Are we near the end?

Emerging markets will get a jolt in the next six months, which will affect India.

As the markets, both globally and more specifically in India, keep rising, the inevitable doubts begin to resurface. Are we at a stage of euphoria creeping in? Aren’t the markets too hot, isn’t the flow of capital towards India unsustainable?

All these doubts inevitably come to the fore with markets having effectively doubled over the past 24 months, and given India’s historical propensity to disappoint just when every thing looks extremely rosy.

The genesis behind my thinking is driven by an article I read recently written by Jonathan Wilmot of CSFB. Mr Wilmot is the global strategist of CSFB and tracks a global risk appetite indicator on a weekly basis. This indicator tracks the level of complacency among investors and their ability and desire to take risk driven by interest rates and liquidity.

The article was fascinating as the risk appetite indicator tracked by Mr Wilmot moved into the euphoria zone just last week(indicating high complacency among global investors).

Prior to last week, this was only the 7th time since 1981 that the indicator had moved into this rarefied zone.

Interestingly, if one looks at the performance of global financial markets post a move into the euphoria zone, in six out of the past seven episodes global markets posted a new high for the cycle within three months, and in the other case the return was basically flattish.

But 6-12 months after the risk appetite indicator entered the euphoria zone, global equity markets suffered a major correction or bear market four times out of seven, traded sideways twice and rallied strongly only once.

The record for emerging markets is even worse. After the risk appetite indicator enters the euphoria zone, within six months of this in every single case emerging market equity returns have been negative.

Returns have varied from -1 per cent to -27 per cent with the average being -10 per cent. The greater vulnerability of emerging markets reflects their greater susceptibility to global monetary tightening and their inherently greater cyclicality and volatility.

In that sense the countdown has begun. If past financial market history is any guide, then we should brace ourselves for a significant emerging markets equity correction within six months.

Tie in the above with all the emerging signs of euphoria one can see in India. Over the past six months, more than 20 India dedicated hedge funds have been set up, more than the number that existed prior to these six months.

India dedicated country funds have raised over $1.5 billion from Japan (of all places) and all the NYSE listed India country funds have now gone to a premium. If one looks at the list of new 52-week highs(of stock prices), I would wager that most professional money managers have heard of less than 50 per cent of the companies on that list.

There have been three India investor conferences arranged by leading international brokerages over the past 45 days, each attracting more than 125 investors, of which atleast 30-40 per cent are first-time visitors to the country.

Imagine that, prior to 2003 if an India conference was able to attract even 40-50 investors it would be considered a great success.

Today over the past 45 days at least 450 investors have visited the country! Another indicatoris when one gets off an international flight, the line for Indian passport holders is dramatically shorter than the foreigners’ line, again very different from even 12-18 months ago.

Invariably hotel rooms are unavailable and the whole place has the look and feel of 1994(prior episode of India phobia).

The whole country seems to want to raise money, meet any company today, and besides its vision for 2010, everyone talks of fundraising and that too in multiples of hundred million dollars. Atleast 10 one billion dollar plus ADRs are lined up for launch over the coming 12 months.

There was a time when if the entire country could raise a billion dollars in international equity markets, it would be considered a great achievement. Today, single issues of a billion dollars attract little notice.

Even in terms of FII fund inflows, last year India attracted almost as much foreign flows as Korea and atleast 60 per cent of the number for Taiwan, despite both of these markets having much higher weightings than India in all emerging market indices (atleast 3-4 times).

For most international brokerages, India is now the second-highest profit pool in Asia and growing much more rapidly.

India has clearly been discovered, and is now enjoying its day in the sun, but are things going over the top?

If one forgets the anecdotal type of signs indicated above, one would argue that there is still a long way to go. The market has not entered a zone of irrational valuation, trading at 13-14 times 03/06 earnings.

Also, if one looks at other countries like Taiwan or Thailand which have gone through a similar period of investor discovery in the past, these moves tend to be multi-year and secular, with the market eventually going up 3-4 times from its pre move bottom.

Also, there is absolutely no sign of any weakening of the fundamentals from any quarter. Volume growth seems universally strong across all sectors and types of companies.

In addition, retail investor interest, while strong, is still nowhere near the levels of 1994 or 2000. We are yet to see hordes of people lining up in the hot sun to get an application form for the latest mutual fund launch, or IPOs of dubious quality trading at grey market premiums of 100-200 per cent.

If I were to hazard a guess I think we are very likely to get a significant correction within the next six months, but it will be driven by external factors. Emerging markets will get a jolt sometime in the next six months, and given the quantum and type of money present in India, this will invariably hit our markets as well.

Given the outperformance of global emerging markets over the past three years and the record low EMBI+(Emerging markets bond index) spread over treasuries, there is clearly a lot of money in the emerging markets world which does not need to be here.

At the first signs of trouble, it will bolt. This will invariably have an impact on India as well.

As for India-specific issues, politics comes top of mind. The situation in Bihar is currently being ignored but has clearly weakened the ruling coalition.

Thus, while the long-term picture still looks very good for all the reasons stated many times before, investors should be aware that a significant correction is probably lurking out there waiting for total complacency to set in.

Business Standard

Deadpresident's Valuepicks

You can buy into Container Corporation of India - currently trading at 870. Its almost a monopoly and operates on very high profit margins. For more visit the website

Exide Industries - EquityMaster StockSelect

Access it here

Emami - Equitymaster report

Access it here

Budget 2005

Two links that you can look at

India Budget
Crisil Budget Analysis

A Cure For Cloning

Subash Menon, the 37-year-old President and CEO of Subex Systems is thrilled at the coverage mobile phone cloning has been getting. That's because his company sells Ranger, a fraud prevention software (companies such as Agilent and Ushacomm do too, but Subex is a leader in the business). Indian telcos, claims Menon, lose between 8 per cent and 10 per cent of their revenues to fraud and his software can prevent that. How? By identifying whether multiple calls are emanating from the same phone at the same point in time (the technical term for this is call collision event). And by identifying whether the same phone has made one call from Delhi at 8.12 a.m. and another from Bangalore at 8.16 a.m. (geographically infeasible event). The solution still involves a new phone or a new SIM, or both. Still, that's better than knowing there's someone out there with your phone's twin.

Cellphone Cloning

Recent reports of people cloning both GSM and CDMA phones with the objective of getting legit subscribers to foot airtime bills for illegitimate clones should not surprise anyone. After all, if India is a power to reckon with in the cloning business, isn't it logical that it should have expertise in the cellphone cloning one too? For the benefit of the interested, here's a set of FAQs.

What is the objective of cloning mobile phones?

Getting someone else to pay for your usage or, even more insidious, cloaking activities such as extortion, even terrorism.

Can both GSM and CDMA phones be cloned?

Yes.

How are phones cloned?

With GSM phones that require a SIM (subscriber identity module) card, one can buy a SIM-card cloning device for as little as $100 (Rs 4,400). Pop in the genuine SIM card and a blank and out comes a perfect replica. In case the criminals do not wish to go through the process of acquiring a SIM card, they can literally scan the airwaves for signals. Every time one makes a call from a GSM phone, the phone transmits the phone number assigned to it, the SIM card mobile identification number (min) and its (the phone's) own electronic serial number (ESN); both numbers are also referred to as unique identification number (UIN). Older analogue phones do not encrypt this data and anyone with a $250 (Rs 11,000) scanner can pick it up and transfer the data to a blank SIM card.

With CDMA phones that do not use SIM cards, cloning requires stealing and plugging in the phone to a device that is available fairly freely (starts at $350, Rs 15,400) and copying its ESN and min to another phone, maybe 5,000 miles away. Scanning the airwaves works too.

Oil Prices and Dollars

This Article is a week old

Crude futures jumped back over the US$50 mark today. And as you might guess, stocks and the US dollar went lower. There are rumblings that oil exporters and Russia are converting dollars into euros and that's pressuring the dollar. But should that have an effect on crude?

Actually, yes.

It seems that anytime oil rises, the dollar falls. If you superimpose a US dollar chart over a crude chart, you'll clearly see the relationship. But it's important to understand that the relationship is not casual. Like gold, oil should rise when the dollar drops.

That's because crude oil is denominated in US dollars. Forget supply and demand dynamics for a minute. Forget China's insatiable appetite for crude. Ignore the financial media's fixation on weather reports for the Northeastern United States and what that means for heating oil.

The single biggest force on the price of oil is the US dollar. And that's because the price of oil represents the real buying power of the dollar.
It's not a fixed peg that implies a benefit, such as can be found with the US trade deficit.

Since 2000, the US dollar has lost around half its value. Crude oil consistently traded below US$20 a barrel during the late 1990's. And it wasn't until OPEC adopted the US$22-to-US$28 price band on March 28, 2000, that crude prices got above US$20 a barrel for good.

Stocks are down today because of the appearance of that US$50-a-barrel price on the tape. But if the stock market was going to crash because of high oil prices, it would have done so already. The fact is, US GDP growth is largely immune to higher oil prices, as we've seen.

The US economy grew at a 3.1% rate in the fourth quarter. Crude prices ran between US$45 and US$55 during that same period. Low interest rates and rising income will keep US consumers spending enough to maintain US GDP growth at 3% to 3.5% - regardless of whether crude futures are trading for
US$40 or US$50 a barrel.

Most oil analysts expect flat to lower prices for the remainder of the year. And yet nobody is willing to go on record and predict a rally for the US dollar. But, interestingly, one of the biggest dollar bears in the world over the last few years, George Soros, isn't forecasting more declines for the US dollar. Rather, he's linked its fate to crude prices.

Now, a guy like Soros can always be expected to talk his position. If he wants to cover a dollar short, he'll say publicly that the dollar is going down. So in light of his apparent candor, I can only assume that Soros currently has no position in the US dollar. Maybe he's long the euro.

There's one thing that all the hand wringing about the dollar and oil proves - there is an abundance of fear in the market right now. This despite the fact that the economy is on pace for 3% to 3.5% growth, the forward P/E for the S&P 500 is moderate at around 20, fourth-quarter earnings were above expectations, and economic data is coming in mostly as expected.

Cheers,

Briton L. Ryle
Chief Trading Strategist
Money-Flow Matrix

Navneet Publications

Download the Motilal Oswal research report here

Stock Picks for the Budget Day !

Here are some of the valuepicks to mop up in case there is panic selling on the Budget day !

In the order of favourites..

• Avaya Globalconnect
• ONGC
• Geometric Software
• ITC
• ICICI Bank
• State Bank Of India
• Essel Propack
• Exide Industries
  
• Tata Consultancy Services
• Asian Paints/Goodlass Nerolac
• Ashok Leyland
• Hero Honda/Bajaj Auto
• Sundram Fasteners
  

Investment Strategies

1. Buy stocks of companies that have disciplined plans for achieving dramatic long-term growth in both profits and revenues. Such companies must also have inherent qualities that make it difficult for new entrants into that business to share in such growth.
   
   
2. Prefer to focus on such companies when they are out of favor; i.e., market conditions are not favorable or the financial community does not properly perceive the true worth of such companies.
   
   
3. Hold the stocks that you buy until there has been either a fundamental change in the company's nature or it has grown to a point where it will no longer be growing at a faster rate than the economy as a whole. He also says that investors should never sell their most attractive stocks for short-term reasons.
   
   
4. If your primary investment goal is long-term appreciation of capital, then you should de-emphasize the importance of dividends.
   
   
5. Recognize that making mistakes is an inherent cost of investing. The important thing is that the investor must be able to recognize such mistakes as soon as possible, understand their causes, and learn from them so they are not repeated. A willingness to take small losses in some stocks while letting profits grow bigger and bigger in your more promising stocks is a sign of good investment management. Don't just take profits for the satisfaction of taking them.
   
   
6. Realize that there are a relatively small number of truly outstanding companies. Your funds should be concentrated in the most desirable opportunities. "For individuals (in possible contrast to institutions and certain types of funds), any holding of over twenty different stocks is a sign of financial incompetence. Ten or twelve is usually a better number."
   
   
7. An important ingredient of successful investing is to have more knowledge and apply your judgment after thoroughly evaluating specific situations. You should also have the moral courage to act against the crowd when your judgment tells you that you are right.
   
   
8. One of the basic rules of life also applies to successful investing -- success is highly dependent upon a combination of hard work, intelligence, and honesty.

ONGC - StockSelect

ONGC StockSelect - access it here

ITC - StockSelect

ITC StockSelect download here

Mphasis BFL - Stock Select

Download it here

GE Shipping - Research Meet

Background

GE Shipping (GES) is the largest private sector shipping company in India (owns almost 69% of the Indian shipping tonnage). Currently, the company has a fleet of 70 vessels, including 40 ships (tonnage of 2.76 mdwt (million dead weight tonnes)) and 30 offshore vessels. The company is predominantly focused in the crude and product transportation segment with largely 'Aframax' type tanker mix. The company has also diversified into oil drilling rigs, marine construction and air logistics. The shipping and offshore businesses contribute to 81% and 15% respectively to the company’s revenues.

Key impressions from the research meeting

1. Tonnage expansion: Citing IEA projections of a 2.5% growth in oil demand, the management expects demand for global tonnage to grow by 5% in 2005. The company has planned a capital expenditure of US$ 353 m over the next 2.5 years to expand its tonnage from the current levels of 2.7 mdwt. The current new-building order book comprises of 7 tankers (aggregating 0.5 mdwt) and 8 offshore support vessels). While 20%-25% of the committed capex is likely to come through internal accruals (GES has a cash war-chest of Rs 10 bn), the rest would be financed through debt (largely foreign debt). The fact that most of the new vessels are coming at low break-evens as they were contracted when new building prices were low shall also benefit the company going forward.

2. Continued buoyancy in freight rates: The management expects freight rates to be buoyant in the calender year 2005 as well, though lacking the strength that was witnessed in 2004. It has also clarified that the spike that was seen in freight rates towards the middle of 3QFY05 was due to Hurricane Ivan that knocked off around 500,000 bpd of US production. This, coupled with low US oil inventory and speculative positions being built up with regard to future deliveries, led to surge in exports from long haul Mid-East countries that consequently led to the spike in tanker freight rates. The management has indicated that it has renewed contracts on a few ships, and that have been done at higher freight rates as compared to what they had earned earlier. For instance, on Suezmax tankers, while the current spot rate is around US$ 26,000 per day, GES is expecting to get around US$ 65,000 for around 50% of the vessels’ spot revenue days in 4QFY05.

3. Increased initiatives on the offshore front: In the conference call for 3QFY05, the management had indicated that the government of India has plans to conclude NELP-V in 4 months instead of 6 as was in case of NELP IV and this gives a clear indication about the seriousness of ensuring oil security for the country. Under NELP V, 6 blocks in deepwater, 2 shallow water and 12 on land blocks, involving an investment of US$ 1 bn have been offered and this is positive for the offshore division of GES.

Other key points

1.The revenue visibility for FY06 for the shipping division is Rs 4 bn (25% of expected FY05 shipping revenues). Crude tankers and product carriers are covered to the extent of 35% and 47% of operating days respectively. In case of the dry bulk segment, the fleet is covered to the extent of around 16% of operating days.

2. For the offshore divison, the revenue visibility for FY06 is around Rs 2.8 bn as of now (78% of expected FY05 offshore revenues). The offshore support vessels (OSVs), construction barge and harbour tugs are covered to the extent of 39%, 20% and 68% of their respective operating days.

3. The company’s NAV is around Rs 256 per share (Rs 139 in March 2004 and Rs 84 in March 2003). The increase in NAV could be attributed to the younger fleet mix of GE Shipping, firmness in demand for tonnage in the global waters leading to an increase in market value of assets and a favorable shipping cycle. Like commodity prices, the NAV of the company also fluctuates.

Conclusion

Based on our inferences from the research meeting, we have revised upwards our revenue and earnings projections for the company. For FY06, our topline and bottomline projections stand revised upwards by 26% and 42% respectively. While FY05-till date has been a strong year for the company, we expect growth in FY06 and FY07 to be relatively slow on account of a huge influx of tonnage. As per the management, the current order book size of global shipping tonnage is around 28% of the current capacity of 334 mdwt. As such, around 90 mdwt is likely to be added over the next 2.5 years of which around 31 mdwt will come in 2005.

While we are positive about the overall growth prospects of GES in light of the fact that the company is building up capacity to cater to the strong and growing demand for crude oil and commodities, we expect freight rates to be volatile going forward. Also, as indicated by the management, any ‘shock’ in form of the US economy slowdown might have a negative impact on the shipping industry’s and GES’ performance in the future. Having said that, there is likely to be stability on the offshore side of the business, which would act as a cushion in case the shipping cycle weakens significantly in the future.

Tax-saving funds: Low on assets, high on performance

THE idea of locking into an investment for three years in a volatile equity market is surely not too appealing to the average investor. Equally, the tax benefits from the investment may not be attractive enough for the really big-ticket investors. Whatever the reason, `tax-saving' funds, or `equity-linked savings schemes', , have never really found many takers, as their average fund size indicates. At a time when some diversified equity funds are coping with corpuses exceeding Rs 1,000 crore, the tax-saving funds still have a small asset base — usually Rs 50-100 crore.

Tax-saving funds have, however, fared well in recent years, easing concerns over investing in them. These funds gained prominence over the past year, topping the mutual fund performance charts almost every quarter. During this period, they recorded average returns of 35-40 per cent.

As an investment up to Rs 10,000 in a tax-saving fund entitles one to a rebate under Section 88 of the IT Act, it is attractive for the small investor. And investor interest does appear to be picking up. Between June and December 2004, the asset base of HDFC Long Term Advantage (formerly HDFC Tax Plan 2000) more than doubled to Rs 71 crore, while the net asset value edged up just 55 per cent, indicating the inflows the fund attracted during the period.

Outperforming the diversified funds

But that most of these funds even outperformed their diversified equity-fund counterparts is what may make even investors not seeking tax benefits sit up and take notice. For instance, over one-year and three-year periods, HDFC TaxSaver and HDFC Long Term Advantage bettered the performance of HDFC Equity.

Funds such as PruICICI Tax Plan, SBI Magnum Tax Gain, Sundaram Tax Saver and Birla Equity have outperformed the regular diversified equity funds of their respective fund houses over the past year. These funds are also beginning to have a better three-year track record than the regular diversified equity fund. For instance, on an annualised basis, PruICICI Tax Plan generated returns of over 50 per cent over a three-year period, while PruICICI Growth recorded 30 per cent.

Aided by stable asset base

So what makes these funds race ahead? If it is the lock-in period that puts you off, think again. In fact, the lock-in period is the advantage that tax-saving funds have over their peers. Because of the lock-in, fund managers of tax-saving schemes are guaranteed a relatively stable asset base compared to those of regular, open-end diversified equity funds.

Fund inflows or outflows have a bearing on the performance of a typical diversified equity fund. For instance, if there is a sudden pullout by investors, managers may be forced to book profits prematurely on some of the fund's holdings, in order to meet redemption pressures.

As the asset base is more volatile, they may be forced to churn their portfolios more often thana manager of a tax-saving fund has to, as the half-yearly portfolio statements of funds such as PruICICI Mutual Fund reveal. According to the statement, the portfolio turnover ratio (a measure of the fund's buying and selling activity) of PruICICI Growth is about 67 per cent, against about 15 per cent in PruICICI Tax Plan.

To avoid such frequent churning (which also involves higher expenses), some managers may be inclined to hold a small portion of their portfolios in cash to cope with outflows during volatile periods. Again, not being fully invested may act as a drag on performance during a market rally.

Flexible fund management

Large corporate and institutional investors often bypass tax-saving funds as they are not eligible for tax benefits. As such funds cater broadly to the retail investor, they are not vulnerable to volatile fund inflows or outflows, or lock-in periods.

In addition, the fund size remains small and is, therefore, easier to manage. Most tax-saving funds have a small portfolio of stocks, which reduces the number of right calls the manager has to make.

The small asset base also has a bearing on the kind of stocks in the portfolio. These funds typically have a mid-cap bias, unlike their diversified fund counterparts.

For instance, HDFC Long Term Advantage has a distinctly mid-cap and small-cap tilt. HDFC Equity, on the other hand, with its asset base of more than Rs 1,000 crore, has few options in the mid-cap space to invest in without significantly affecting the stock price, given the liquidity constraints associated with mid-cap stocks.

Stocks such as Orient Abrasives, Vesuvius India and Balkrishna Industries make a rare appearance in the portfolios of Long Term Advantage and HDFC TaxSaver.

With mid-cap stocks hogging the limelight in the past year or two, it is not surprising that tax-saving funds, with their mid-cap heavy portfolios, have raced ahead of larger, diversified equity funds.

Long-term orientation

With fund performance closely tracked these days, managers of regular diversified funds often tend to ride sector themes, rather than pick offbeat sectors, lest a lag in performance makes investors jump to another fund.

A tax-saving fund, on the other hand, caters to those who are invested for the long term. With the three-year lock-in period, fund managers are, therefore, better placed to pick stocks that would deliver value over the long term. That these funds tend to have a long-term orientation is also reflected partly by their lower portfolio turnover. They are thus, more likely to pick contrarian themes that would pay off over time.

HDFC Long Term Advantage, among the top-performing tax-saving funds, did begin with a rather unconventional approach, picking up mid-cap stocks in the chemicals and industrial machinery sectors earlier than its peers. Even now, while HDFC Equity has holdings in conventional sectors such as banking, IT and engineering, HDFC TaxSaver and HDFC Tax Plan have among their top sector holdings sectors such as paper products and paints.

Typically, tax-saving funds, having been early-movers into unconventional sectors, are seen as sporting more distinctive portfolios than regular diversified equity funds. But with the latter now packing their portfolios with mid-caps, previously "offbeat" sectors such as chemicals and fertilisers — which have seen much mid-cap action — are now figuring in their portfolios as well, blurring the distinctions between tax-saving and diversified funds somewhat.

Good investment option

The tax-saving fund is a good option for the small investor with an appetite for the equity market. The lock-in period of three years is lower than that required by other tax-saving options.

Investors who are not seeking tax-benefits need not view such funds as strictly tax-saving options.

Given their superior performance and the unique advantages they enjoy over the average diversified fund, investors can consider including such funds in their portfolio. Here are a few points to consider before adding a tax-saving fund to your portfolio.

# As always, pick a fund with a good long-term track record. HDFC TaxSaver, HDFC Long Term Advantage, Birla Equity Plan, Sundaram TaxSaver, Franklin India Taxshield, PruICICI Tax Plan and Alliance Capital Tax Relief boast of good track records in this category.

Preferred picks from this shortlist would be HDFC Long Term Advantage and HDFC TaxSaver. Birla Equity Plan and Alliance Capital Tax Relief may also be considered, although the last mentioned has turned in a rather indifferent performance over the past year.

# Invest in small lots through a systematic investment plan (SIP).

Most tax-saving plans ask for a minimum investment amount of Rs 500, which is lower than the Rs 5,000 usually stipulated by most diversified equity funds. By investing small sums every month, you can avoid exposing a large investment to the downside risks that could arise from a badly-timed investment.

Sourced from Business Line