and 1000 tonnes. At $ 53,000 per kg, 800 tonnes would be 2,12,000 crores!! This is almost 18% of the total budget of the government or more than one thirds of the tax receipts!! I do not have figures of diamonds, gems etc. Add those and it could be some mind boggling sums. How much of this is money that has evaded the taxman? Less than half? More than half? CASH as a medium of exchange is encouraged by the taxman. The only limitation is that if you have a business expenditure that is more than Rs.20,000 and in cash, it is not allowed as a business expenditure, unless there is a valid explanation. So, there is no bar on CASH SALES by anyone. So, one must compliment our tax authorities for leaving enough room for tax evasion. It also shows that they are serious about black money. Can we ask for more encouragement? We must also give thanks to bodies like the Institute of Chartered Accountants who help prepare draft legislations, the lawyers who ensure loopholes and above all, the politicians who ensure a way out of all difficulties. After all, who wants to pay tax? R. Balakrishnan October 13th, 2011

Sunday, October 2, 2011

GOLD

(Published in Asian Age / Deccan Chronicle on 2nd October 2011)
In gold the world trusts




Oct 02, 2011 - By R. Balakrishnan



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Share1

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Gold rose 58 times from $19 in 1900 to touch $1,110 in 2010, while the Dow Jones Industrial Average jumped 172 times from $61 in 1900 to $10,500 in 2010.

Today, gold and real estate have become essentials in every investor’s asset creation. But is there a danger that these two asset classes could turn out to be the biggest bubbles in the long run? We all presume that we will be the smart fellow and will bail out before the others. However, mass following, inflation and the action of governments such as constant bail outs and subsidies ensures that these assets keep inflating in value. It is likely that lack of faith in the sovereign as well as inflationary pressures and crowd behaviour could keep these assets on the high for times to come.
Gold is a metal, which has no intrinsic use or value, but it has become a synonym for wealth due to purely emotional or sentimental reasons. In the frenzy of speculative hoarding, it has virtually become a self fulfilling prophecy. If we take the pure extraction cost, it is well under $400 per ounce. However, it has become a store of value and is driven by factors such as the strength of the dollar, the degree of likelihood of an alternative to the dollar as a “safe haven”, the fetish of Indian and Chinese households for the yellow metal and the speculative forces of hedge funds and commodity funds.
The one thing to note is that gold does not follow any predictive valuation model. It is perception and a function of demand, supply, fear, greed and hype. In dollar terms, gold gave negative returns from 1980 to 2006! The quantum leap has come only post 2006.
For Indians, there were some positive returns as the rupee consistently weakened during the entire period. Gold was used primarily as jewellery and as a store of unaccounted money.
A year ago, gold was trading at under $1,300 an ounce. Now it is around $1,700, after breaching $1,800 per ounce and it is now looking volatile. Can it fall further? The key to that lies in whether the global money managers believe in what the US is doing. If faith flows back to the dollar, gold will get sold off or vice versa.
Faith in the US government is perhaps the most important factor that will influence future gold prices. Most governments that have huge trade balances have invested bulk of their surplus money in bonds issued by the US government. The day this faith cracks, there will be a dumping of these bonds, a run on the dollar and a mad rush to gold. Perhaps, there is not enough physical gold in the world to accommodate all the surplus money and hence the governments may not dump the dollar for gold in one go.
For Indians, gold prices are also determined by the exchange rate of the Indian rupee. If global prices of gold fall by five per cent and the Indian rupee depreciate by five per cent, the rupee price of gold will not show any change. So the price of gold in the Indian markets is also a function of the Indian rupee!
Indian demand for gold is a significant price driver for gold. Today, India and China account for nearly 60 per cent of gold demand! An important factor to note is that in spite of the rapid price rise in the last 12 months, the Indian hunger for gold has not declined. In fact, demand for physical gold has also increased due to investment buying through the ETF route.
To sum up, gold has become an important alternative investment thanks to the recklessness of governments. Lack of trust in third parties, perhaps makes gold a good friend. The higher is the mistrust in governments, the higher the payoff in gold and vice versa. Should you continue investing in it? That is your call, depending on how you assess the economic situation and your own investment strategy.

Wednesday, September 14, 2011

Bonds-Caution in investing

(Recent article in Moneylife)

Indian companies are very quick to catch on to any fund raising window that opens. Just when a couple of bond issues hit the retail market and mopped up money, we have a virtual queue of finance companies lining up one issue after another. The fact that they are raising money simply because the market is conducive is borne out by the fact that they announce an issue size of three to four hundred crores, with a right to retain hundred percent oversubscription! This is as vague as one can get about using money. The standard excuse the finance companies offer is that there is business and if I get more money, I will write more business.
We do not know whether the company is geared to disburse all the money it raises. We also do not know at any point, how much the company has borrowed. We have a dated balance sheet with us. In addition to raising money through public offerings, the finance companies constantly tap the ‘private placement’ market for debt. So, the investor does not know how much money the company has raised.
The other important thing is that borrowing money from public has never been easier. I can bet that no investor knows what his money is going to be used for. There was a subsidiary of India Infoline which raised money through this NCD route. Wonder how many knew that the money was for a subsidiary, let alone know what the money is going to be used for? Maybe the offer document had details, but no retail investor has the skill and ready access to an offer document. The finance companies are happily taking advantage of easy money.
I am reminded of the eighties, when there was a craze to invest in fixed deposits of leasing companies, thanks to high interest rates and the fancy incentives paid to investors and intermediaries. The prime lure was the promised rate of return and not the credit quality. I think the same herd mentality is on display and at some point in the not too distant future, there will be some default.
All of these finance companies have to continually keep raising more and more money to keep growing. Their appetite seems to be unlimited. In fact, I look at the reported asset size of some finance companies that have grown at a furious pace and start worrying. Do these companies have the systems and processes in place? Do they have a proper understanding of their customer segment? It is one thing to be a specialist lender in one region of India and another to replicate it on a pan India basis.
This easy access to public money will make some finance companies take unreasonable risks, so that they can deploy the money. With their pockets hot, they will hire in a hurry to cater to ‘growth’, pay unnecessarily high salaries and dilute lending processes and standards. Ultimately, these companies will have to keep hitting the markets on a continuous basis, to keep the cycle intact.
Many of the lending is to the retail segment. Lending against gold is the latest ‘flavour of the day’. Things look fine so long as gold prices keep rising. There are also stories of officials in a bank that took the pledged gold of the clients and sold them off. This can easily happen in finance companies, where they give enormous discretion to their branches and advertise “loan in 15 minutes” etc., Risks will multiply with rapidly increasing headcount.
Ok. We are investing only in those companies that have a good credit rating. Well, for rating agencies, retail lending in India is a new experience. There is not enough of a track record or credit check available, to come to any definite or indicative conclusions about lending. Look what happened to the ‘micro’ finance companies. Data was robust, default rates low. All was well so long as the reach and size was small. No sooner did the resources grow, that the microfinance companies started taking high risks to deploy the money. Multiple companies lent to the same set of borrowers. Ultimately, defaults were the logical outcome of this kind of reckless lending, political interference notwithstanding. Political interference only helped the borrower to default without fear. Otherwise, he required to borrow from Ram to pay Ravi and keep the hat going around. Credit ratings can change over time. Remember, ratings are valid till they are changed. There is no assurance that the credit rating will be unchanged over the life of the debenture or bond.
More important, the bonds are going to give this kind of interest rates for maybe another year. After that, the interest rates should come down. However, your money is stuck till maturity. Secondary markets will not be easy and price discovery will not always be easy. So, if you invest in bonds, be careful. Spend ten minutes trying to understand the issuer’s business.
And a request to SEBI. All these issuers are advertising “First come, first served”. This hustles a lot of investors in to issuing a cheque first and think later. Please keep the issue open for a fixed period and ensure a pro-rata allotment when there is extra subscription. And please make the offer document make a mention of what the business of the company is and what is the borrowing that the company has done post the last annual accounts.
Please read the fine print. Do not take risks that you take on a equity share investment for a limited upside and high downside possibilities.

Monday, September 5, 2011

A recent piece on Income Funds_ Asian Age/Deccan Chronicle


http://www.deccanchronicle.com/channels/business/personal-finance/returns-income-funds-likely-vary-226

Tuesday, August 30, 2011

Beyond Jan Lokpal..

Anna Hazare has brought corruption in to the limelight. For those who do not follow the details, Anna’s present ‘fight’ is only against those who are found guilty or corruption, from the CENTRAL government and the elected representatives. And believe me, this is not the largest source of corruption in India. The Jan Lokpal as proposed by Anna Hazare, is still some time away from seeing the light of day. Whether it would do so in the form as desired by Anna, is a highly debatable issue. There is too much opposition from the elected representatives, to make it effective.
The biggest beneficiaries of corruption in India have been the businessmen. Wherever there is political dispensation to get licenses and permits, the graft is tremendous. Some are central government level and some are state government level.
Everyone in government position extracts his ‘rent’. So much so that even public sector employees across the board are party to this. It is generally a question of ‘degree’ of corruption and never one of ‘principle’. Of course, there would be some honest people, but they are the exceptions who prove the rule.
The next logical move should be the one to introduce the “Lokayukta” in all the states. Karnataka is one strong reason why this bill will be resisted tooth and nail by every state government politician. Already, tamilnadu politicians are talking about the Lokayukta amounting to ‘interference’ in authority of the ‘elected’ representative of the hapless ‘people’. And we have state government politicians who have made so much money that they are the envy of the central government cadre.
Then we come to the so called ‘petty’ corruption which impacts our daily lives. This is a cancer that has affected India and can never be removed, Anna or no Anna. This is the bribes that are demanded by government employees for doing their work. Whether it is a ration card issuance or a passport or a driving license, corruption is the ‘speed’ money that we will continue to pay. The processes are so designed that most people will give up before they start and pay a bribe to get things ‘done’.
If we think that the Anna campaign means something for us, think again.
What is needed is changes in law that will make corruption punishable. And in India, the rich get away with anything. Power and position ensure preferential treatment. A minister is treated with kid gloves. He might have defalcated zillions of rupees. A pickpocket will be subjected to third degree. Unless a minimum punishment, of say, twenty years of Rigorous Imprisonment, combined with confiscation of all wealth of the person and his immediate family, is prescribed, corruption will flourish in India. Shed no tears. The present Indian entrepreneur is also happy with paying the bribes. He evades taxes, duties and has multiple overseas assets that he has stolen from the shareholders. He needs the system to be corrupt so that he can make progress. In a country where there is no private capital and a fetish for control, corruption is the grease that moves the wheel of progress.
Bribe on...

Friday, August 19, 2011

Razor's Edge- To buy or not to buy


http://moneylife.in/article/heres-how-you-can-time-your-equity-investments-after-the-market-crash/19066.html

A piece on the markets.

Monday, August 1, 2011

Manmohan Singh- A parallax view


All of us love to trash Manmohan Singh. Weakest PM, gutless etc.,

One thing strikes me. All of us seem to want him out. We have not thought about the subsequent possibilities. Then maybe we will get Rahul G or Pranab. One is a family member and the other a family loyalist.
Today, Manmohan Singh appears to be quiet and infirm. Think. He is letting the Supreme Court function without fear or favour and it is possible that this wave of judidicial activism could clean up a lot of things. If either Rahul or Pranab were out there, would they have let this go on? Would they not have bamboozled their way through and let corruption continue unabated?
Let us give (to borrow a cricketing phrase)'the benefit of doubt' to Manmohan Singh. Perhaps, in today's muddied water, he is the one paddling beneath the waters.

Warren Buffett buying Indian companies??

( I had written this piece more than a year ago, for a personal finance magazine)

As far as I am concerned, the Warren Buffet Graham Dodd School of investment is a complete education in stock picking. Having seen the Indian markets over the last few years, the one thought that comes to mind is that if WB were operating in the Indian markets today, he would perhaps find it difficult to find companies. However, if you take a cycle of twenty years, he would have found many opportunities to buy. WB is associated with ‘value’ investing. India is a ‘growth’ story. ‘Growth’ means buying in at prices that a ‘value’ investor may not buy.
If I look at WB/GD for inspiration, the key takeaway is the relevance of Return on Equity in conjunction with the ‘Margin of Safety’. If one uses these two financial measures, today’s markets are unlikely to throw up any investment worthy candidates. It is simply because our markets are today in an orbit that is being justified by the growth potential as well as the fact that when most of the world comprises of blind people, the one-eyed are looked upon with awe.
If I look at some of the key qualitative attributes that WB/GD has listed out as pre-requisites for being included in the short list, the following things stand out:
i) Find companies that have strong entry barriers and strengths that enable predictability of earnings. One of the examples in the WB domain is Coca Cola. In India, I have not come across an Indian company that has this attribute. It is only some of the multinationals operating in India that has this attribute. Clearly, India is not a business pioneer even in its homeland, forget globally. Companies like a L&T / HDFC come close, but one will have to search hard to find many more;
ii) Management quality: Here again, most Indian companies suffer due to management being a family affair. Father passes it to son and so on. The best person for the job is not chosen. So, here again, the list of Indian companies is rather small.;
iii) Forever companies: WB says that he would like to stay invested in a company forever. Here most Indian companies fail the test. Where are the Century’s / Nirlons’/ Mafatlals/Singhanias of the yesteryears? They were the blue chips then. Again, one has to stay content with an HDFC or most of the MNC’s who will be there a hundred years from today. You cannot bet on the longevity of an Indian company or management or family. Their capacity to surprise is immense.
Apart from the key differences, the other issue is a WB approach may simply fail because we have two classes of shareholders, whose returns are different. The promoter shareholder gets his returns from many sources whereas the non promoter shareholder gets incidental benefits. Corporate governance and capital market regulations notwithstanding, the promoter only lets you see what he wants to let you see.
SO, to gain from a WB approach, we need to have the ability to understand the management and take a call on what the odds are of riding his coat tails. The other most important thing, to my mind, is that we have to learn when to sell. The volatility in our markets (illiquid and shallow by characteristic) gives great opportunities. I like to make a shortlist of companies that I like and put against them, prices that I am comfortable paying. And then wait. Surely, in a person’s investment life span, anything from three to five opportunities will come. And the returns will be great. Much better than market returns if I may say so. One must not have the compulsion to invest everything in one go, like a fund manager.


Thursday, July 28, 2011

A happy ending- Schooling and beyond

Tuesday, my son joined the IIT, Chennai. It was a satisfying moment for us. The new batch size was around 800 odd students. The students were from all over the country, with arrivals from Andhra Pradesh perhaps being the single largest chunk. Being the first day of ‘orientation’, almost all the children were accompanied by one or both parents.
I noticed something interesting. Almost without exception, every parent seemed to be from a modest middle class background. The cars in the parking lot of IIT were few (perhaps local Chennai crowd) and most had come by train to Chennai and then by autorickshaw / call taxi to IIT. For 800 odd families, there were less than a 100 cars!
My mind went back to the day my children were admitted at Bombay Scottish School. I felt like a fish out of water. Almost every parent was from the upper echelons of society, working in a foreign bank or a multinational company or a businessman or a rich politician. There was no ‘smell’ of ‘middle class’ and I felt oddly out of place. Most of the parent crowd seemed to know / recognise each other. I was perhaps sticking out like a sore thumb.
Conclusion?
A school like Bombay Scottish attracts the rich and famous and merit is not a driver. The parents of the children who study at Bombay Scottish have already ‘made it’. The children here will probably end up going to colleges abroad and life has already been set up for them. A place like IIT attracts the best of talent. And it those students who get admitted to the IIT are going to ‘make it’. Their parents have perhaps struggled with life and sacrificed a lot to get their kids through the grind. They have shifted all their dreams to their children.

Am I making a 'sweeping' conclusion? I see this rich school poor school syndrome happening again and again. My children left Bombay Scottish in 1999 and the last ten years happened in Chennai. They went to a school names PS Senior Secondary School and my son shifted to a school called Padma Seshadri in 11th standard. The reason for the shift was that the earlier school hated students going to any classes for so called 'entrance' exams. My daughter finished her schooling at PS Senior and is currently doing her Law at ILS Law College Pune. She again had a choice of going to one of the National Law Schools, but opted for ILS Pune.

RBI vs India Inc


THE DEBASEMENT OF THE RUPEE

Inflation is perhaps the biggest destroyer of wealth. Imagine if I had put aside a sum of Rs.100 ten years ago and earned around 7% p.a. as a return. Today, I would be having around Rs.200/-. Ten years ago, I could buy dal at under Rs.30/- a kg/- or buy a litre of petrol at under Rs.25/-. Today, the Dal is close to 100/- a kg and petrol is over 60/- a litre and climbing. Of course, vegetable and food prices have more than tripled in this time. In essence, what I saved ten years ago, is today worth less than half. Half has been destroyed because I did not spend it. More important, my assumptions of ten years ago, that what I put aside would suffice for me today, have gone terribly wrong. If I cannot earn additional income (Ten years ago, my plan was to stop having to go to work at this stage in my life, presuming that my savings were enough) I have to scale down my expectations or sell off some other assets.
Inflation is not going to stop. To me, the biggest damage has been done with the increase in the interest rate on the Savings bank deposit, by the RBI. It virtually amounts to the regulator giving up on inflation. I would, in their place, have reduced the savings deposit rate to zero! Till a few years ago, savings bank balances beyond one lakh rupees would not earn interest on the excess. Today, banks pay interest on everything. The result of this move by RBI is for people to create a higher benchmark in terms of expectation of returns. If the savings rate had been brought down to zero, not many (barring some vested interest groups) would have protested. At the same time, it would have had the magical effect of lowering people’s expectations. Today, the Savings Bank interest rate has become a kind of a low point of expectation. Naturally, to park money anywhere else, we need higher returns. If the savings interest rate was zero, our expectation of return from other instruments or avenues would have been lower.
Similarly, the RBI has hiked interest rates across the board. Now we are seeing ten year instruments being floated with yields of 12% p.a. and above! It is not as if the banks are flush with money and the RBI will reduce credit offtake due to this move. In fact, the banks do not have enough money to lend. And a company will not stop borrowing for its regular needs simply because the interest rate has gone up by a couple of percentage points. In fact, due to lack of additional supplies coming on, in most industries the competition is minimal. This gives the companies to pass on the increased interest rate to the buyer. Inflation gets worse due to this vicious cycle.
What will get impacted is capital expenditure. Large projects will get postponed due to the high interest rates.
In this environment, the villain of the piece is retail lending. It continues to grow unabated. A couple of percentage increase in interest rates has not deterred spending. Durables and automobile industries are growing at record rates. Most of this growth is on account of credit purchases. Of course, it does help these industries, but these goods are virtually immune to price hikes in today’s environment of unfettered ambition and consumerism. Banks are continuing to grow this portfolio unmindful of credit quality. The race for market share and the gambler like urge to keep growing the ‘book’ has diverted focus to size rather than quality. Many banks and lenders have outsourced even the critical function of origination of loans to third parties. Obviously, this will result in mounting bad debts. I am seeing consumer portfolios that have gone bad, being sold at ten percent or lower of the outstanding value to other banks or asset reconstruction companies. Consumer activism and a benign regulatory attitude to defaulters have made it very easy for the individual to default and not impact his lifestyle in any way. Smart borrowers are using this aspect to run up loans, negotiate them after deliberate default and continue. I do not think that the credit bureau scores will have much impact in the near term, so long as it is used only as a pricing tool rather than a denial of credit mechanism.
Credit is a useful mechanism to bring buyers and sellers together. However, when buyers are more than the sellers, credit will only serve as a tool to push prices up. As the old saying goes, when credit has to be ‘sold’ it will end up as a bad debt.
This cycle will have its conclusion either by supply catching up with demand or by prices going up to an extent that at some point buyers will vanish / reduce dramatically. Supply does not look like it is going to catch up in a hurry. The most likely thing seems to be that we will go through a phase of rising prices. To me, this is a scary situation. We will see apparent prosperity, without increase in number of jobs. We will see fixed income earners (pensioners/retired persons) struggle to make ends meet. Income disparities will rise to record levels not seen before. Rising interest rates cannot benefit all. Only to those with continuing inflow of money, will rising interest rates be of gain. If I have already locked in my money, I cannot take advantage of rising interest rates. Even if I go through the mutual fund rate, I will not gain. As interest rates rise, we will see the prices of assets fall.
So, what do we do? One assumption I would like to make is that the RBI will stop its misguided driving up of interest rates sooner rather than later. I will accept that inflation in India is going to have a run rate of eight to ten percent per annum given the fact that our combined state central fiscal deficit will remain in double digits and the base savings rate having been raised to four percent. I will preserve my assets in as much short term assets as possible. I will wait for a stock market correction to add to my equities portfolio. What extent? Maybe another twenty percent fall from here or the same levels two years down the road (assuming that profit growth would still be around 15% p.a). Postpone most of my durable purchases and push back the buying of my second home. Put some more money in to Gold ETF’s. Follow the Shakespearean dictum of ‘Neither a lender nor a borrower be”. I would look out for fixed deposits / bonds to park some of my money. Liquid funds are back in fashion, with decent returns. I will avoid Income funds for now; till I am sure that the RBI is done with jacking up the interest rates.
What I have outlined is perhaps a pessimistic outlook. However, if I can be prepared for this, I can only have positive surprises. I am still not so pessimistic that we will go all the way to hyperinflation or a severe bout of stagflation. I bank on the domestic entrepreneurs to fight their way out of this, rather than expect the government of India to do anything constructive. The politicians are busy fighting their survival battles and economics, unfortunately has no place in that.

Friday, July 15, 2011

Reel Estate

REEL ESTATE.. OUT OF FLAVOUR

Everyone seems to be of the opinion that the real estate prices in the metro cities is likely to correct downwards significantly. This is also borne out by many large projects (esp in cities like Chennai) that kicked off in 2007-08 madness, getting delayed in execution. In fact at Chennai, I see many projects still selling at prices below what they were launched at, apart from changes in plans that involve change in usage, cutting corners with regard to facilities etc.
The interesting dichotomy I see is with regard to the size and scale of the projects. In metro cities, the large projects tend to be on the fringes of the city or in ‘new’ growth areas, due to availability of large land pieces. Within the city, the supply of new housing stock is rather limited and the demand strong. So we have a situation where prices in the heart of many cities, for small projects, have risen dramatically. At the same time, prices have slumped in most large projects. Of course, when I mean slumped, it is still not juicy or attractive enough to become bargains, yet.
So what is holding up the prices? I see unsold stock, incomplete projects and steady prices. In 2007-08, most of the demand that came in was of a speculative nature, where hot money chased quick and easy returns. Book a flat at the ground breaking ceremony time at base price. As progress happens, the prices start to rise. Sell it off before completion and enjoy full profits with less than full investment. The banks and housing finance companies also contributed to this speculative frenzy by giving loans of 100% or more (some banks gave on furniture also!).
The 2008-09 crises saw hot money rushing for the exit. Prices fell, especially in the large projects in outlying areas. Projects got delayed, reshaped and prices stagnated. Many overpriced projects had to correct prices in a big way.
Now (two years since the stagnation) there still does not seem to be much recovery in prices. Projects still take time to sell out. Inflation in two years has been high, which means that the costs of construction have. So, the days of superprofits for the builders are coming down. I recall balance sheets of companies like DLF showing net profits of over 70% of sale value! It still has to come down to reasonable levels.
For the investors, this means that real estate stocks are untouchable yet. Many of the real estate companies are raising money through privately placed paper at high interest rates. Some companies are trying to reschedule their obligations. The debt on the balance sheet of most real estate companies is still at uncomfortable levels.
We also had a phase of euphoria with almost every real estate company projecting huge returns on “SEZ” development. Most now want to give back the land or change the use to something else! Unless there is corruption, it is unlikely that the usage would be allowed to be changed from “SEZ” to ‘commercial’. So, I would keep away from the SEZ dreamers for a few more years.
The shares of most companies still seem to be holding on (of course far away from the stratospheric levels of 2008-09). And given the lack of transparency and periodic bad news from one company or the other in the sector (Unitech and the 2G scam for instance) investors have no reason to put money in shares in this sector. Despite that, prices have not crashed nor have institutional investors ditched this sector totally.
The one inference I draw from all this is that there still is some serious money that is backing this sector. Is it legitimate money or money that has found its way through devious routes that is holding up this sector? To me the biggest risk this sector has is a fear or feeling of instability in the political environment. A scare from that direction can perhaps bring about a real slump in the sector.
As regards land, prices fell and then gradually recovered. Yes, large deals are not happening, but small investments in land continue to happen. Given the reducing retail participation in stocks, there is a diversion of money to real estate and precious metals. Tier two cities are witnessing firm to rising land prices.
The other interesting perspective is on the rentals. Commercial properties across most large cities have seen a steep decline in rentals. At the same time, an oversupply situation seems to be correcting itself with the withdrawal of a lot of projects. This perhaps implies stable rental situations. The one interesting fall out is that the newer properties command significantly higher rentals. Apart from offering better infrastructure, the new properties have a very large hidden premium. The carpet area to built-up ratio in new projects is significantly less. Regulators are continuing to play footsie with the builders by refusing to mandate uniform standards in measurement standards for real estate.
I would watch out and an eye on companies that are able to hold on to commercial properties and earn rentals from that. This seems to be a good strategy. Apart from that, I would also like to revisit companies with low to zero debt and with low profit margins. These are the companies that will do well when the next boom in real estate happens. As regards timing, difficult to take a call as to when we would see a revival in this sector. But this is one sector (if we can exclude the governance issues) where there could be value picks.

R. Balakrishnan
(balakrishnanr@gmail.com)
May 27th, 2011

(This was published in the 14th July issue of Moneylife)

Wednesday, July 13, 2011

Inflated economy, debased currency


(This appeared in a recent issue of Moneylife. )

THE DEBASEMENT OF THE RUPEE

Inflation is perhaps the biggest destroyer of wealth. Imagine if I had put aside a sum of Rs.100 ten years ago and earned around 7% p.a. as a return. Today, I would be having around Rs.200/-. Ten years ago, I could buy dal at under Rs.30/- a kg/- or buy a litre of petrol at under Rs.25/-. Today, the Dal is close to 100/- a kg and petrol is over 60/- a litre and climbing. Of course, vegetable and food prices have more than tripled in this time. In essence, what I saved ten years ago, is today worth less than half. Half has been destroyed because I did not spend it. More important, my assumptions of ten years ago, that what I put aside would suffice for me today, have gone terribly wrong. If I cannot earn additional income (Ten years ago, my plan was to stop having to go to work at this stage in my life, presuming that my savings were enough) I have to scale down my expectations or sell off some other assets.
Inflation is not going to stop. To me, the biggest damage has been done with the increase in the interest rate on the Savings bank deposit, by the RBI. It virtually amounts to the regulator giving up on inflation. I would, in their place, have reduced the savings deposit rate to zero! Till a few years ago, savings bank balances beyond one lakh rupees would not earn interest on the excess. Today, banks pay interest on everything. The result of this move by RBI is for people to create a higher benchmark in terms of expectation of returns. If the savings rate had been brought down to zero, not many (barring some vested interest groups) would have protested. At the same time, it would have had the magical effect of lowering people’s expectations. Today, the Savings Bank interest rate has become a kind of a low point of expectation. Naturally, to park money anywhere else, we need higher returns. If the savings interest rate was zero, our expectation of return from other instruments or avenues would have been lower.
Similarly, the RBI has hiked interest rates across the board. Now we are seeing ten year instruments being floated with yields of 12% p.a. and above! It is not as if the banks are flush with money and the RBI will reduce credit offtake due to this move. In fact, the banks do not have enough money to lend. And a company will not stop borrowing for its regular needs simply because the interest rate has gone up by a couple of percentage points. In fact, due to lack of additional supplies coming on, in most industries the competition is minimal. This gives the companies to pass on the increased interest rate to the buyer. Inflation gets worse due to this vicious cycle.
What will get impacted is capital expenditure. Large projects will get postponed due to the high interest rates.
In this environment, the villain of the piece is retail lending. It continues to grow unabated. A couple of percentage increase in interest rates has not deterred spending. Durables and automobile industries are growing at record rates. Most of this growth is on account of credit purchases. Of course, it does help these industries, but these goods are virtually immune to price hikes in today’s environment of unfettered ambition and consumerism. Banks are continuing to grow this portfolio unmindful of credit quality. The race for market share and the gambler like urge to keep growing the ‘book’ has diverted focus to size rather than quality. Many banks and lenders have outsourced even the critical function of origination of loans to third parties. Obviously, this will result in mounting bad debts. I am seeing consumer portfolios that have gone bad, being sold at ten percent or lower of the outstanding value to other banks or asset reconstruction companies. Consumer activism and a benign regulatory attitude to defaulters have made it very easy for the individual to default and not impact his lifestyle in any way. Smart borrowers are using this aspect to run up loans, negotiate them after deliberate default and continue. I do not think that the credit bureau scores will have much impact in the near term, so long as it is used only as a pricing tool rather than a denial of credit mechanism.
Credit is a useful mechanism to bring buyers and sellers together. However, when buyers are more than the sellers, credit will only serve as a tool to push prices up. As the old saying goes, when credit has to be ‘sold’ it will end up as a bad debt.
This cycle will have its conclusion either by supply catching up with demand or by prices going up to an extent that at some point buyers will vanish / reduce dramatically. Supply does not look like it is going to catch up in a hurry. The most likely thing seems to be that we will go through a phase of rising prices. To me, this is a scary situation. We will see apparent prosperity, without increase in number of jobs. We will see fixed income earners (pensioners/retired persons) struggle to make ends meet. Income disparities will rise to record levels not seen before. Rising interest rates cannot benefit all. Only to those with continuing inflow of money, will rising interest rates be of gain. If I have already locked in my money, I cannot take advantage of rising interest rates. Even if I go through the mutual fund rate, I will not gain. As interest rates rise, we will see the prices of assets fall.
So, what do we do? One assumption I would like to make is that the RBI will stop its misguided driving up of interest rates sooner rather than later. I will accept that inflation in India is going to have a run rate of eight to ten percent per annum given the fact that our combined state central fiscal deficit will remain in double digits and the base savings rate having been raised to four percent. I will preserve my assets in as much short term assets as possible. I will wait for a stock market correction to add to my equities portfolio. What extent? Maybe another twenty percent fall from here or the same levels two years down the road (assuming that profit growth would still be around 15% p.a). Postpone most of my durable purchases and push back the buying of my second home. Put some more money in to Gold ETF’s. Follow the Shakespearean dictum of ‘Neither a lender nor a borrower be”. I would look out for fixed deposits / bonds to park some of my money. Liquid funds are back in fashion, with decent returns. I will avoid Income funds for now; till I am sure that the RBI is done with jacking up the interest rates.
What I have outlined is perhaps a pessimistic outlook. However, if I can be prepared for this, I can only have positive surprises. I am still not so pessimistic that we will go all the way to hyperinflation or a severe bout of stagflation. I bank on the domestic entrepreneurs to fight their way out of this, rather than expect the government of India to do anything constructive. The politicians are busy fighting their survival battles and economics, unfortunately has no place in that.

Saturday, June 18, 2011

TO BUY OR NOT TO BUY

( This appeared in a recent issue of Moneylife)


Our stock markets seem to have stuck in a range. It neither breaches the 20 thousand mark on the BSE Sensex convincingly nor falls low enough to make buying attractive. Corporate results being announced for the full year ended March 2011 seem to be in line with market expectations. Negative voices, expressing concern on the valuations as well as the possibility of more attractive opportunities elsewhere, do not seem to have dampened the cash coming in to our markets.
Valuations are rich, pricing in growth in earnings of over twenty-five percent year after year. Inflation is sticky and refuses to come down. Gold, silver, crude and global stocks are all moving up. Some metals have lost lustre, but overall, the mood is without any caution.
As I write this, there is news out that Mr KV Kamath is taking over as Chairman of Infosys. This company deserves a relook for reasons other than valuation. This decade would perhaps see the exit of its original team of founders and no dominant shareholder. Someone large enough could perhaps make a takeover attempt on it. I would like to keep an eye out for companies where families are likely to sell out. Mergers and takeovers are not possible in the Indian context unless there is a willing seller. Or else look for companies like an Infosys or a L&T where there is no dominant ownership.
The other thing that is likely to keep valuations in check is the Central Bank’s actions that would make borrowing unreasonably expensive. Instead of attacking inflation from the supply side (a long term solution rather than a quick fix one) the Central Bank is trying to make borrowing more expensive. This is precisely the wrong thing to do. This will make capital spending more expensive and lead to postponement of projects. Sectors like construction will get hit badly. So, the Central Bank will contribute its bit in keeping profit growth down for many Indian companies.
FMCG and MNC companies continue to do exceedingly well. They are likely to do better, but stocks in this pack are not exactly cheap. Capital goods and labour intensive sectors are seeing pressure on their operating margins as increasing wage costs become a concern. Service sectors like banking and IT are facing a shortage of competent people and are managing to add headcount by compromising on quality of people.
All in all, there is reason to believe that things look ok, but no runaway upside is visible.
So, what can cause a downslide in our markets? Clearly fundamentals do not matter, given the fact that our markets are driven by the inflow / outflow of FII money. Political crises and corruption clearly do not worry the institutional investor. Otherwise how else does one explain the fact that stocks of companies, whose key executives have been put behind bars, continue to trade at not so cheap valuations? It is clearly an indicator that the market participants do not think much of governance issues.
Gold and silver continue to defy gravity and head in to bubble territories. The excess currency supply in the world and the weakness in the global economy are making people run away to gold and silver. The global economy seems to show some signs of recovery, but the withdrawal of stimuli would surely dent global growth. On top of that, the rating agencies are threatening to downgrade US and Japan. Food inflation is clearly a global concern. US is facing the twin issues of jobless growth and a declining currency.
In all these worries, the global stock markets are strong. Clearly a case of excess money in the world that is trying to find havens of safety and some money chasing higher returns from riskier markets like India or Brazil.
So, logic and reason seem to be clearly not a driving factor for the global equity markets. It seems more like a case of too much money going around and no one wanting to miss a party if it happens. Everyone is willing to pitch tent and wait it out.
In such a context, where global money flows in to our markets are robust, a significant downside may not happen. Many investors seem to be wanting a significant downside, so that it becomes a buying opportunity. The markets seem to be testing them. The BSE Sensex seems to get stuck in a groove, refusing to decisively cross 20 thousand. At the same time, it falls by a couple of thousand points in a couple of weeks, then recovers back to the 19 thousand plus level! This market is surely not good for domestic mutual funds, which would underperform in this kind of a market, due to sitting on cash and not having conviction to be fully invested at these valuations. Mid cap funds have had their own roller coaster ride, with steep falls followed by sharp recoveries.
In this market, the best is to keep new money away from the equity markets. Fixed income still offers around nine to nine and a half percent yield. That takes care of a near 2000 point rise in the BSE Sensex over one year. Sure, does not satisfy greed and perhaps may not beat inflation, but could help to save on any significant downside if the FII’s ( some of it could be Indian money illegally routed through the FII route) decide to take a powder.

IDR- An idea too soon for India

Standard Chartered Bank had issued the first 'Indian Depository Receipts'. Given the capital controls, it is clearly too soon. Typically, arbitrageurs got in and tried to bully the regulator. A debate on both sides was published by Business Standard, a bus newspaper. For once, I was happy to take the side of the regulator.
Here it is

http://www.business-standard.com/india/news/is-sebi-killingidr-market/439080/