India - Time to invest from FII perspective?

The other day, I was talking to a person from a major UK multinational company managing investments, who was telling me about how there is a sudden buzz there in increased interest in investing in India.He suggested that there is a lot of money in the developed which is looking for good value investments in India as most people are relatively extremely optimistic about the country.

The sudden upsurge in increase in investor interest in India makes you wonder if India has suddenly turned around from being one of the least popular destinations for investments in 2013 to one of the most promising ones in 2014. To get more clarity on it, lets take the following things into consideration from the fundamental side to see if it really makes sense to be considering investing in India.

a. BRIC countries - The BRIC countries actually represent a very important chunk of investments for asset managers managing emerging market funds with allocations between 20-60% whereas the rest of the world gets the remaining pie. Now looking closer, with Russia and Ukraine tensions coming to the fore, and the west planning to strongly condemn it, Russia has lost a lot of popularity in terms of investing due to perceived political instability which could lead to under performance for the country. On the other hand, the Chinese data has consistently been below expectations and there is a growing consensus that the world's second largest economy is slowing down and is having some serious economic problems to solve. This leaves the emerging market asset manager to consider only 2 destinations in BRIC countries viz India and Brazil. Thus there is a possibility of higher allocation from these BRIC focussed funds to India. Though this is not a fundamental improvement, but it still brings greater investment to India.

b. CAD - The recent fall in current account deficit in India has made the world optimistic about the seriousness and intent of the government to curb it. Besides, the improving trend augers well for the country as it helps in improving the rating of the country as well as ensuring that the debt market remains stable. Also, the cost of funding reduces for the government and companies within the country. Also, India has been grappling with this problem since a pretty long time now and any improvement in this suddenly opens the gates to growth and development improving performance of companies.

c. Monetary policies - The RBI has generally been tightening the interest rates as the inflation has been stubborn within the country. RBI is currently being headed by a very prominent economist who has been clear in his intention to promote and support growth as soon as inflation comes under control. Also, considering a possibility of rate cut cycle commencing, there appears an opportunity that Indian companies would start seeing their cost of capital coming down. This could help post companies perform better and hence leading to higher returns on capital.

d. Company performances -There has been little improvement in the performance of companies over the past 2 years. Most of the times, the results have surprised to the downside rather than upside which makes one skeptical about a possibility of a rebound here. But the silver lining is that the equity markets are generally forward looking and there has been growing optimism that the performance disappointment has been bottoming out. Most Indian banks are focusing on improving their balance sheets and reducing NPAs which would bear fruit now. Besides, the IT companies and pharma companies have found themselves at advantage due to falling rupee. FMCG companies have consistently outperformed owing to the ever increasing consumer base. Infrastructure has been a very serious concern currently with little reforms and lots of project delays and higher costs of funding but these companies have little weight on most broad indices. Oil and gas as well as metals which are major components have started benefiting with supportive government policies and stronger intent to decentralization and increased transparency. 

e. Oil and Gold prices - With Iran and Iraq increasing production and call on OPEC reducing, there has been an increased oil supply in the world. For the first time in decades, US has become self sufficient in oil. Looking at the oil supply demand equation - Demand - US (Rank 1 - Self sufficient first time ever in decades), China (Rank 2 - Going through slowdown), Developed economies (OECD/ IEA/ EIA all predicting near constant demand with little upside risk). Hence it appears that demand growth has been reducing significantly. On the other hand, comparing with previous year, US production has increased , Iran and Iraq have started supplying rapidly. Libya may soon come back into supplying which means that the supply could increase by as much as 5-6 mbpd very easily compared to previous year making it clear that oil prices may not go up in near future. Oil is one of the biggest component of import bill for India and hence a stable or reducing oil price augers well for India. Also, with possibility of Fed going into a rate increase cycle, gold prices might start coming down which would reduce the cost of gold imports too. The top 2 components of Indian import bill appear to be all set to come down which would improve the trade deficit for the country and improve the INR.

f. Currency - Despite the onslaught of the emerging market currencies, INR managed to hold strong its fort which indicates improving strength of the currency. Fundamentally too, reduction in oil and gold prices, inflows of capital, relatively higher interest rates, improving CAD all point to near term support for the currency. There is  however a possibility that tightening by the Fed could change the entire picture but then considering that India is better placed than most emerging economies, it appears that India would keep its attractiveness over other destinations. 

g. Optimism on the new government

There has been an increased overall perception and expectation of a stable government which is highly progressive and could lead to spurt in economic growth. If this does happen, it could lead to a sustained improvement in company performances as well as increase in GDP growth rates which could auger well for the country.

This entire picture can change in the following scenarios:

a. Unstable central government

b. Ukraine - Russia issue transforming into a serious diplomatic/ military conflict

c. Fed tightening more aggressively than expected

d. Spillover effect of China slowdown on the world.

Since the above reasons are currently defined and one would be able to see them coming, there is a valid case for India becoming an attractive investment destination for global asset managers! 

Inflation & Hedges

Inflation is the rate at which the price of a particular basket of goods increases. In India, the standard benchmark used is the wholesale price inflation. The basket of goods comprises of more than 600 goods polled from more than 5000 vendors. This gives an estimate of the rate at which the price is increasing in India.

The inflation figure is calculated using the following formula

WPI = ( Price of the basket in current year) - (Price of the basket of goods in same month of previous year)

                                    (Price of the basket of goods in same month of previous year)

India has among the highest rates of inflation in Asia which is not really surprising considering that it has a rapidly growing rate of consumer base and a rapidly increasing rate of money flows. Higher the inflation, faster is the rate of loss of value of money. To make it more clear, lets assume that inflation is 10%. Suppose you buy a package of goods worth 100. Next year, the same 100 rupees will be able to fetch 10% lesser goods. Hence, it would make more sense to buy goods today than to postpone the purchase to the next year as the prices will increase by 10%. This can be offset only by ensuring that the value of money increases by a rate greater than inflation so that despite an increase in the price of good, the money does not lose value and can still buy the same set of goods. 

This is generally done by investing in places which would either beat the inflation rate or at least give rate of return equal to inflation (Generally called as inflation hedges). This insinuates the need for investing as failure to invest would make your money less valuable.

The most preferred inflation hedges are considered to be precious metals essentially because the index of inflation itself has them as major components. Besides, real estate is also considered as a good inflation hedge though it does not reflect it as well considering a huge cost of entry and also a a large amount of overheads on it. Also, it is considered that equities give inflation beating  returns as generally valuation of most companies is based on the assumption that the company will at minimal grow at rates above the inflation rate.

                                  

5 Worst moments in World History

Since the beginning of civilization, humans have witnessed and experienced a tremendous set of ups and downs. Some of them have helped man reach the moon whereas some have been extremely brutal and tantalizing. Here is the list of 5 worst moments in human history. These are the lows which have either made life difficult for humans or fellow beings.

Rank 5 - Forced extinction of species

The Permian-Triassic extinction event at one point threatened to completely annihilate life on earth. It occurred some 252 Million years ago and was the worst ever extinction witnessed by Earth. It destroyed 97% of marine species and 70% of terrestrial vertebrates. The destruction was so severe that it took more than 10 million years for recovery from it. Though this has been mostly a natural phenomenon, humans have also contributed recently to extinction of a huge number of species right from tigers to black rhinoceroses. For more information on Permian-Triassic extinction, refer to: 

http://en.wikipedia.org/wiki/Permian%E2%80%93Triassic_extinction_event

Rank 4- The Black Death

The Black Death refers to the Bubonic plague’s rise to power in 1346.This could be attributed to Europe’s general belief on the existence of witches. This led to mass hunting down of witches and cats (as cats were considered to be related to them). This led to extreme increase in the number of rats which were infested by fleas. The fleas carried yersinia pests, better known as plague.

Without treatment, plague is one of only three known diseases with a mortality rate of 100%. The other two are rabies encephalitis and HIV. Given the primitive medical knowledge of the Middle Ages, the world didn’t have a chance.

It killed 40% of Egypt, 30% of the Middle East, about half of the 100,000 people in Paris. The worst hit area was Mediterranean Europe, including Italy, Spain, and southern France. There, about 75% to 80% died. England suffered about 20% dead. The total average was about 25% of the whole world, as evidence indicates plague deaths in sub-Saharan Africa, India, and the Orient. As much as 66% of Europe and Asia succumbed. Approximately 100,000,000 people died in 4 years.

Rank 3- Fanatical Terrorism

Terrorism is generally an act which is meant to harm fellow humans either physically or emotionally. It has many forms like bombings, hijackings, assassinations etc which are all meant to kill fellow humans. It is a form of guerilla warfare against the existing systems and governments. Over the past 20 years – 1990 to 2010, the world has witnessed an extreme rapid rate of increase of terrorist activities. Besides, it is not limited to only one part of the world but is experienced in almost every region of the world. Besides the huge amount of human and material loss, these activities have led to a huge amount of suspicion and caution in global diplomacy.

Rank 2- World Wars - One and Two

The World War 1, 1914 makes it to the list since it was one of the worst and most destructive wars in human history which engulfed almost all of Europe and a huge amount of world. It was evident that every country in Europe as harboring hatred for the other country and was looking for a reason to invade.

About 15 million, military and civilian, died, unless we include deaths from Spanish influenza, which was itself a direct result of the War. That puts the estimate at about 65 million.

World War 2, 1939 was the next war which engulfed almost the entire world leading to huge loss of human and material. It was initiated by Germany and slowly engulfed the whole world in it.

After 6 years, 71 million people were dead. Rome, Paris, Moscow, Leningrad, and London were smoldering. Dresden, Hiroshima, Nagasaki, Stalingrad, and Manila were obliterated.

The most infamous aspect of the War will forever remain the Holocaust. In this, they carried out the murder of 6 million men, women, and children, by poisonous gas, shooting, beating, torturing, “scientific” experiments, systematic starvation, and overwork. More than 3 Million people were murdered in the camps simply because they were Jews. Meanwhile, at least 750,000 soldiers and civilians died in 199 days in Stalingrad. That was one of the battles of the war!

Rank 1- Crusades

The Crusades was a war based on religion. Though religion has been one of the most common reasons for war, it was also the reason for the bloodiest act in the history of human civilization – The Crusades. It was a war between Christians and Muslims whose sole objective was destruction of the other group in the bid to glorify their God. It lasted from 1063 to 1434 – Nearly 350 years!

The land which suffered this war was Jerusalem. The sole objective of both Christian and Muslim extremists was to capture this land and destroy all the religious observers of the other religion staying on it. There were 9 wars and in every war Jerusalem changed hands between Muslims and Christians. The war suffered severe loss of humans and also acts of mass killings. It was in the name of religion, immense cruelty and destruction was inflicted on fellow humans which led to extreme hatred which has continued even today.

Effective Promotion - Educate, Engage and Engross!

With the ever changing world of marketing, there is a need to evolve the strategies to achieve effective and lasting communication to generate a loyal customer base. 

With the new generation of customers taking center stage, there is a need to understand their usage and behavioral trends. This would enable creation of strategies which would in turn lead to lasting effects.This new generation customer is been constantly looking at active modes of entertainment (which necessitate getting more involved) over the passive ones (like just sitting and watching or reading). To examine this further, lets look at trends in the entertainment and communications industry.

The ever increasing share of active methodologies of entertainment like social media and gaming or pursuing adventure sports in the mode of entertainment over the passive ones like watching movies or reading books clearly insinuates on this evolution. Most surveys and research highlight increasing trend towards modes of communicating which are more engaging and involve more active response. With mobile phones and laptops surpassing televisions in sales and people accessing more facebook than reading books/ newspapers, clearly there has been a greater reception for modes of media which are more engaging.

Hence any corporation looking at effectively promoting their goods or services should essentially focus on ensuring that their promotion contains the 3Es - Educate, Engage and Engross to make sure that their promotion achieves a lasting effect and generates a loyal customer base.

Educate - Educating the consumer helps in two ways. It helps in not just helping create a newer market and creating more market segments. But most times, a customer who has been educated by a particular brand/ product tends to remain loyal to it. Also, it helps in ensuring that the product/ service is used in an optimal way as it has been designed which rather helps in creating higher customer satisfaction too!

Engage - Engaging a customer by games/ events/ contests etc help in getting a mind-share of the customer as well as ensuring greater recognition considering that there is a lot of clutter in the market with constantly increasing product varieties. Also, reports show that higher ability to recollect a particular brand influences buying behavior and which would in turn boost sales.

Engross - Engrossing a consumer would work exceptionally well for goods and services which are big ticket purchases. Big ticket purchases unlike FMCG are made at a lesser frequency and hence engrossing would enable better remembrance and recollection. The most commonly employed mode is loyalty programs. However with ever reducing cost of marketing on internet, engrossing could assume more methods and strategies to ensure that the product stays in the consumer's TOMA.

The success of lot of the companies can be attributed to their ability to engage their consumer. In some companies like Apple, Facebook etc. their product itself is engaging. Whereas automobile companies like Mercedes, BMW etc. go at length to engage their consumers and retain TOMA or influence buying behavior.

Valuations - A myth , A calculation , Or Just a random number

For generations, human mind has been perplexed by a question which looks simple but is still unanswered!
What is the value of this??

This question applies to everything from an electronic gadget to a house to even company valuations!

For products, it gets a little simpler, as the answer to this question is given by the manufacturer itself by attaching a price to the product. Despite that, the human mind still evaluates if the price is greater than the value or not and based on that makes a decision whether to buy it or not.

However, even in this case, the value is more or less a perceived value of it and would vary from one person to another. Someone might value a product at 100 dollars while someone else might value it at 500 dollars.

Lets look into this with an illustration - A bag made by a local vendor priced at x. Now suppose this local vendor becomes famous and besides starts using a better quality of raw material and as a result produces a better quality product. Also, he creates a loyalty program to benefit loyal customers, how should I value it?

Mathematically

Original price of the product = x
Add better quality of raw material ensuring the bag looks better and life of it increases twice = x
Add loyalty benefits = 0.25 x
Brand value (Esteem value for using that brand ) = y

Nett price = 2.25x + y

However it is common to see people paying a price of 10x ( or even 30x).Does it make sense for the same product. Look at Rolex or LVMH etc.

Now Isn't paying this amount a blunder for a value buyer! However this segment still exists and its pretty commonly perceived that the owners of such products are generally perceived as more successful people. This is an irony that these successful people are rather the most foolish value buyers!

The same is the case with company valuations. A company is valued at x. A sudden increase in someone's interest in buying that company pushes it valuation by 5x too! Besides, higher is the desperation (Rather foolishness) of the acquirer, the higher is the value it fetches despite any change of underlying fundamentals. Essentially, this simply shows how the so called smarter CEOs and investment bankers ( who show off complicated excel sheets and business fundas) are rather foolishly wasting time on valuing a company when the value of the company is simply the buyer's perception (desperation) for buying it.

Broadly looking at it, one could conclude that valuation of a product/ company/ service or anything for that matter is just a random number which comes from elaborate calculations which generally are simply based on one's perception and need.

Investing - Fixed Deposits v/s Equities

Over a period, I have heard people debating between investing in the so called riskier equities v/s the less risky fixed income investments. Here is a perspective on how you should allocate your capital between the two depending upon your investment horizon and goals. Here, I would rather focus on fixed deposits as an investment vehicle for Fixed income and equity mutual funds for investment in equities and India as the country.

So lets consider the case that the investor has an income such that his return on investment income falls in the 30% tax bracket. In such cases, the return on Fixed deposit = 9% (-30% tax) =6.3% risk free!

Now on the other hand, if the investor invests in equities with a horizon greater than 1 year, he is exempted on long term capital gains tax. Hence if the return is greater than 6.3%, it would make sense to be invested in equities. However, looking at the inherent risk, the overall return one would expect is in excess of 8 percent.
Generally, it is expected that equities return more than that as the inflation rate in India itself is around 8 percent and the basis of investing in equities is that it should at least beat inflation in terms of returns.

Considering this, it is pretty obvious that investing in FD does not make any investment sense in terms of returns. However, one should allocate a small chunk of one's portfolio to such products(15-30%) based on risk profile to ensure that the risk is partially managed in case of severe shocks in the economy.

To conclude: If you are long term investor, your equity allocation should be at least 2-3 times your fixed income allocation. Else, you are likely to be outrun by inflation in your investments.