SBI reporting Loss & the Message it Sends…

SBI reporting loss in its December 2017 results after 17 years of profits was a shock to the markets. At a time when the markets are giving off gains made in the previous year, worries arise in the minds of investors when big names bring shocks.

Indian stock market had a great run last year supported by all the external factors like Geopolitics, environment, climate, Government spending, etc. The only non-support area was companies yet to show profit growth in their Balance Sheets.

In this condition, loss reporting by SBI, brings uncertainty on the profit growth of India’s businesses. Is the low or negative growth only in one company, sector or is it in the whole economy? Knowing this will help us take decisions on whether to be invested into the markets, add more or stay away.

2229 companies have reported Dec 17 results so far. Among them sales has grown by 5.24% & profit growth was 12.31%. Clearly showing that the economy as a whole is not growing. They have been managing to get higher profits by cutting down expenses. In one way it is good because, when business grow from here, they will have higher profit margins.

If suppose, sales takes time to grow, cutting expenses further will lead to lower salaries and people will have less to spend. Economy will become flat.

There is an immediate need for the consumption to pick up. If everyone is saying no sales, thought comes as to, why sales are not happening? Are people not spending money?

It is said that, inflation is low, blue collar salaries are increasing, economy is growing. Then where is the money going? Is the whole population saving without spending? If that is truth, there is a new challenge to deal with.

We have Japan as an example. They saved so much that, now if they keep money in their bank, bank is charging them a fee. There are no borrowers, only deposits. Instead of lending money and earning an income, banks have now become safe keepers for people’s money.

This is the reason that Japan is now financing projects outside their country at ridiculously lower rates. Our bullet train project in Gujarat is financed by Japan. 80K crores finance with technology which we will start repaying only after 15 years and can take 35 years to payback. The interest is 0.10%. It is an advantage for India as we need not worry about the cost of this loan.

When more and more money goes into the affluent people’s hands, only savings get increased. Hence the government’s push to concentrate on increasing income for Blue collar jobs, who will spend and bring consumption.

Does this mean, opportunities for investors have come down?

There are businesses which have been growing, only that investors have the responsibility to identify them and invest. One cannot invest into any other stock & expect returns from his investment. So, be selective when selecting your stocks for investment.

As we are publishing this article, almost all other public sector banks have reported huge loss on their Dec 17 results. Upon this is the RBI directive to move about 2 lakh crores of bad loans to Bankruptcy Court. More pain coming to PSB’s which is bringing out their real worth.

1.30 Trillion $ earning negative returns globally

There are about 1.30 trillion $ of money that is earning negative returns globally, in the bond markets, there are about 12 Trillion $ that have turned negative as demand surged for quality papers. This is a very good opportunity for countries like India as there are very few countries today with quality papers available, that are having high returns. Chances are that, a major part of these funds can find their way to India. If that happens, it will be a good advantage to stock investors too, as some of it will also move into Equities which will increase the valuations higher.

In countries like Japan, which is the second largest economy today by valuations, companies are sitting with huge cash reserves, not finding ways to deploy them in their country. In Japan these days, shareholders meetings more than 1000 shareholders turning up, which was earlier only in the higher 100’s in number. All because of the concern that, growth is not happening and their businesses are idling capital. These shareholders have now began to ask the managements on the plans for deploying the funds and they have become specific in asking how much is going to be allocated to India.

World over, pension funds have a certain percentage of their funds to be deployed in emerging markets. While among the Emerging markets, India is the leader both in current performance and potential, which is going to attract a major chunk of the allocations.

India is becoming the next economic super power, giving best of returns potential both, from its debt markets as well as the Stock markets. With so much of funds likely to be routed to India, the Equity valuations are going to be far higher than what we have now. All these money are going to chase the same small number of quality stocks available in our country, which will push the PE multiples of those stocks. So, people can leave of the worries of high PE’s multiples and just stay invested in the quality businesses of India. It is boom time for Indian markets, capitalize on this greatest opportunity.