Wednesday, May 26, 2010

European Crisis: Market Volatility and Opportunities

As the title suggests, Market volatility brings us very good opportunities which we will not get otherwise. If we track the stock market history in the past, one or other bad news dragged the market down when pundits were more hopeful about the bull market and this time is no different. The latest “financial bomb” came from, again the so called “Developed” countries and the difference being the region, which turned out to be Europe.

In the name of infrastructure building, all these western countries pile up the external debt to unimaginable levels and then they try to plug that debt by either printing currency or again by external debt. It is really funny that they boast of their standard of living and annual per capita income of $25,000 when the country they belong to is in the verge of collapse. Please see below for the external debt level of few important “trouble makers”.

Luxembourg – 38 times the GDP (For every 1 Euro GDP they have 38 Euro Debt)
Netherlands – 4.7 times GDP (470%)
United Kingdom – 4.2 times GDP (420%)
Switzerland – 2.7 times GDP (270%)
Belgium – 2.6 times GDP (260%)
Portugal – 2.2 times GDP (220%)
Spain – 1.7 times GDP (170%)
Greece – 1.6 times GDP (160%)
United States of America – 0.98 times GDP (98%)
India – 0.18 times GDP (18%)
So, most of these countries have huge external debt. I have highlighted Greece and India to see the Paradox (Greece has less external debt than most Euro economies). Rich Countries have huge external debt and a country that is being termed as "Developing" has less debt and in fact nothing when compared to western countries. My argument is if we deduct the per capita debt from the per capita income of these western economies then I suspect they are no better than people in poor countries in terms of wealth! Among the large developed economies, USA is in much better position in terms of externeal debt compared to European counterparts not withstanding the recent credit crisis.



Why Greece?
If you look at the above facts, most of the large economies in Europe have higher external debt than Greece. Then why Market is in fear of Greece? As I read and understood somewhere, Greece has the habit of cooking the books and I am not sure if Ramalinga Raju took training from them or they took training from him as Greece manipulated the books way back in 1994. So, any bad news in these times will pull the market down. Some of them are genuine and some of them are silly. For example, no one knows what the underlying truth with Greece is. If they default, then it would be pretty bad and I see some reason for people panicking. But if couple of policemen roams in the North Korean border, I don’t know why people should sell stocks. I thank Bush for spreading “Bush Mania” to the world as he was the one who went to Iraq war to eliminate Saddam for having few fire crackers. It is good that he did not know about Sivakasi and our Fire cracker industry. In fact we send “Rockets” during Diwali that could hit either Washington or Alaska. Anyways, against this backdrop I want to air my views regarding the stock markets and what strategy I follow.

Market Volatility

For anyone who believes in Fundamentals, Fundamentals of Indian economy in General and Indian Companies in particular are strong and most of the companies have announced robust growth and quarterly numbers in spite of the bad global scenario. So, the downside we see in the market has nothing to do with domestic issues. Foreign Institutional Investors are dumping the stocks and that’s coupled with reduced inflow of money will bring down any market let alone Indian market. No one knows what is going to happen. All the talk of SENSEX at 9000 or SENSEX at 22000 will get breached when investors panic. What I mean from this statement is, finding either the peak or bottom is next to impossible. All these “Experts” throw some numbers and 1 out of 10 gets a correct call purely based on luck. May be we can give credit to him for his assumptions based on which he predicted that. Talking about current situation, Market can go down from here or go up from here or stay where it is. This can be a bottom or the bottom will never come. Only thing that we can surely tell at this point of time is India in 2015 or 2010 is going to be much more developed and stronger so do most of the companies. So as a prudent person I would think that Investors (Both Foreign & Domestic) will be hard pressed to invest in Indian equities and SENSEX will be definitely higher than what it is today. At what level? I wish I know that. It can be at 22000 or it can be at 30000 or it can be at 40000. Anything is possible. The sure thing is our returns will be very good in 5 or 10 years down the line if we invest in good companies now and continue to invest in those companies prudently taking advantage of the market volatility.

Companies that are Relatively Cheap

Again we can tell only relatively whether a particular company is cheap or not as we do not know what price is cheap for a particular stock with 100 % accuracy. So, my strategy here is to select “relatively” cheap stocks and invest now. If the market goes down, I will continue to average as long as the company is announcing good results. When we do that, we lower the average cost price and increase the number of stocks and the result will be known when the stock market rebounds. I am listing below some of the stocks that are relatively cheap now which can be considered for Investment.

Note: Again I am listing the companies that are cheap now as there is no point in investing in HDFC kind of companies that are already expensive.

Infrastructure


GMR Infrastructure
Jaiprakash Associates
IVRCL Infrastructure

Education

Educomp Solutions
Everonn Education

Finance / Brokerage

Mahindra Financial Services
GIC Housing Finance
Yes Bank
South Indian Bank
Indiabulls Financial Services

Power

CESC
Adani Power
Reliance Power


Retail / Home Appliances

Aditya Birla Nuvo
Shoppers Stop

Real Estate

Indiabulls Real Estate
Anandraj Industries
HDIL

Others

Gitanjali Gems
Rajesh Exports
Hanung Toys and Textiles
Ahmadnagar Forgings
Arshiya International
Fortis Healthcare

Please add your observations in comments.
Kumaran Seenivasan

21 comments:

Nannu,  May 26, 2010 at 10:13 PM  

Dear Kumaran,

One of the best article i have read in recent times. The best thing about your articles is simplicity of your thoughts. Excelent stock picks. Financial Technologies,NTPC and PSL Limited are heavily beaten down in this volatility. What are your thoughts on these stocks.

Regards,
Nannu

minda May 26, 2010 at 10:58 PM  

i like arshiya int, jsw energy, ub enggering & dcb bank. thanks

i defer i agree May 27, 2010 at 10:57 AM  

Once you had written that sasken communication is the stock of the decade,with the opening of 3g spectrum,i did not find the same in your latest picks,it is still available at the same price

Your take and now that the 3g spectrum is comming out ad Apple taking over Market capitlisation more than microsoft with the mobile content revolution dont you think sasken is a buy at all times,or has the fundamental changed

Kumaran May 27, 2010 at 1:31 PM  

Hi I defer I agree (!!!!),

I have never suggested Sasken in my blog. If you disagree, please provide me the link or article name. Also I do not have the habit of writing "Stock of the Decade" kind of words. So you might have read some other blog and are commenting here.

-Kumaran.

Kumaran May 27, 2010 at 1:32 PM  

Nannu,

Fin Tech, NTPC and PSL are good stocks. No doubt about that. But I see better bargains than those at this time.

-Kumaran.

zarir wadia May 29, 2010 at 4:43 AM  

Dear kumaran,
The only words that comes to my mind for this post is"just Beautiful as always". Your list of trouble makers is a real eye opener. Keep up the good work.
I sometimes don't understand the fickleness of these so called FII investors. Why do they run away from growing markets like India at the first sign of trouble in devoloped world.
Thanks once again for the post.
Regards,
Zarir Wadia

jamesvaikom May 30, 2010 at 7:22 AM  

Sir,

Good to see shree ganesh jewellery in your list. Though the IPO price was high now the stock is undervalued.

Kumaran May 30, 2010 at 7:28 AM  

Hi Zarir,

You have asked a good question. The reason for the FII's fleeing the India Market is because they are concerned about Stock Market in General. The clear reason is given below.

Most of the FII's are not individual investors. Foreign Mutual funds, Hedge Funds, Private equity firms and high networth individuals form FII group. So, let me explain with an example. There is a Fidelity Mutual fund in USA. They pool the money from US people and invest in India. For some reason, market gets bad news and stock prices are going down in USA and other global markets. Not many retail investors invested in Fidelity mutual fund does not even care where they have invested and they certainly don't analyse all those things. They just start redeeming their Units with Fidelity Mutual Fund. In order to meet the liquidity requirement, Fidelity Mutual Fund sells the stocks that they bought all over the world and particularly in India as they will be in profits most of the times these days. Even if it is not the case, the loss would be minimal in Indian Markets when compared to other global markets. So, they sell the stocks they bought in India and meet the liquidity requirements for fund redemptions in USA. Hence, our market goes down. Hope this helps.

-Kumaran.

zarir wadia May 30, 2010 at 9:00 AM  

Thanks Kumaran for a prompt reply.
Very well explained as usual.
Regards,
Zarir

Shabu's May 30, 2010 at 9:12 PM  

Dear Kumaran,

Worthy read and a contemplated selection of good stocks. Keep up the good work.

nkt,  May 31, 2010 at 8:58 AM  

Good post at the right time. All stocks in your post looks fundamentally very strong and reasonable valued. I made new entries in few of them Fortis, JSW energy & M&M Fin with a medium to longterm view and bought additional shares in exiting ones after seeing your article. The information on external debts of EU countries is an eye opener. Thank a lot will look out for your next post!

NKT
Washington dc

Balaji,  June 3, 2010 at 6:21 AM  

Hello Kumaran,
As usual, this article is good. But, have a question. Why there are no PSU power companies in your list? NHPC, NTPC or SJVN? Why do you always recommend Adani and Reliance power? It would be great, if you could explain me on this?

Thank you.

Kumaran June 3, 2010 at 9:16 AM  

Balaji,

There are several reasons for not suggesting PSU power companies.

1. Efficiency : Most of the PSU companies are undervalued if you measure in terms of PE Ratio and the reason being efficiency. They are not as profit motivated as shareholding based public companies. This is one of the reasons, government is going for disinvestment. The employees do not have the same pressure to perform and there are no incentives for them unless you are the most beautiful women in the company.

2. Expansion: Adani Power, JSW Energy and Reliance Power are executing huge capacity power plants and the immediate capacity addition with PSU Companies is not the same.

3. Shareholders will be better rewarded with Adani, JSW and Reliance than PSU's as their mandate influences them to do so.

Like these, there are several reasons. PSU companies are conservative stocks and if you are not a risk taker, then you can ofcourse buy PSU companies. There is no harm in that.

-Kumaran.

Venkat June 4, 2010 at 11:36 AM  

Kumaran

Superb article..you really come up with a very simple and effective articles...thank you for sharing your Cristal clear thoughts.

Venkat

Narinder June 5, 2010 at 4:32 AM  

Kumaran,

Thanks for the excellent advise coupled with complete clarity of thought!!

I am in the process of constructing a well balanced portfolio and have the following query:

1. In your post dt March 14, 2009 with Heading "Best Indian Stocks for Long Term Investment" you listed 9 leading Sensex scrips. Further, you advised selecting 7 of these stocks and making 50% of one's investment in them.

2. However, in this post, you have not included any of the above 9Sensex scrips as also mentioned: "no point in investing in HDFC type of companies that are already expensive".

Kindly confirm that scrips recommended by you in this post are due to their much higher growth potential and hence, preferable to expensive valued Sensex stocks which were recommended earlier.

Do keep up the good work!!

Narinder

Kumaran June 5, 2010 at 12:13 PM  

Narinder,

The SENSEX stocks were very cheap in March 2009. Hence I recommended those at that time. But right now all the SENSEX stocks are trading at high valuations compared to midcaps. So, I am suggesting stocks that are not expensive now. One important thing to consider in stock market is "Whether the stock is inexpensive now" or not. Of course you can invest in SENSEX stocks even now. But your return will be equal to the Index gain. For that you can invest in a Index fund and sit at home.

-Kumaran.

Narinder June 6, 2010 at 7:48 AM  

Kumaran,

Thanks for the prompt clarification.

Narinder

Nannu,  June 7, 2010 at 8:55 AM  

Dear Kumaran,

I have query on the recent government annoucement of 25% public share holding in listed companies. Do you think equity dilution in companies like Reliance Power will affect its EPS and hence its valuation. Can you please explain the effects of equity dilution.

Regards,
Nannu

Salil Dhawan June 9, 2010 at 3:03 PM  

Hi Kumaran

What you think of Bharti Airtel now at 275 odd with two years perspective.All analysts have big NO for Telecom sector but do you see potential in long term in companies like Bharti

Salil

Investor June 22, 2010 at 1:25 PM  

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sory to write to you like this, but i could not find the contact form. I really like your blog and i was wondering if you would maybe like a link exchange with my website www.makemoneyinstocks.net . My site has many good articles, is a non-profit site and gets over 40.000 different visitors per month. I think we would both benefit out of this exchange alot. We would get higher position in search engines and many new visitors from each others investment sites.

Well please let me know on admin@makemoneyinstocks.net . I would really like a link exchange with your blog (I like it alot).

Thank you in advance for your reply.

Cheers,
Matt

AMIT July 11, 2010 at 2:12 AM  

I want you to write more frequently not after 1.5 Month time span or 8-9 article per year, Your reader are eager waiting for your artile checking your blog every single day. i think you should shorten your time span to 15-20days,
Thanks
Your Follower Amit Raul

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