Budget 2019 & industry view on it…..

Just back from a meeting with Manish Gunwani, CIO of Reliance Mutual Fund. His views about our markets are that we are at a sweet spot where India markets will perform well. Election outcome if the seats are in the range of 180 to 250 for BJP, markets will not react. Less than 220 seats, will see a new Prime Minister, likely candidate is Nitin Gadkari. It was a little out of the box to hear Modi is not a choice, challenges of a bigger democracy.

We have very less contributors on exports. IT contributes $100B and NRI remittances at $80B. Apart from these 2 there are no big contributors. Pharma was giving some support, now with a lot of regulations, it has gone down. While our imports from Oil which is $100B and Electronics at $40B, almost takes away all of our income.

Oil price should reduce which it eventually will over a few years, due to the advent of electric vehicles and solar panel usage. With #MakeInIndia, as we begin to consume more of electronics made from India, both the big shareholders of our Forex expenses will come down. This shows a very bright future for India.

In the immediate period, 2019, though fund houses and fund managers are saying that we will have 10-15% growth, I don’t see a potential, it might take another year to get a boost for our economy.

The budget shows too much dependence on PSU disinvestments. This year Rs.90K crores to come from PSU disinvestments. Every year if we keep selling what will be left. Already government ownership in many big PSU’s have come to 50-55% levels. As it is, they are poor performers, and would not fetch good price, hence finding buyers will be a challenge.

Among PSU’s some are called Nava-Ratna’s & Mini-Ratna’s or Gems. These Gems got their shine because of government business which was like a light shown on a plain glass. Once they come to the outside world and face competition, they are very poor performers. When the light goes off, it is only plain glass with no value.

Continuous selling is also bringing down prices. Example is Coal India, where the stock was offered for sale at one price, then 5% discount, again at 3% discount and it continues. As the sale keeps happening the stock price is not moving up, thereby not giving any growth for the investor.

Now again government want to sell some more shares, which might not be an achievable target. Due to this the planned deficit of 3.4% will not be achieved. There were talks that, for the last 10 years we have been trying to maintain deficit at 3% and not achieved.

Next big damage in this budget was the bringing of a permanent expense of Rs.75K crores in the form of payments to farmers. These kind of facilities cannot be rolled back, no government will want to bit that bullet of non-popularism.

2019 probably might not be a big winning year for the markets. One very good advantage of this condition is that, if there is 2 consecutive years of no or negative returns next subsequent year will be a super star year.

2019 will set the tone for the blast off in 2020.

Golden tree Zee complains of negative forces

Zee group was the biggest loser this week. Their chairman blaming about negative forces destroying their wealth is a little too childish. Zee stock was bearish since Aug 18, all the present developments like promoters shares almost fully pledged, all the companies carrying huge debt, losing money on wrong decisions have only aggravated the condition. I remember having a meeting with one of the ex-senior of this group, where I was a little taken aback when he said, ‘everything said & done it is a “seth” owned management, they have lot of cash dealings. One should always be good with the bada “seth”, if he has to stay with the company’. After hearing this comment, when I used to find Essel Pack stock going up in the recent days, my mind was somehow confirming that it is not a good sign for the stock and it sees a single day collapse of 17%, washing away almost 2 months of price rally. The group including all zee channels, Dish TV and Essel Packaging together are running more 5000 Crores of debt and about 75% of promoter holdings is pledged with banks. Now when the stock price goes down, the promoters not only lose the valuation, they also get margin calls from banks due the value erosion. Satyam was a similar case which is now history. Looks like we are going to see more of our big names getting out of the markets in the coming days.

5 Myths & facts of Mutual funds

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.

Here are some myths & facts about Mutual Funds which are useful, when investing in this asset class.

  1. Myth – Mutual Funds are meant for long term investors.

Fact – Mutual Funds can be a short term investment but, It is meant to be a long term asset, to receive  high returns. Mutual Fund when invested for period of 5 years may give a return of an average of 12 – 15%. ₹1 lakh invested for 5 years will be 1.75 lakhs in 5 years. At 15%, money will double in every 5 years.

  1. Myth – Funds will get locked and cannot be used.

Fact – There is no lock-in period for Mutual Fund Investments, apart from ELSS schemes which are done to save taxes. Even these schemes are one of the lowest lock-in available in the tax saving products universe. Other products like, PPF, Tax saving FD’s, ULIP’s etc are locked for more than 5 to 15 years.

All other mutual fund investments are available for redemption at time after the investment. Only that withdrawals made before 1 year from the date of investment will have 1% exit load and above 1 year, it is free to withdraw.

  1. Myth – Mutual Funds always give positive returns

Fact – Investments into mutual funds are market related and will go through the up’s and downs of the market. If invested for short durations, there is possibility of having negative returns on the other hand, if the investment horizon is more than 5 years chances of negative returns becomes zero.

  1. Myth – Mutual Funds is very risky

Fact – It becomes risk only when we do something without the knowledge of what we are doing and don’t know the outcome. In mutual funds, experienced fund managers manage the investments and they are well equipped with research teams to identify good investment opportunities.

  1. Myth – Big Funds will give big returns and small risk

Fact – Wealth creation is about time and not size. Just investing into a big fund will not give big returns, while staying with the fund for a longer period will for sure give big returns.

 

Shifting of Crude Oil pain

In early October this year the emerging economies predominantly India was worried about crude
increasing rapidly on its price. Many of analyst expectations that it will not go beyond $63 went wrong, it moved past $80 and there were pessimists in the forefront talking that it will soon cross $100 and will bring big challenges for India on its CAD, the government on its elections, inflation etc. Oil going up continuously even defying its own weakness on technical made many who thought that pain of oil price to the world is behind us were also made to believe that it will have some more damage done to the growth of developing economies.

For the Oil producing countries, there seemed that they were the lords of the world, dictating terms
on price front threatening of production cuts to jack up price. At times it felt like they were enjoying
the pain that the emerging world was undergoing.

Within 40 days the story turned upside down. On 5th October, oil was at $84, it is overvalued on the
charts. On 21st November, it was $63, going straight to undervalued zone. Now the talks of the global media also have changed. So far, it was a concern that the emerging world is at pain. Now, thoughts of global slowdown has come.

Mercy thoughts are flowing in support of the oil producers. Saudi wants price to be above $73, to meet its budget plans. Russia says $70 is ok for us and we cannot stop our companies from producing as it will bring pressure to their capital. US says even $68 is ok for them.

Emerging countries are in party mood. In India, pressure on the Government to bring down taxes on
oil when price kept moving higher has now brought double benefits to the users. Oil price is down
and along with that lower taxes, it is big savings for the consumers and in a election year, there will
be no increase of taxes so, it is time now to enjoy lower pump prices.

So much in just 2 months. What took more than a year for the bulls to move up oil prices only took
40 days for the bears to damage. This is why it is said that, Bulls climb by the stairs and Bears jump
out of window.

In a couple of years from now the importance to Crude Oil as a product will be history. For immediate periods, Crude will try to move up in price, while it will find resistance on every upside rally and bears will bring prices down. At least 2 such events of lower price penetration will be there before we have any significant upward movement in prices of Oil.

FM’s thoughts on Oil & Loan Waiver

Jaitley’s talk at the ET awards, “Users should pay for oil… else fiscal deficit will rise and add to the current account deficit. It will push up inflation, weaken rupee. Tax on fuel prices should come down not by creating fiscal deficit, but through an increase in the non-oil tax to GDP ratio, which is on the rise since last few years. We must create a sense of maturity among people” Very nice thought, if we contribute by way of higher compliance, it will help in getting other benefits.

It felt like, we have only been asking without contributing. When we talk about this to people, they get agitated about paying taxes. It is because, for generations we have been on the receiving end.

Want farm loan waiver, how can that happen? Vice president Venkaiah Naidu said, “Loan waiver can happen only if there is a deposit waiver’. We did not want FRDI to come because we stated poor man’s money in the banks should not get used for the bank’s non-competence. All the deposit holders should be given highest safety on their investments. At the same time banks should waive off loans. This can happen only from the profits that banks make.

And unfortunately our banks don’t have that edge too, because of people running the banks who don’t have big vision.

Happened to hear a banker say that, “De-Mon was good and GST was good, while it was wrongly timed and not executed well. Government should have planned well to avoid the problems that it came across in implementing both these great reforms.”

We are the world’s biggest democracy having diversity of Africa to Europe in our mindset. When it comes to paying taxes we are like Africa, the most corrupt. There could not have been an opportunity to learn from some others mistake before bringing these two reforms. We should only learn from our own experiences. That is how it can be…..

There is an urgent need to move out of the comfort zone of protectionist mindset to accept reality & face the world as it is. It will strengthen us as a country and prepare us to have more luxuries.

 

7% gain in 3 weeks, what next?

Nifty closes above 200 DMA, rally comes from not so prominent stocks contributing for the gains. On Friday it was Bharti and today it was Yes Bank. Both are not fundamentally great ones. After a steep correction when there is a recovery, the general pattern is to go up and get back to lows.

Now the pattern seems to be changing course. When there is a steep rally and deep correction, which gets back to median without sufficient strength. The next course is consolidation. Presently we are in this area. Consolidation will bring more pain to traders with many whipsaw or losing trades, where they will shy away from the markets and then let the market take its direction.

With state elections due in December, where the expectations are fairly against the central power, it will trigger the next sell off. Crude Oil which was a big concern when it rose in price till a couple of weeks back has now suddenly turned opposite. Media headlines are “Beware! Lower Oil prices foretell sooner than expected Global slowdown”

When it goes up we are worried, when it goes down yet we are worried. Currency was high, it impacted the economy, now it goes down more than 5% from its peak, exporters are worried. Our country needs exports to perform well to bring in dollars. If that slows down due to uncompetitive prices, again we hit the reserves issue.

So delicate are our requirements. What is likely to happen? Tussle between the Government and the RBI is now one more worry. Govt wants RBI to relax lending to SME’s, it is a good gesture while that should happen only to quality businesses. Just for the sake of funding, we get into an urgency and give out funds. That will end up adding to more NPA’s. RBI agrees to infuse 8000 crores of liquidity into the markets. A small breather though.

Oil might take time to move up as the depth of correction is very high, while the currency is not in the same zone. We should see currency reaching for a new peak very soon, which can bring some uncertainties in the market.

From July to mid-November, traders made big money as the markets took a swing on both sides, now it is time for them to give back some gains. Among the index heavy weights, very few stocks have strength to move up like Hindustan Lever, HDFC Bank & L&T all others don’t have patterns that can take them to a bigger rally. Even those that are showing little strength, all of them are in their end stages, over head resistance will be high as they reach their top.

AS we keep climbing higher & higher the height of correction gets higher. As of now we have recovered more than 7% from the bottom. Strong resistances are just above the present price levels for the index. So we should be prepared for a 8 to 10% correction, where the previous bottom will get breached. When that happens, volumes should be low, which will happen because weak hands would have moved out due to prolonged correction. Then we will start our next rally.

Many of the stocks in the market are having patterns that require a test of lows to get strength. All these data coincides supporting a big correction which can come in mid December or early January.

For those waiting on side-lines, the next low is going to be a great opportunity to enter markets because they have the potential to make an easy 20 plus percent gains which can come in the next 12 to 15 months.

 

Defaults, defaults & defaults, what is happening to India

For the last few years, we have been going through continuous defaults by corporates in our country. More than 10 lakh crores of NPA’s & more can come. It can be agreed that there will be a few weeds in any stack, while not all of them or major part them are useless, right. Kingfisher went down, Jaypee group sank, Jet Airways is now blinking towards a collapse, Air India is in the ICU since long & now recently the IL&FS default.

Does this mean that, as a country we are a population which is not fit to do business? We are 20% of the world’s population and are most of them useless? It makes us think about the condition in a different manner. Was there something that is forcing these corporates to not perform or giving them room to think of cheating the system?

IL&FS is saying that the Government did not pay them on time, even though the amount that it has to receive from the government is only about 17% of the total default of 91K crores. Yet, these amounts if they had come on time, it could have helped save some losses in the form of interests.

In the KFA case, we had the FDI issue which did not allow funds to come in and support the airline. Later that was relaxed, after the air line collapsed. Our system was adamant to not change until we had one calamity. This change made Jet Airways to forge alliance with Ethihad, now it has gone nowhere. Here what will be the reason? GOK.

Most of the infra projects that are draining huge amount of capital in various forms like capital infused, serviced borrowings in the form of interest. Capital expenditure lying unused losing value are due approvals and clearances where the government is involved.

In most of the defaults, if we go deep to find the root, it is the Government that is responsible in one or other manner for the collapse. Next question – why is government not able to deliver & has been party in creating so much loss of wealth. Are they not accountable?

Non- competence, irresponsible people in the system who are running the departments is the reason. Why did our Public Sector Banks go into the condition where they are now, devastated? Very low responsibility of the people who managed these banks, more than work, job safety was the bigger priority for the employees. Even the top management did not question.

Compare private banks with PSB’s, in private if target is not met he or she is kicked out in 3 months. In Public, one need not do anything, come at his or her convenience, do some work if they have time after their multiple tea breaks and chit chats.

The other day there was a service tax scrutiny in one of my known sources business premise. The chief officer who came from the department team was comfortable ordering tea and snacks for his team, getting temperature in the room arranged for comfort. Other than this work he did not do anything. They had a plan of doing audit for 2 days, fortunately it got completed half way through the second day. The whole team packed off to their homes after having lunch. Half day’s salary for the team is to be paid by the citizens of India.

In the same manner one of my other friend had some work to be done from the corporation office. At 11.30 am there is only skeletal staff in the office on a week day. Only 2 women employees in the whole office, one is dozing off on her desk & the other is busy with her kid. When approached to submit the application requesting some rectification work, it was said to give it outside and outside there were only tables and chairs, no human being. All of them are either out to have tea or are in the rest room.

This is the way our government departments work and we should not be surprised if a couple of lakh crores are lost from our system. Until the system is flushed out of these non-productive resources our country will continue to have defaults. Many of the smart brains either gets sucked into the same group or gets lost of all their life time effort.

I don’t say that all the corporates who lost money were genuine hard workers, there can be crooks in them too.

Dividend as passive income

Dividend from investments into listed companies forms one of the passive income streams. Whenever this concept of dividend as income is talked, that too from shares, the immediate thought is that, it will be very less returns and the next one is, how to rely on a company for a longer period. Because every person who has a fairly good period of exposure to stock investing will know in their memory itself, many companies have vanished from their business.

Whereas, on the other side, there are people who are having dividend as a regular income stream. A couple of years back when the Tata Sons board had a thought of reducing dividends, there was big concern raised by elderly people who said that, they had commitments in their life based on the dividends and reducing it will impact their lifestyle.

What this shows is that, there is a possibility to have dividend as regular income which can take care of our livelihood expenses. In that case, how is it sustainable if a company gives ₹5 as dividend for a stock that is quoting ₹250. The dividend yield comes to only 2% of the investment.

Yes, most of the good, familiar and companies that have long track record of existence generally pay out about 2% of their prevailing value of the stock as dividend. While these are companies that are growing in their business consistently and that growth takes the stock price higher as time passes.

So, today if we buy a stock for dividend the return will be lesser, whereas holding on to that stock for a longer period increases the value of the stock as also its dividends. A ₹250 stock will become ₹2000 over a period and at the time the 2% dividend will work out to ₹40. So you will be getting ₹40 as income from your original investment of ₹250, which becomes attractive.

Only criteria here is to chose a stock that has been there in the market for a fairly long period and also continue to be in existence for an even longer period. Do we have businesses like that in our country?

Yes, there are many. Like ITC, BATA, TITAN, Hindustan Lever, Godrej, Bajaj Auto, Maruti to name a few. Look at these names, most of them or producing daily use products that you and I consume. When will we stop consuming and these companies can run out of business? For example, ITC has been there for more than a century now. In almost every corner of your city you will find Bata store, probably you will be using a Bata product too.

Investing in these kind of businesses will help get a good dividend income over a longer period and these investments will become legacies which you can leave for your children. If not to have all your income coming from dividends, one can look at having a portion of his or her income from dividends.

This is passive, because you are not required to put any kind of effort in making these investments work, people consume & growth these companies. So long the consumption continues, your investment grows and keeps giving you returns.

I did a working on ITC to find if it is viable. The stock price of ITC was about ₹850 in 2000. Over the last 18 years ITC has given many bonuses and splits in its stock price. If someone had bought 100 shares of ITC in 2000 by investing ₹85000. His dividend in 2001 was only ₹1000. It is just a little above 1%.

After all the splits and bonuses, today the 100 shares have grown to 4500 shares and the stock is priced at ₹300 today. The value of ₹85000 invested in 2000 is now ₹13.50 lakhs. The dividend that came for these shares in 2018 is ₹23500.

₹85000 investment in 2000 is now fetching 23500 per annum which is close to 30% of the investment & it will keep increasing.

If you have thoughts of having dividend as one of your sources of income in your retirement years, you can think of accumulating stocks like ITC to create a legacy. One more advantage is that, the feeling that you own a part of the countries economy. As you go across town in your older days, as you keep seeing brands across and people consuming, your mind will say, “I own a part of these businesses and every minute it is earning me income.”

What a feeling right?

 

Next big opportunity to invest in Stocks –

Stock markets go through cycles with up & down phases on regular periods, those who are able to identify them early and take advantage end up getting the best returns from the markets. Like the cycles we have in commodity prices. Crude or steel goes up in price when there is demand and comes down when supply increases.

As there are cycles for the whole market, there are similar ones for sectors too. Like for example metals sector went through a down phase when there was huge supply from China and when China stopped production, demand took the prices up and now the metals index is up 200 plus percent from the bottom it hit in early 2016.

Identifying and investing into sectors when they are at the bottom and about to turn up gives immense opportunity to grow wealth. Such opportunities come up often and 2 such conditions are available at present.

One among them is the Pharma sector, it went through a tough time since mid 2015 due to USFDA
clearance issues which forced many companies lose access to lucrative markets and thereby report losses. Now the condition has changed, most of the manufacturers have now adopted to the required standards, generics market has brought good opportunities and after a bottom or base formation any small growth will show up big and that will bring added value to the stocks.

This valuation gap will get filled with prices of stocks going up. Pharma stocks have already began their upward journey many stocks like GLAXO, ASTRA Zeneca etc are on the upward spiral. It is good time to pick up investments into a good Pharma specific mutual fund to ride this rally, which should last for more than 2 years and give some very big gains. 

Another opportunity waiting to happen is in the PSU Banking sector. All of us know of the challenges that our PSU Banks have gone through in the recent past due to their bad loans. Cleaning their balance sheets brought immense decrease in valuations and big loss in their stock valuations.

Now the cleaning activity is almost coming to an end, in another quarter or two most of the balance sheets should get cleared of all their NPA’s and even if the banks do not show robust performance on their numbers, just their regular profit reporting will give a big strength to their balance sheets which will attract valuations.

Again a very good opportunity to make more than 100% gains in the next 2 years by investing into this sector. The best way to capitalize on the rally that this sector will have is to identify mutual fund schemes that have more exposure to PSB’s and invest in them. One other alternative will be to invest into PSU Banking ETF’s.

These are pure sector calls which will go through high volatility and requires timing to enter and exit.
Getting in late into the rally or overstaying will give results that are opposite to what one expects from the investment. Have lesser allocation so that your investment does not go through volatility as well as help capture the gains of the next big opportunities available in the market.

Your investment advisors should be of help in choosing the right schemes along with timing entries
& exits.

Multi-Baggers in Pharma & PSBs

Turkish currency collapse and India staying strong brings confidence that India will continue its rally. When Large caps are giving new high’s, midcaps yet to catch up, which are trailing by 10% from their peak.

Midcap at the bottom of correction gives a bonus to current investors and the advantage that Mid caps have with average 3% additional returns against large caps, which when compounded bring more big gains.

SENSEX expected to reach 90K by 2027, where 1 lakh invested into SENSEX will be 2.25 lakhs & the same in Mid Cap will be 3 lakhs. For those who are investing now that is a bonus of 25K. Mid cap will give 225% growth for the next 9 years.

Pharma & Pub Sector Banking sector are likely multibaggers for the next 2 to 3 years. Investing in sector specific Mutual Funds with exposure to Pharma & PSB’s will help in taking advantage of the same.

Sector based investments can be volatile, take only small exposure to avoid any shocks int he interim.