Money distribution…….

Last week, auto sales numbers came out. It was not impressing; in fact it did revoke some thoughts. Apart from Maruti and Hyundai, no other company is positive on sales. This message makes it clear that people are not buying automobiles.

Urbane-Media-Start-Up-PostReal Estate sales are down for quite some time, which means people are not buying homes either. Inventories of apartments are moving up on a regular basis which is placing severe pressure on the finances of real estate developers. It is just time, that the developers will do distress sales of their holdings which will still supress the markets.

On the other side inflation is cooling down, fuel prices getting eased has given a lot of cushion on the inflation. Wholesale price index has moved into deflation. This again means that people are not buying more of essential products because only if there is no demand can the prices move down.

Does this mean that people don’t have cash to spend, which is not likely because there have been good increments in salaries.

Where does all the money go? One area where it can go is investments. Even there we don’t see a big pick up, though compared to previous years the savings rate this year is a little higher, which is the reason Mutual Funds gave a big support when the markets fell this time. They had purchased stocks to the tune of 22600 Crores in the last 8 months.

So, if investments are not happening, and people are not spending, where is the money going. Obviously, it cannot be stored in the back yard though. A little guessing on this idea, made me think that there is indulgence spending happening in the economy. People are spending money on things that are not of much value. Off late India has become a booming place for start-ups. Every other day there are at least a few start-ups coming out and the beauty is that all of them want to corner market share to show their investors and get funded. And when funding happens, there is more pressure to scale up so that the investors take exit and give way for the next level of investors.

Buy3get3To achieve this goal, almost all of them are playing the discount game. The public today are lured to offers, even if they don’t require a product, for the sake of discounts, they buy things. Buy three get three free. The product price may be ₹5000, which is sold at ₹7000, the buyer feels he makes a 30% profit and buys this merchandise, even though he does not require the 3 that comes free of cost. Whereas for the seller it is a win-win, he would have already got his investment because the merchandize that comes free are those that were inventory that was considered waste and all of its cost had been factored into the existing pricing.

The end result is buying something that did not have much use and having it stored in the house. The inventory that was to be lying at the seller’s godown now takes a place into many buyers’ residences. The loss is distributed, while the buyer is not much worried about not using the purchased products.

startup-keySimilar situations are happening around the country, thereby sucking liquidity from the markets. And there is one more interesting thing happening now in our country. A couple of decades back, in every house the only word that was familiar was software. Software not only took space on the computers, it went into all the nooks and corners of the country. Every house had a software engineer, either working in India or abroad churning big sums as salaries. Since they were earning big money, they were splurging in expenses too. All of a sudden shirts cost upward 3K, shoes above 5K. Real estate sky rocketed all because of demand and there was money chasing these merchandize.

Inequality started showing largely in the economy. A poor man walking with his kid across the road can see through the glass panes of a pizza outlet where the family of a software engineer is wasting food, half eaten and half left because he had judged that he has a big appetite only to realize that his stomach got full with half the quantity. Keeping the food on the table his kids are enjoying a softee from which the ice-cream is melting through the hands of the kid. While at the same time the poor man who is watching this has no money to buy a square meal to his child who doesn’t have a good clothing to wear.

Money just flew away and got accumulated with the software people. Now, after 2 decades, the people who are funding the start-ups are the very same software engineers from their savings. They have so much money, which they want to multiply even faster; in the bargain they are taking wild bets on the start-up companies.

In reality what is happening is that the hoard of money earned is now getting distributed in the form of discounts. The people who beared the brunt of low paying jobs while our software guys took away fat salaries are the people who are most sorts after by the start-ups for their companies to show market strength. All the start-up companies will not see the light of listing in the stock markets which is the ultimate exit point for the Angels and Venture capital investors (Almost all these investors are one time software engineers).

The winning percentage here is less than 5%, if 100 ideas come out as businesses, only 2-3 businesses will get listed. There will buyouts and merciless killings of companies happening in the coming years, in all this drama that is going to happen, the money that is going to be used is from the Angel and Venture capital investors

This kind of spending is not good for the economy. This start-up bubble will soon go into thin air and by that time the distribution would have been fully through.

If the public are smart, each family can easily make a couple of lakhs using the discounts that are dished out by these new age companies. As the money gets distributed, it will move from the hoarders to where it is required.

Be smart, make use of all the apps and take as money as possible from these deep pocket investors, who mostly do not know the dynamics of investing. One thing is good here; this loss to the Angels and Venture capital funds is not going to hurt anyone, because it is a bigger level gambling that is happening in our country now.

So, enjoy the journey, make money in the bargain.

One serious message to the public, when these companies come out into the market to get listed, doesn’t invest in them blindly. Almost all of them are under loss; don’t get sucked by the hype. You were already killed once by sacrificing your dreams when they made big salaries, now, don’t feed in again. Stay out and watch the fun.

Volkswagen emission crisis..

On22nd September SENSEX reeled down above 2%. This was not a big tremor to the public because they got used to such shakeouts since the Volkswagen LogoAugust 24th fall post China crisis. This time the story turned towards the other part of the globe, EUROPE, where there was a mostly calm situation apart from the known fact that the European economy is almost a stagnant economy. Volkswagen has cheated the US authorities by using a faulty emission test norm to sell about 11 million cars fitted with a poor performing diesel engine. Whereas, the company had been advertising across the US stating that their cars come with the cleanest diesel engine.

Now, the company is recalling 11 million cars from the market to fix this issue and it has earmarked more than 6billion euros to meet the crisis. The US government has filed a case against the company claiming damages to the tune of $18 billion. Its CEO Winterkorn, admitted to have screwed up the company for good. Volkswagen stock loses 48% value in 2 days since the issue got reported. The company being the beacon of engineering excellence in Germany, an automobile behemoth controlling most of the prominent brands under its ownership like Audi, Skoda, Porsche etc.,

The impact of this scandal to the global markets has been multilevel. Due to Volkswagen’s huge exposure in the auto sector and the prominent brands it owned, there are a number of companies globally, who are vendors to the groups businesses in Europe as well as across the globe. All these companies will get affected. Germany being the hub of Automobile engineering, there are a lot of Indian companies who own facilities in Germany and across Europe. Some of the big names are Motherson Sumi, Amtek India, Bharat Forge. All these companies have already taken a big hit on their stock prices.

Amtek is into a bigger default, already faltered on a 800 Crore debt and has about 15K Crores which are not likely to be serviced. This issue is going to take many of the PSU Banks and some Mutual Funds into hardship.

At a time when the world markets are under pressure due to the commodities meltdown, this issue added fire. The beauty here is that, the Beetle carautomobile industry segment was the leader in the last year’s market gains. There were many companies in the Auto Ancillary sector that gave very high profits to their shareholders. Now, within a year the same sector has become party to huge loss of wealth. This makes us realize that, anything that shines cannot shine for ever or at least cannot continue to hold the strength regularly. If someone has been invested in the auto stocks by virtue of their understanding of the industry growth, they should have already moved out of the investments, else will suffer losses now. The damage that is being played out is pretty huge and will take a lot of time to recover.

In our portfolio, we had big time exposure to auto stocks, mainly in the ancillary segment. A couple of weeks back our system had helped us move out of them to a larger extent. When auto stocks were in rally mood we had more of them, now as they enter into troubled zone, the exposure has got reduced by a natural process.

Mid Cap stocks are stronger than their large cap peers.

FIISelling TableThe interest rate hike fear has come again this year after it had created a tantrum in 2013. A comparison of FII selling in our markets against what was in 2013 has been marginally higher. In 2013 they had sold to the tune of 22639 Crores, now it is 22693 Crores, just surpassed the previous numbers.

The situation now is entirely different from what it was in 2013. This time when FII’s were selling, we have had the Domestic Institutions (DII) buying, from 13K Crores in 2013; they have increased it to above 21K Crores in 2015. Domestic buying was possible because there was money available with the Mutual funds, which means there has been good retail participation in the markets. Indian public’s contribution to mutual funds.

Even though there were good amount of purchases made by the domestic institutions, the SENSEX has taken a bigger hit this time. The dynamics here was totally different. FII investments were mostly into the large cap stocks, while the domestic purchases were from the mid cap space.

Now, who is smart among the both?

I have been tracking MF purchases for the last 5 years, and all this while the domestic participation will always be on the wrong side. While, this time it is different here too. FII’s have been caught on the wrong foot. Their investments have largely been on the frontline stocks. There is a reason that the large cap stocks are not performing.  It is both they have a bigger base and growth from there is a challenge or there is de-growth visible in their balance sheet.

For example: Banking stocks do not have any kind of growth visible in them, this was more clearly known last year itself. Banking has hit the highest impact in the current downturn. FII’s splurged heavily by being invested in these stocks.

So, when they sold out, there was no saviour for large caps, hence the fall is 8.77% on the SENSEX this time when compared to 5.77% loss in 2013.

Have the MF’s become smarter on their own or the retail participation made them do it, we do not know. The inflows into mid cap mutual funds were higher compared to large caps and hence, the DII buying was concentrated on the Mid-Caps. It springs about good news; the retail investors of India have gone smart. This is news to celebrate.

I used to always think about, why foreigners are taking away all our wealth through stock market profits, while our people being the creators of this wealth are not enjoying it? Now, there is relief. People of India are enjoying the benefits of their growth.

The Rupee has also been strong when compared to 2013 Taper Tantrum, now it is down only 2.29% as compared to the 9.70% drop in 2013. Thanks to Raguram Rajan’s wonderful policy decisions.

All these data numbers throw out some predictable moves in the coming months.

  1. 1.       Currency is strong, so, the bounce back is going to be strong for India.
  2. 2.       Mid-caps show more strength, they are going to outperform in the next rally.
  3. 3.       Large Cap investments will take time to pay returns.
  4. 4.       FII’s cannot do much damage from here. They can only multiply the bullish effect.

If tapering of interest rate is happening in the US, FII’s will take time to come to India. There is no fear of big sell out, as they have already moved out considerable funds from our country.

In case the situation is opposite and the FED postpones tapering, the FII’s will rush back to our markets and this time they will buy more into Mid-caps as they have already burnt their hands on the large caps.

FII buying into Mid-caps will take the stock valuations to levels one cannot imagine off. The reason behind this is that Mid-caps don’t have the float that large caps have; which would simply mean that there will be very high demand for quality Mid-cap stocks while the supply is going to be minuscule. Unless the DII’s get into a selling spree, there cannot be much liquidity available for the FII’s to absorb. And it is unlikely because it is the public who have to decide on moving the funds out of the Mid-cap funds to provoke selling pressure.

What a beautiful situation we have come into?

Investors, sit tight with your mid-cap exposures, you will see astronomical valuations coming in a few months from now.

Out Bravisa Templetree portfolio is loaded with the best of quality Mid-cap stocks, which is likely to take us to the moon….. I suppose.

Let’s laugh all the way to the bank, enjoy our money growing in a super-fast manner. A speed that we have not experienced so far in our life.

Debt Market: In for a spin.

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There have been 2 new developments in the debt market which has been doing rounds with more seriousness. Amtek Auto Group is staring at a ₹17500 Cr. Debt due to over leveraging and Jindal Steel & Power have got its debt papers under rated. Following these developments SEBI has summoned Mutual Fund Houses having big exposure in these Corporate Papers for evaluation. JM Mutual has gone into scrutiny, Franklin has been asked to give the data since it has exposure of more than ₹4500 Cr’s in Jindal.

Banks like Axis, Corporation Bank etc., have big exposure in the Amtek Auto lending. Any further negative development will bring shock waves into the market which is already reeling under pressure of Global consolidation.

The assets that could get affected are Fixed Maturity Plans of fund houses and to some extent all their short term schemes. If the confidence of the investors in these secure assets is shaken, the overall markets will move into a prolonged sideways consolidation.

Automobile sector which was the leader in 2014-15 market rallies has slowed down; Amtek has mentioned it and have been experiencing the same in their investments in buying out larger businesses across the globe.

With a couple of days left for the Fed Interest drama to pan out, this week is going to be a serious one at the markets. Fed decision making is planned to be done over two days, 16th and 17th September. Our markets are to be closed on 17th following Ganesh Chathurthi, which will add to more pressure.

As people pray to Lord Ganesh asking “GIVE ME MORE YA”, it has to be seen what will be more, pain or pleasure.

30% of BSE 500 Companies available at 40% discount.

There was an article in Economic Times on the above topic. 40% discount is a big number, how should we see this one? Is this discount an advantage or worrisome?

goldbear_npMost of the companies that have lost big time in the recent weakness are from the Metals and Banking sector. Metal stocks have been the mostaTeoRR7T4 hit with some stocks losing more than 75% from their peak prices. Metals or commodities as they are wildly said have been very poor performers worldwide. The reason behind this is China! Does that mean the whole world has been dependent on China for their commodities business and if that is true, China had been buying raw materials from across the globe to feed its mammoth manufacturing facilities? Which also means that, the world has given itself fully to the dragon.

 

How things will change from here and make this crisis situation an advantage is not very clear for now. Whereas, such high level of dependency on China is not a good one. If it is continued, such turmoil’s will repeat. China’s forex reserves have taken a nosedive as the government has resorted to dollar selling to keep the Yuan safe from sliding down. This will create one more problem, if China has to purchase all the raw materials available in the world, it has to pay in dollars. Will it resort to some other game plan to meet that requirement? It is very early to comment on these ideas.

bank-collapseFor the banking sector the woes are much higher. Banks have not only lent to the core sector like metals which are in doldrums, it also has good exposure in the infrastructure segment, which is another big bottle neck.

When Modi government came to power, infrastructure was expected to be of highest attention and priority of the government, where, there seems to be an abrupt neglect. Our country needs infrastructure to grow faster, why we are not taking bolder steps here is not known. As the lending to these two sectors along with all the existing mistakes the consortium of public sector banks have created are building up huge NPA’s, Banking sector is not likely to see a turnaround in a shorter duration.

Housing sector has seen slow down, Automobile purchases are showing down tick and these are the segments were banks have big exposure too. When the industry is not taking loans, retails is becoming tight, Banks cannot perform better.

So, no wonder that both these sectors lead the wealth destroying mela in the markets. Investing in them just because their stocks are quoted at lows will only result into long term dormancy or investment suicide. Yesterday I had one of my clients ask me about investing in SBI, because he sees the stock is cheap. This thought is normal, because for us Indians, SBI is a behemoth at least that is what we think about. Our Grandfathers had accounts with SBI, which means it is trustworthy. Yesterday SBI hit its 52 week low. Any stock that reaches for a new low goes there for a reason; they rest in peace for some time and only then start their journey upwards.

When markets go down, which is a natural process, how much our portfolio has taken the impact is what everyone who has invested in stocks think about. Going by emotions and sentiments if someone has invested into stocks like Tata Steel, SBI, PNB, Jindal Steel, Tata Motors etc., they are doomed for failure. Always, investing in the sectors that are in the limelight for their performance is the good one, when it comes to investing.

In our Bravisa Temple Tree portfolio we don’t have a single stock in both, Metals as well as Banking sector. We were not biased in taking this decision, it happened as a natural process as our research application did not give out such names for investment. Following the very simple principle that we will invest in only those companies that have good sales as well as profit numbers has eliminated these stocks from our list. When in 2014, the markets made a big rally with most of the participation coming from the banking sector; there were thoughts in the back of the mind, “Have we missed something?”  It was good that we struck to our rules, now; it is getting proved that our decision was right. The damage that both Metals and Banking sectors have created in the market will take time to ease out, which in the process will also bring down valuations of those companies that are fundamentally good. Once the dust is settled, and the market begins on a renewed rally, the fundamentally strong stocks are the ones that will lead the market rally.

Feels good, that we are placed right.

April-August in 2015, is my money safe?

Stock markets have taken a nosedive post Chinese currency crisis, affecting valuations worldwide. In a sense, this correction has been getting the real value of those stocks, which had run up without any fundamental support. In this scenario, how our portfolio has performed or is my money safe? Is the question that will strike our mind?

Overall there is likely to be a drop in value of the investment, because one cannot be positive always by investing into Equity. Equity is a volatile asset and it is only due to that volatility, there is opportunity for the smart people to outperform all other asset class in returns.

If it is continuously going up like a Fixed deposit, there is no chance to have any better profits than the average and there is nothing much to do with this asset. And if there is something, that secure, it would have factored in for all the fears and have the minimum appreciation. It is because of this reason that the secure assets grow below the inflation which is normally said in the investment parlance as ‘Negative Returns’.

These kinds of corrections are not a surprise; a small magnitude correction does happen once in 2 years and some corrections of higher magnitude happen once in 5-6 years. This is mandatory and we have seen them quite often only that over time, we tend to forget the pain we went through. Once we move into a zone, where we experience pleasure, there are very less chance that we remember the pain we underwent, before reaching the joyful zone.

Sensex Gain ChartThis is what is happening with the markets now. Last year we had a euphoric run and now it is correction time. We have not moved below where we started on this current rally, but, when markets corrected, there is panic of losses and newspapers & media are blowing it up. When the bull market of 2014 started SENSEX was at 19500-21500 range, now the correction is happening at the 30000-25000 range. It is more than 3500 points higher than the space where it began. When this consolidation is complete and we resume the next journey upwards, we will have a support zone that is for sure, higher than the previous one at 19500.

For a regular investor, this was a good opportunity; having secured about 15% profits and moving up to add more. But, for people who time the markets and wait for a lot of confirmation before entering in, the losses could have been higher, because, by the time they decide and take the plunge, market would have had a fairly higher move and be ready for a correction. If someone had entered the market in March 2015, their losses as of now will be more than 15%.

fundAll these events that come often, like the Currency War that is happening now, will inflict a small damage, make the valuations realistic andPharma-Tabs vanish from the scene. Then, we tend to forget the pain the move on. To avoid major damage, any portfolio has to re-adjust the holdings by moving out of weaker stocks and add stocks that are showing new strength thereby getting prepared for the next move.

Every time there is a correction, the leadership among sectors and stocks change. In 2013 Technology sector was strong, in 2014 Agriculture and Automobile stocks had a very good rally, now in 2015, Pharma and NBFC stocks along with Textile stocks are showing strength.

Let’s take a look at how our portfolio at Bravisa Temple Tree has performed so far, in this financial year compared with the other funds that are available in India. As our portfolio consists of diverse sectors, it is apt to compare the performance with the diversified funds and the broader index that can be either the NSE 500 or the BSE 500 Index.

Apr-Aug15 Returns

In the last 5 months in this financial year, the top performing diversified fund, is the ICICI Prudential Exports & Other Services Fund with a near 8% returns, while the NSE 500 Index has given negative returns of close to -7% in the same period. Bravisa Temple Tree portfolio has managed to record 3.34% returns in the last 5 months.

 

Bravisa Temple Tree portfolio stands second in the top order in performance. Our portfolio does not consist of any Banking or Metal sector stocks which have been the biggest wealth destroyers in the recent past. We moved out of Banking in end 2013 as the performance of Banks sowed and they began to feel the impact of wrong lending. Moving into the Pharma sector along with the NBFC and Textile sectors just as they began to show strength in 2015, was the reason that we have performed well. ICICI fund has exposure in the Technology sector which has been showing a run up following the currency depreciation. We have low exposure in Technology stocks as we follow the discipline of investing only in those companies that show strength on their Sales and Profits. Technology sector profits are likely to show more growth in the coming quarter because of currency depreciation, which is not a right valuation. We might miss a few percentage gains by not adding them to our portfolio, but, on the hindsight a portfolio that only consists of growth stocks gives more confidence when there is a shakeout in the market, because, overnight there cannot be a situation where such g companies with good fundamental will falter and bring down the valuations.

We have been reducing exposure and moving to cash as many of the stocks in our portfolio that were showing tiredness are moving out of the portfolio. On a continued weakness in the market, lower exposure will ensure lesser losses and when the market moves up after the correction, we have funds to add new stocks and be on the next journey with a stronger presence.

Ashok Leyland leads in August Auto sales.

Auto sales were weak for most of the frontline companies in August this year. Hero lost near 14%, TVS had a 1% growth, Maruti managed due to Ciaz and S-Cross, which otherwise would have been negative. M&M goes weak, Tata Motors 0.50% down on overall sales.

LeylandLorry

Ashok Leyland & Eicher were super stars. Ashok Leyland managed a 39% growth, supported by pre-buying ahead of ABS (Anti breaking System) becoming a mandatory norm from October 1st 2015. The growth was slightly ahead of expectations. Eicher continued with its above 50% growth. Royal Enfield sales grew 59% and commercial vehicle sales grew 22%.The company has opened sales office in the North America, which is another positive for its growth as exports are on a steady increase.

classic350_right-side_blue_600x463_motorcycle

Ashok Leyland turned around in the last quarter and it is likely to continue its growth phase for some more time to come. Stock has already run up, but still has a lot of room to be captures. Ashok Leyland came into our portfolio at ₹74, in August 2015. Post strong growth numbers we are adding to the existing exposure after the current correction phase is over.

At its high of ₹99.65, our investment in this stock has reached 30+ percent profits in a month. The broad based correction in the market post Chinese currency crisis has brought the stock down, which is an opportunity to accumulate for those who missed it at 75 levels.