Infrastructure... The Big Investment Story.

The elections' outcome have given a new wave of confidence globally in the Indian economy and with more than US$700 billion worth of investments to be channeled into India's infrastructure, power, telecom and pharma sectors over the next five years, this sector is well poised to reap the benefits.

The government is all set to make sure that the recommendations of the eleventh 5 year plan takes place and thus the Indian economy is on its growth trajectory . The total planned spending in the eleventh plan was about $275 bn and this can only be possible if the government ensure that the public-private participation framework is strengthened by creating the institutional framework for center-state coordination, financial closure, and viability gap funding. Above all since the government is already running into high budget deficits of over 10% of GDP it has to invite more private equity to fund the infrastructure growth.

Moreover investment in infrastructure provides a very good linkage effect for other sectors to go, because the lack of adequate power, road, railway and port infrastructure it is very difficult for other sectors to perform, creating a bottleneck to growth. India has faced a huge power shortage over the last few years which has increased from a low of 5.9% in 1998-99 to 9.5% in 9.5% in 2007-08, thus hindering the growth.

While theoretically India's potential economic growth could have being higher at 10%-plus, as in China, the slower-than-warranted response from policy makers to create the infrastructure supply was restraining "practical" potential growth. The government knows that if it is able to develop the adequate infrastructure the growth will follow but more - votes in the next elections.

The classic example is the number of seats bagged by Nitish Kumar in Bihar in the recent polls. After the years of Lalu raj in Bihar, when Nitish's Janta Dal was sworn into power it did a great deal of work to turnaround Bihar's ailing infrastructure. It left no stone unturned in building roads leading upto even the smallest of villages, improving irrigation and much more and the result- A SOUND VICTORY IN LOK SABHA POLLS.

Thus I believe its the right time to build up a portfolio of good infrastructure stocks and keep investing in it in SIP mode. Some of the good stocks I believe are good for long term investments given the upside potential of the sectors are L&T, GVK Power & Infra, GMR Infra, Supreme Infrastructure India Limited, Madhucon Projects and NTPC.

The reason I am saying that one should invest systematically and not at one time because this completely eliminates the market timing risk. Presently some of the mentioned stocks have rallied a lot over the last few weeks , however the upside potential is still there and thus with SIP investment there remains value to be unlocked.

Would be great if you people could also suggest some good Infrastructure stocks and your views on this sector.

HAPPY INVESTING

Too Good to Be True...!!!

I'm sure you have heard the expression, ‘If something sounds too good to be true, it probably is.’ Well, in the investment world, I say, ‘If something sounds too good to be true, it definitely is.

After months of pain, miseries and cries for the Indian markets, here comes the best panacea: UPA in power without LEFT. This all seems so very good as if we have entered into a fairy tale land and the whole world has changed. The Indian markets became the only market in the world to rise more than 20% in a day and hey we also outperformed NYSE yesterday in terms of total turnover for a day. (and Udyan Kisses his laptop- Amazing Journalism)

You must be wondering that after saying all this I would say that this is all crap and markets will fall again as I have said earlier and have being proven incorrect on some occasions. Then you must be correct to some extent.

I am also very much in favour of this idea that UPA can take India out of economic crisis, Mr. Singh is an amazing economist (most learned in the country) and his privatization and other reforms will give government the required funds to pursue reforms and will lead to a stable Indian economy. But from here I change my views. He is an economist, but surely not a magician out of Harry Porter's book that he would wave his magic wand and the crisis vanishes.

Even the best of the policies takes time to take effect, and this sudden euphoria will only leave a more sick retail investors class (read my earlier post Medicine for Markets). Its time to be realistic and start picking good stocks for long term investing rather than joining this bandwagon and chasing those highly overpriced large caps. The worst may not be over but the speed at which we were reaching there have definitely reduced. For FY10 the average EPS of index companies is expected to grow by not more than 10-15% and the indices themselves have grown by over 60% in 3 months. So a correction is definitely round the corner and its the time to build the portfolio.

Current Nifty P/E has come very close to those bull market levels and there is a buzz that "BUY or otherwise You will be left out". I believe its better to be left out from buying those hefty large caps. Focus should be on good mid-caps/small caps whose earnings have not collapsed as much as their P/E has collapsed within last one year and are fundamentally strong (low debt and good operating cash flow).

Some on which I am working presently are : Prism Cement, Temptation Foods, Sonata Software, (more will come.) Would be great if you all can also add some on the list:

HAPPY INVESTING.

Election Over.. What Next...?

Five years ago—on 17 May 2004—Indian equities plunged on news that the United Progressive Alliance would form a government in New Delhi with Left support. The 30-share Sensex had lost a record 15.8% of its value on a frenetic day, opening at 5,020 and hitting an intraday low of 4,227. That episode receded from public memory after the subsequent bull run that took the Sensex over the 21,000 mark a few years later. Can today's gap up lead to a reverse mirror...? (Gap up and a bear for the next few years...?)

Come 2009 the verdict is out again and this time its a resounding victory by UPA, led by Dr. Manmohan Singh. It was the best possible verdict (other than clear NDA victory). The people who held the country to ransom (likes of Left, Mayawati, etc) have been shown the door.

However as an expert said, "The real worry is now that the Congress should not fritter away this mandate like they did in 1984". The next big event lined up domestically is the Budget and the Monsoons. Budget will take at least2 months to be prepared, and good monsoons should be here in a months time. Domestically, things seem to well settled now. The Budget would be interesting because all the freebies will have to be balanced out.

Today, the markets will gap up 300-400 points (Nifty). Now, what do you do at this point? Do not jump and buy the gap up. Just look at the charts after the Nuclear deal vote of confidence, the markets peaked the next day. We still have not reached nifty 4620 after that. Look at US markets charts when the day Obama was sworn, the Dow fell and reached its all time low within few months. (Coming of Obama was a good news for US).

It would be best to wait for markets to cool in. It would now be retail money jumping in. They are typically the last to get in. There would be definitely corrections on the way. (At 13000 sensex, nifty 3950, the trailing P/E would be around 19.)

There would be a dip after the euphoric rally on Monday. One should wait for that dip to buy.

Election Results & Market Implications

India's general elections will be ending tomorrow with the last round of polling. It was spread over 5 stages, taking over 4 weeks, involving 6.5 mn staff. In 543 constituencies, 4,617 candidates, representing some 300 parties, have competed for the ballots of an electorate of 714 mn eligible voters. In 828804 polling stations, 1268430 robust and tamper pro0f electronic voting machines were deployed which will release the results this Saturday.

This is perhaps one of the most important events that will shape the Indian equity markets in short term (definitely) and long run (in adverse results cases). I believe that there are 3 possible scenarios of the results:

• The Best case scenario which has a very little probability is that either of the 2 main coalitions NDA and UPA get over 200 seats. This will lead equity markets to soar immediately. The winner could be called to form the government immediately and this will a good outcome for the long term growth too
  
• The worst scenario is that both leading coalitions have less than 160 seats. Bad for equities in the short and long term. This would not only raise the chances of a third-front government, but can also take a long time for a stable government formation (as was the case in 1996). This could spell doom's day for markets on Monday and for the near term too


• The base case scenario (most likely) is that In the base case, at least one of the coalitions will have between 160 and 200 seats. In this case what matters is the margin of victory and if one coalition is ahead of the other by over 25 seats then the likelihood of a stable government is more profound (and good for markets for short term). However if the gap is small, which is equally likely, the terms extracted by the minority parties could be severe and become critically important for the market. For example the role played by the Left parties or Ms Mayawati’s party. (This is bad for the the short term markets).

These are the three possible scenarios I believe. Once the polling ends tomorrow in which even I am voting ,the exit poll results will start coming out in the evening. However in the past exit polls have being misleading and so they should be viewed with ample scepticism.

As they say, the only thing predictable in such cases is the unpredictability and hence investors/traders should not leave any open positions ahead of this crucial Saturday and this is the reason why markets are tanking over last few days as the long positions are being covered by the wary traders.

Stocks Vs Gold

There exist an inverse relation between the global stock markets and the price of gold. Gold is regarded as a safe heaven asset class for investing and thus when people foresee a bleak future for the stocks, they hold on to gold to safeguard their investments.

Thus when markets fall, gold prices rise and vice versa. But presently this relationship is not holding true. Over the last few days when the global stock markets have given a significant up move the price of gold have not fallen by even half of that extent. This signifies that people are still buying gold which is a clear indication that the fear of a market crash is still in their mind.

Since 22nd April 2009, when he Nifty 50 Index have moved up by over 10% from a level of around 3330 to to current levels of around 3680, the gold prices on MCX (which is primarily driven by the Global Gold prices) have also risen by around 1% ( despite a appreciation in currency). This clearly shows that the risk aversion is still there.

One of the articles in Economist's last week issue is worth mentioning in this regard related to over optimism and scepticism. Its broad idea was that-

"The worst thing for the world economy would be to assume the worst is over".

t says that this new extreme optimism contains two traps, one obvious, the other more subtle. "The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths"

The crux I could make out of that article was that the worst is not yet over now, only the rate at which we reach the worst has slowed down.

Thus my view is to be cautious and then execute your trades rather than being complacent.

Liquidity No More An Issue..!

I remember watching a group discussion on Diwali's eve on CNBC. The topic was the 'Future of Indian stock markets' and the participants were 3 eminent investors/analysts- Rakesh Jhunjhunwala (The All Time Bull), Shankar Sharma (Bear since ages) and Sameer Arora (a practical hedge fund manager).

The discussion was just after the day on which Nifty touched its last 2-3 years low of around 2250 and the global market mood was really gloomy. The earnings scenario was bleak (which still is), the commodities had crashed, inflation was just easing out, loads of other macro economic problems.

Given the bleak backdrop also Mr. Jhunjhunwala was very very bullish and was saying that India is an amazing long term story and the valuations are at historic low levels and so its a 100% buy situation. On the other hand the famous bear Mr. Sharma was of the view that nothing is going right and the index will touch 1800,1500 and the stock market is not the place to invest or earn, but to go for full fledged shorting.

But the third view of Mr. Arora was a realistic one. He said that the problem is liquidity. He said that its a known fact that the valuations are cheap, but where is the cash (liquidity) to buy things at this cheap valuations. He was of the view that the markets will only recover (or give temporary short term rallies). Its like u know that a BMW top model costs over a crore and someone is saying that pay me Rs 10 lakh cash and the car is yours. But Can u still buy that...? The answer for many would be no despite the fact the valuations are cheap as the person does not have the cash.

Thus I strongly agree to Mr. Arora's view. What has happened to global financial markets over the last 1.5 months is that too much of liquidity is chasing the beaten down stocks and as a result the Nifty Index has risen by over 45% in the last 1.5 months when the Bloomberg consensus earnings estimate growth for the Nifty constituent stocks for FY10 is not more than 15% and the consensus expected GDP growth is only around 5-5.5%.

The situation is really going crazy. Three months back a news for Chrysler filing bankruptcy could have taken markets to new lows and today with the same news the experts are saying that whatever is happening is happening for its betterment. Swine flu did created some jitters last week, however even the flu got a panacea-The Liquid cash ready to buy that dip.

The BSE IT Index rallied more than 8.7% yesterday, when none of the IT companies have guided for more than 4-5% earnings growth for FY10, and given the fact that most of them are trading well above 14-15 times their FY10 earnings (so valuations were also not cheap).

Thus all I would say as I have said earlier that once the euphoria starts creeping in, once the CNBC starts having new polls all having questions saying what is the next upside level. The downside is definitely inevitable but the only question which remains is its timing. It may be after the Thursday's bank stress test result, or after 16th May when the election results come out.

I remember a famous quote "The steeper the rise, the faster the fall"