Sunday, November 27, 2011
(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 (firstname.lastname@example.org) November 22, 2011
Saturday, November 26, 2011
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
(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
(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
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.