Here's how economic indicators can affect your financial life

3 Oct, 2013

Text: Preeti Kulkarni, ET Bureau

You couldn't have escaped some of these statements in the recent past: The market has tanked, the GDP figures were disappointing.  

Sure, the disappointment in the tone and falling economic indicators must have caught the attention of every investor. 

But what most have missed is that the market is increasingly getting influenced by economic indicators and events — that too in faraway lands — in a big way.

Therefore, it is important to keep a close eye on the developments in this space. Also, all these events cannot be seen in isolation.

For more information:

Source:

http://economictimes.indiatimes.com/slideshows/investments-markets/heres-how-economic-indicators-can-affect-your-financial-life/slideshow/23434653.cms

Why this is a good time to invest in equities

23 Sep, 2013

In August there was a lot of pessimism around the rupee and the Indian economy at large. In September the markets have recovered. Sensible investors should not make too much of either the earlier pessimism or get too carried away by the current optimism.

The pessimism around the currency was overdone. The RBI governor has addressed some of the issues though I don't think we are out of the woods yet. Broadly we expect the rupee to stabilise between 57-58, which is its fair value, and 65, which is the level to which the RBI will let it drop.

Why invest in stocks now

There are four compelling reasons for investing in equities at this juncture. First, if you look at the data for the past 30 years, our equity markets broadly move in fiveyear cycles. Since returns from the stock markets have been disappointing in the past five years, there is every chance of mean reversion. When returns have been poor and the broad swathe of the investing public is shunning equities, that is the best time to buy stocks.

Second, it has been widely commented that the Indian economy has suffered due to the government's policy paralysis and that the India growth story is structurally damaged. I believe this whole "structurally damaged economy" hypothesis is overly pessimistic. Like any other free-market economy, the Indian economy too goes through its cyclical ups and downs. We are probably at the bottom of an economic cycle and will emerge from the trough in the next year or so, hopefully helped by favourable election results. As we emerge, the stock markets will pick up in anticipation of growth.

Three, most economies, whether the Western economies or the BRIC countries, are now locked into each other through trade and capital flows. Hence we are all part of a single global economic cycle now. As the global economy bottoms out and starts recovering, we will see the benefits flow through to India as well. This is the reason why you should discount the notion of structural damage to India and to the BRIC economies — it makes for good press copy but is not grounded in the underlying economic realities of the world we live in. The US economy has recovered first, Europe seems to be next in line, and we will follow in due course.

Valuations provide the fourth and final reason. The Nifty is trading at a good 15-20% discount to its 10-year average valuation. But more compellingly mid- and small-cap indices are quoting at their highest ever discount compared to the large-cap indices.

Growth will rebound

If you examine the various components of our GDP, agriculture has turned. In years when the monsoon is good, agricultural growth tends to surprise on the upside. But agriculture is only 15% of our economy. Next, look at exports. From a negative 1% growth for the year ended March 2013, we had 12% growth in July and 13% in August. The data we are getting suggests that between now and December (the final four months of this calendar year) we are likely to have 22% yearon-year (y-o-y) growth. So the export sector is gathering speed, propelled by a weak currency.

Government spending is also picking up in the run-up to the elections. If you compare the first six months of the current year with that of the last, government spending is already up 14%. In the December quarter of 2012, the finance minister had slashed government spending to contain the fiscal deficit. So on a y-o-y basis, government spending is likely to be much higher in the last threefour months of this calendar year and that will stimulate growth significantly.

Due to all these factors, growth in the second half of the year is likely to be better than in the first half even if industrial output remains subdued. It should be around 5% compared to around 4% in the first half. Hence GDP growth for the financial year 2013-14 should be around 4.7%. While this is not a very impressive number, the key point here is that we are on the cusp of a turnaround.

Where should you invest?

Currently you should invest in cyclicals, midand small-caps, and value stocks. The premium that investors are paying for defensives is at an all-time high. This does not mean that defensives will crack very soon. But it does suggest that the fear about the economic cycle has been overdone and hence investors have over-bought defensives. Since we believe that the economy will recover, we expect this fear to dissipate, defensives to underperform, and cyclicals to outperform. Second, at no juncture in history have mid- and small-cap stocks traded at such a steep discount to large caps. That discount is again the result of widespread fear about the stability of the Indian economy.

As the fear dissipates, this discount will vanish. Third, over the past 15 years value stocks have outperformed growth stocks. But in the past three years the opposite has happened. Growth stocks are safe, well known, safe-haven plays. Many of them are in the consumer- or export-oriented sectors. They have done well and hence growth has outperformed value. The avoidance of value stocks and the pre-eminence of growth stocks is again a manifestation of fear and risk aversion. As these abate, value stocks will once again enjoy a good run.

Finally, the Indian market is at a nascent stage in its evolution and is hence very volatile. Investors should only put that money into the stock markets which they can afford to lose. Also, have an investment horizon of at least three years. If you have a shorter investment horizon, you will make it difficult for yourself to profit from a relatively risky activity such as stock market investing.

(As told to Sanjay Kumar Singh)

The author is CEO, Institutional Equities, Ambit Capital.

Source:
http://economictimes.indiatimes.com/markets/analysis/why-this-is-a-good-time-to-invest-in-equities/articleshow/22852124.cms 

How are leading Indian business houses doing? The top six business houses have exhibited vastly different growth trajectories in the past 5 years.

23 Sep, 2013
The bear market of 2008 shaved off 64% of the value of Indian equities. Leading Indian business houses, comprising the big shots of the corporate world, also saw their market capitalisation plunge. Five years on, these powerful business houses still continue to fly the flag for corporate India.

The combined wealth of the top six promoter families has swelled to Rs 14.8 lakh crore, a 12% rise per year over the past five years. However, it has been an arduous journey. Stalled projects, high cost of credit and lack of policy initiatives combined to subdue corporate growth, forcing these industrial houses to cut corners in diverse areas. The sharp fall in the rupee has also caused a lot of pain for these businesses.

India Inc's business confidence is now at its lowest level in 17 quarters, says a Ficci survey. In this backdrop, it makes sense to throw the spotlight on India's top business houses and see how they have navigated the tough environment over these years and where they stand today in individual businesses.

Here is a snapshot of the top industrial houses today.
1) Tata group

In the past five years, the Tata group has not only overtaken the Mukesh Ambani-led Reliance group in terms of market capitalisation, but left it miles behind. With diverse businesses spanning IT services, autos, steel and chemicals, the Tata group's combined valuation has grown at 24% per annum over the past 5 years--the highest among the top 10 leading business groups. The group made some bigticket foreign acquisitions in the past decade.

While Tata Motors' acquisition of JLR was a masterstroke for the automaker, Tata Steel's buyout of European firm Corus has been a drag on its profitability. Tata Motors delivered a CAGR of 42% over the past 5 years--the highest among Tata group companies--while Tata Steel has delivered a negative CAGR of -5%.








The group's flagship company, TCS, is today the country's most valued company, with a market cap of Rs 3.81 lakh crore, having delivered a staggering 37% compounded annualised return on investment. Titan Industries and Tata Global Beverages, its other big businesses, have also done well, delivering 31% and 17% CAGR respectively, during this period. In the coming years, TCS will remain the cash cow but the group's consumer oriented businesses are likely to grow at a much rapid pace. A turnaround in steel will be delayed.

2) Reliance group

While the Mukesh Ambani-led Reliance group has multiple business interests, it only has two listed companies--the flagship Reliance Industries and Reliance Industrial Infrastructure. Both combined, their market value stands at Rs 2.83 lakh crore--roughly at the same level it was 5 years ago. The group's activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles, retail, etc. Shares of Reliance Industries have underperformed the broader market in the past few years, with question marks over the output from its offshore gas fields. Production from the KG basin has fallen significantly since its peak in 2011. In fact, for the past three years, a chunk of the profits reported by RIL have been a result of sizeable contribution from 'other income', including investments.


The government's recent decision to increase the price of natural gas from $4.2 per mbtu to $8.4 mbtu from 1 April 2014 would have been a huge boost for the company's profitability, but the matter is currently before the Supreme Court. RIL recently became a debt-free company. The company's retail venture, Reliance Retail, has taken pole position, beating others such as Bharti and Aditya Birla group. It is even expected to turn profitable by the end of the next financial year, while its rivals continue to bleed.

Meanwhile, its new telecom venture will kick-start pan-India operations shortly, which would add significantly to its earnings. Going forward, the group's fortunes will continue to be shaped by oil and gas discoveries as well as the traction in its the retail and telecom businesses.

3) Vedanta group

Diversified natural resources conglomerate Vedanta Resources is among the leading business houses in India. Led by Anil Agrawal, the group is involved in the mining of iron ore, copper, bauxite and zinc as well as exploration of oil and gas and power generation. Over the past five years, the group's aggregate market value has only risen at a CAGR of 8%. The group has gone through a rough patch in recent years in the face of slowing demand and drop in metal prices. It has also hit regulatory hurdles, such as ban on mining in Goa along with the unavailability of captive coal and bauxite mines.


The group has recently undergone a restructuring exercise in an effort to simplify and consolidate its structure and help pare down the huge debt taken on to fund the acquisition of Cairn India and Sesa Goa. Under the new structure, the group's flagship Sterlite Industries has been merged with iron ore producer Sesa Goa to create a new entity Sesa Sterlite, which will be the holding company for all Vedanta Resources companies, including Cairn India and Hindustan Zinc. With this, the new entity will also bear almost the entire burden of the group's sizeable debt.

Even with the huge cash reserves of Cairn India and Hindustan Zinc, lowering this debt burden would prove difficult, as other group businesses continue to struggle and the depreciating rupee adds to the interest outgo on the entire debt. So while the restructuring is expected to bring down the uncertainty arising out of metal price fluctuations, operational issues will remain a challenge for the group in the years to come.

4) Aditya Birla group

The market cap of the Aditya Birla group controlled by Kumar Mangalam Birla has almost doubled to Rs 1.6 lakh crore in the past 5 years ago. The group is involved in businesses as diverse as metals, cement, retail, financial services, telecom and IT services. Among these, its telecom operations under Idea Cellular, which started only in 2007, have grown significantly, beating UltraTech Cement to emerge as the group's most valued firm.
This is despite the regulatory shadow over the telecom sector which has left a bitter taste among many of its rivals in the space. However, in terms of revenue and profits, Hindalco Industries still remains the leader of the pack, followed by Grasim Industries.

But the market value of both these entities has hardly budged over the past 5 years. It is UltraTech Cement which has created the most value within the group, with a 46% CAGR during this period. Its recent acquisition of the Gujarat cement unit of Jaypee Cement for Rs 3,800 crore will add 4.8 million tonnes additional capacity per annum to its current capacity of around 54 million tonnes.

The group's financial services division Aditya Birla Money continues to bleed, and has seen its market value erode at a 24% CAGR over the past 5 years. Its retail business is also facing tough times. However, the outlook for the group's metals, cement and telecom businesses remains bullish for the coming years.

5) Bharti group

The Sunil Mittal-controlled Bharti group has grown from being a manufacturer of bicycle parts to one of the largest and most respected business groups in India, with interests in telecom, insurance, retail and foods. Its flagship telecom business operates in 20 countries across Asia and Africa. After growing by leaps and bounds in the domestic market for years, the company ventured into Africa in 2009 by acquiring the regional operations of Kuwait's Zain Telecom for $9 billion. This purchase was carried out to augment the company's revenues and profitability, but the story has not played out as expected.
Almost five years since, it is yet to recover the purchase price, with the loss-making African operations dragging down the entire company. The company's market value has shrunk by Rs 17,500 crore over the last 5 years. While telecom remains the mainstay for the group, over the past few years, Bharti has diversified into several new-age business areas. It entered the retail sector by opening retail stores in multiple formats, while also forming a wholesale joint venture with Walmart in a much-publicised deal. However, this too has proved to be a troubled alliance.

Walmart is mulling pulling out of the JV with Bharti, which is facing multiple issues ranging from stringent entry conditions for foreign multi-brand retailers to the country's notoriously corrupt system that makes it difficult for American companies to do business without flouting US anti-bribery laws. This could potentially deal a body blow to the group's retail ambitions. In the future, the group's telecom business expects cash flow from Africa to improve as capital expenditure comes down, but for now it remains a drag on the parent's profitability.

6) Mahindra & Mahindra group

The Mahindra & Mahindra group led by Anand Mahindra has a presence in more than 100 countries, with businesses spanning diverse sectors such as aerospace, automobiles, construction equipment, defence, financial services, information technology, leisure & hospitality, logistics, real estate and retail. The group's aggregate market value has risen at a CAGR of 16% in the past 5 years, doubling over this period. The group's flagship, automotive major Mahindra & Mahindra accounts for nearly 70% of the group's combined revenues and 50% of its total profits.


The company has delivered a stellar CAGR of 30% over the past five years, with a market value of Rs 51,000 crore. M&M's portfolio of diesel-powered utility vehicles and tractors gives it a unique presence compared to its peers. The company benefited a lot from the disparity between domestic petrol and diesel prices, with its utility vehicles enjoying healthy offtake even as the demand for petrol-run cars dipped. Now, the rise in excise duty has led to a slowdown in utility vehicle volumes, but this has been offset by the pick-up in demand for tractors in rural areas following a good monsoon.

The group's other significant business, IT services firm Tech Mahindra, has now become India's fifth largest IT company post the merger of Mahindra Satyam with itself. Tech Mahindra now aims to double its turnover to Rs 31,000 crore by 2015. The group's financial services division M&M Financial Services is expected to continue on a high growth trajectory in the coming years. The group has recently entered retailing of solar power based home appliances, primarily for rural markets.

Source:
http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/Tata-Reliance-Vedanta-others-How-are-leading-Indian-business-houses-doing/articleshow/22853479.cms

Raghuram Rajan tries to win NRI deposits by subsidizing banks

Sep 5, 2013

MUMBAI: In a big-bang entry, new Reserve Bank of India (RBI) governor Raghuram Rajan opened the door wide to dollars from NRIs and foreign borrowings by banks, by subsidizing the cost of using these funds locally.

At present, banks do not go all out to raise non-resident deposits because to use them locally, they have to swap them into rupees. A swap enables a bank to get back the same quantity of dollars to repay when the deposit matures even if the rupee has depreciated since then. Typically forex swaps cost around 7%, which increases the cost of a dollar deposit equivalent to 12.73%. The RBI has offered to provide swaps at 3.5%, making them very attractive for banks.

The governor also reversed some of the capital controls, promised new bank licences by January and hinted at reversing some liquidity tightening measures. The RBI partially reversed an earlier decision allowing companies to take over foreign businesses up to four times their net worth if funds came by way of external commercial borrowings.

More flexibility to importers, exporters

Rajan expressed commitment to market reforms and said as a 'down payment', would provide more flexibility to importers and exporters to revise prices on forex contracts in the forward market.

Seeking to reassure markets, which have been racked by one negative surprise after the other, Rajan said, "We will emphasize two other traditions that become important in these times: transparency and predictability. At a time when financial market are volatile, and there is some domestic political uncertainty because of impending elections, RBI should be a beacon of stability as to its objectives."

According to the governor, the RBI has been working on a host of measures, but because they have been announced in a sequential manner their impact has been lost in the markets. Rajan said there are plenty of low-hanging fruit that can be targeted in terms of reforms and assigned fixed time-frames for most of these to be addressed by deputy governors.

Source:

http://timesofindia.indiatimes.com/business/india-business/Raghuram-Rajan-tries-to-win-NRI-deposits-by-subsidizing-banks/articleshow/22302180.cms?utm_source=facebook.com&utm_medium=referral

RBI's intervention helps rupee post biggest single-day rise in 15 years

Aug 29, 2013
MUMBAI: Breaking the streak of severe battering it suffered in the last few days, the rupee on Thursday soared by a staggering 225 paise to end at 66.55 against the dollar and the sensex jumped by over 400 points on the back of RBI opening a special dollar facility for PSU oil companies.

After the rupee plunged to an all-time low of 68.85 on Tuesday, the RBI allowed the three state-owned oil companies to buy dollars directly, the latest in a series of moves to arrest volatility in the domestic currency, which has slid over 20 per cent since April 30.

With PSU oil firms needing USD 8.5 billion every month to import 7.5 million tonnes of crude oil, the swap window will help to ease demand in the spot market. The rupee bounced back to 66.51 before ending at 66.55, a rise of 225 paise or 3.27 per cent — the biggest single-day rise in 15 years.

"The separate forex swap window for oil firms by RBI helped rupee gain. The depreciation was overdone," said Ashutosh Khajuria of Federal Bank.

Mirroring the currency, the sensex surged 405 points on Thursday, the biggest gain in a week. Stock investors gained over Rs 1 lakh crore on across-the-spectrum rise in share prices.

Prime Minister Manmohan Singh said he would make a statement in Parliament on Friday, after opposition parties claimed there was panic in the country over the rupee's fall.

Some experts are sceptical about Thursday's turnaround as markets seemed to ignore concerns related to widening current account deficit and the burden of food subsidy that have plagued investor sentiment recently.

"The sustainability ... will be closely watched as RBI had taken a similar measure in 2008, that gave short-lived relief," said Abhishek Goenka, CEO, India Forex Advisors.

Bank of America Merrill Lynch said in a report on Thursday the RBI will have to take far more pro-active steps to rebuild forex reserves, because if the status quo remains, the rupee could touch 75 per dollar by the end of 2014.

Driven by the recovery in the rupee, gold prices in the national capital fell from record high, plunging Rs 1,575 to Rs 32,325 per ten gram on profit-selling by stockists amid a weakening global trend.  

Source:
http://timesofindia.indiatimes.com/business/india-business/RBIs-intervention-helps-rupee-post-biggest-single-day-rise-in-15-years/articleshow/22143179.cms