Midyear review 2012 and where to invest now?

July first week is a good time to look back at the annual predictions made in Dec end / Jan and course correct if required. So here I am, looking back and seeing what course corrections are required.

My 2012 predictions included the following:

• Indian economy will slow down a bit – well it has slowed down “quite a bit” and I am not too optimistic of the current government’s ability to kick start the spluttering economy. It is not that those in power do not know what is required to be done. The problem is that those in power do not have the political will to push the reforms and the unfortunate part is that the next elections is in mid 2014 – a full 2 years away.
• Europe will dampen the markets – but there will be no crash like the Lehman brothers crash in 2008 – this has held on till now – they have been limping from one problem to another – and they have avoided a crash – but the problem is still there and there are no easy solutions to Greece and Italy’s problems – they will have to improve their productivity and become world class in some industry – easy to write in a blog – but very difficult to do.
• US will limp through at 1-2% growth – well the US has done better than predicted and the economy is holding out  – they are growing at around 2% and the US Dollar is in demand as a safe haven.
• Chinese economy will slow down too – well all the emerging economies have slowed down – China, Brazil and Russia are dependent on their exports and the slowing down in EU and US is resulting in slowing down in these emerging economies.

I had predicted that in 2012, the interest rates in India will go down  and that would present an opportunity for investments in Long term debt funds – well the interest rates have not gone down to the extent that I had thought – RBI is more cautious and they are right – having said that, those who had invested in long term debt funds in Jan  have got appx 5% returns in six months – but that is below my predictions of 12% annualised.

Equity markets have also been volatile and range bound in the past six months – this was expected. I am currently more pessimistic than in Dec / Jan 2012 (actually post the Budget fiasco). But as a long term investor, I see opportunities and I am still investing with a 3-5 year timeframe. My equity portfolio in the last six months has given me a 14.25% returns where as the sensex has done 7.88% (at current sensex of 17296).

Gold has done better than my predictions and has given a return of 24% since Jan 15th – this has been primarily due to the depreciation of Indian Rupee and I believe that this will not continue for the remaining year and in 2012 the overall returns may not go beyond 30%.

Real estate is a very localised call and one cannot take a generic prediction. In Bangalore, there is a general sense of optimism and there are property launches and property expo’s as usual – the sale is happening at every segment – premium to mid level segments – the prices are going up slowly but surely. I cannot say the same about other places though, as my knowledge is limited.

So my views on the markets have not changed much in the past six months –

For investors with 1-2  year  horizon – I do not have much to recommend beyond debt – you can look at FMP’s as FMP’s are more tax efficient than normal debt investments.

For investors with 3 years plus horizon – I recommend Equities and Real estate even though over the last six months, I am tending to go more towards real estate than equities. If you cannot analyse stocks, then go for equity based MF’s  – I recommend HDFC’s family of MF’s as they have the best long term track record amongst the various MF’s – depending on your age and ability to take risk, you can look at mid cap ( HDFC Midcap opportunities fund)  or at large cap ( HDFC top 200 fund).

How the rich got rich

A recent research on how the top 400 rich people in US made their money makes interesting reading. The data spanning a period of 1992-2007 showed that the richest 400 in the US made their money though:

• Wages and salaries: 8.6%
• Interest: 6.6%
• Dividends: 13%
• Partnerships and corporations: 19.9%
• Capital gains: 45.8%

So what does it mean – I believe it means that:

1. Working for a salary won’t make you rich –this is true as much in India as it is in the US –Most of us look at salary to become rich and that is the first wrong assumption. We all need to create multiple passive incomes.
2. Making “Safe” investments in debt based instruments won’t make you rich either –inflation and taxes eat up whatever you may make out of debt instruments like fixed deposits. So interest income will not make you rich -but one should have a part of their portfolio in these instruments just so that there is some safe capital.
3. Investing only in large companies also won’t make you rich – we in India mostly invest in large companies through the equity route. In the US, the investors search for the next multi-bagger – a small company today that will grow into a large company in the future.
4. In the US owning a business or businesses (fully on in part) seems to help people get rich as 2/3^rd of their money came from this route. Remember that US is full of small businesses.

In India, I believe, for getting into the top 400 richest - one has to follow a similar path with one small additional option –

• invest in yourself,
• grow your knowledge and experience,
• take risks in equity ( large and mid cap) and in real estate (this is the additional option in India); and
• build a financial windfall through investing in companies that would be future stars (the venture capital route).

If you do not want to be in the top 400 richest in India – but still want to be reasonably rich, then you can

1.       invest in yourself,

2.       grow your knowledge and experience and

3.       take risks in equity and in real estate.

How will the Greek exit from Euro impact us?

There have been many recent news items saying that if Greece left the Euro zone, it will have devastating effect on the global economy and we are not insulated enough - that set me thinking as to what would happen to India and my view is that nothing much will happen to us – we are reasonably safe.

First let us see what will happen to Greece, and then we will see what will happen to us in India.

As we all know, elections are scheduled in Greece this week and there is a 50% plus chance that the Greek will vote for the party opposed to the austerity measures imposed through agreements with IMF and ECB. If the new government goes back on its austerity agreements, the Greek government will not be supported by further infusions of credit from IMF and ECB – this will result in the Greek government running out of funds in a month or two –but before that there will be a run on the banks –Greek citizens would like to take their cash out of banks and that will trigger a banking crisis.  In order to avoid that, the Greek government will need to launch its own currency immediately and leave the Euro zone. In order to be globally competitive, the new currency will need to be pegged at an estimated 30% lower than the current Euro. This will create inflationary conditions in Greece –the interest rates will go up, cost of doing business will go up and Greek economy will be in a recessionary state for a few years – they will need to pull themselves out of this mess over time by improving their competitiveness and productivity.

Now what will happen to the rest of the world and especially to India - If Greece exits the Euro zone, there will be flight of capital away from other “high risk” countries like Spain and Italy. The cost of borrowing in these countries will go up. Investors would move to safe haven currencies and currently US is the preferred safe haven. The Dollar would strengthen against the Euro.  That would mean that the Indian Rupee would be under pressure on account of the strengthening US Dollar –Indian Rupee would depreciate a bit further – this would put further pressure on Inflation in India as imports will become costlier. It will surely put pressure on the Indian economy – but as we know, the Indian Rupee has already lost about 20% of its value in the past 12 months –so we will live to see this further slide due to Greek exit and we will survive.

India’s trade with Greece is negligible and devaluation of Greek currency will not leave us poorer. India’s trade with Europe will survive as the movement of Rupee vs the Euro will not be impacted much.

So the exit of Greece from the Euro will at best devalue our Rupee a bit more –beyond that, I do not expect much to happen in the short term.

In the long term, if this exit opens up the doors for the exit of other countries like Spain and Italy (which is highly unlikely), then it could have some impact – otherwise we are insulated reasonably well from this event.

Current directions on where to invest

After a one month break, I am back. Not that I was not watching the markets or the economic news –our smart phones ensure that we are always connected.  But I was not actively investing as I was busy elsewhere.

Warren Buffet had famously said – “Be fearful when others are greedy. Be greedy when others are fearful.”

This is the time when everyone is fearful –there is more than normal amount of bad news –my prediction in December for 2012 was a tad optimistic – I did not predict that the Indian GDP growth would fall so much so soon – I also did not predict that the EU problems will go beyond Greece and Italy – now it is at Spain’s doorstep. There is more bad news than what I predicted.

And that is good news

I believe this is the time to look at investment opportunities.

Let me quote Warren Buffet again:

“Buy a business, don’t rent stocks.”

“Buy companies with strong histories of profitability and with a dominant business franchise”

“If a business does well, the stock eventually follows”

Some may say that these sayings of Warren Buffet are more suitable for the US markets where the market is very broad and deep (there are very large number of stocks and many investors). Our stock markets are very shallow - the FII mood dictates whether our markets will go up or down.

Well Yes –there is some truth in this argument – But, when you look at long term of 3-5 years, I believe that  the basic principles given by Warren Buffet will apply for Indian stock markets as well.

So I am happy I bought the stocks in second half of 2011 (when the markets were down).  The companies that I have invested (and most of them are listed in my blogs) have high profitability and good profit growth and have been bought at a fair value. I will invest again in these companies in the next few months as opportunities arise.

Some of the companies that are in the buying range right now are:

Agrotech Foods (invest at around 450), Bharti Airtel (invest at current levels of 300), BHEL (invest at current levels  till Rs. 270), Gruh Finance (invest at around 660), LMW (invest at around 1650), Shriram Transport Finance (invest at current levels till Rs 540). 

In case you are looking fore investing in these companies, I would recommend that you wait for another 3-4 weeks - the markets may go down further and that will give you still better entry price.

Some of the companies that I am watching and am close to investing are - 3M India (will invest at Rs. 3250), Bosch ( will invest at around 7000), Exide (will invest at around 100), Hawkins (will invest at around 1130), Nestle (will invest at around 4200). I hope to get these prices sometime in the next two months and I will invest in these companies if that happens.

I am confident that over a long term of 3-5 years, these stocks will return a 20% ROI for me. The current atmosphere of fear and pessimism will open up opportunities. And I am waiting patiently.

Predicting the Rupee / Dollar conversion rate

This blog is in answer to a question from one of my school classmates (of 1979-80 vintage) who is based in the US and wanted to know where the Rupee /USD rate is headed.

Let me try to explain the mechanics in simple terms. This logic can be used to predict the long term movement of the conversion rate as well.

Two years back, in Q1 2010, the conversion rate was around Rs 44-45 to a dollar. Today, in Q2 2012, it is hovering around Rs 52 -53 to a dollar. The rupee has lost between 15 and 20% of value with respect to US dollar in the period.

In the last two years, India has had an inflation of around 10% per annum – which means over the last two years, the rupee has lost 20% of its purchasing power.

In the same period, the inflation in the US has been around 2% per annum – which means that the US dollar has lost 4% of its purchasing power in the same period.

What it means is that during the period Q1 2010 to Q1 2012, the US dollar has lost 4% of its value where as the Indian rupee has lost 20% of its value. Thus over this period, the Indian rupee has got devalued by about 16% when compared to the US dollar.

That explains the devaluation of the Indian rupee during this period.

Now my investment banker friends and students of economics may not like this simple explanation – but I believe that this logic is good enough to predict the conversion rate in the long term.

So here is the simplified formula:

The annual rupee devaluation vis a vis US dollar = (Indian inflation rate) - (US inflation rate).

This formula can be used for long term predictions (one year and above) and not for short term predictions.

I predict that the INR/ USD conversion rate should be around Rs. 55.5 to a dollar in December 2012.

Stocks that I recommend now:

Based on requests from friends who follow my stock advice, I have decided to share my stock trades as and when I do it.  I currently have invested in 37 companies since last November. On 1^st Nov 2011, the sensex was 17480 and today it is around 17200 – the sensex has not moved much but I have an overall absolute return of 10% plus on my investments.

As most of you know, I watch the market closely and have a list of appx. 150 good companies that I want to enter when their stock price is low. I have been able to find an entry price for 37 of these companies and I believe that these companies will do well when the Indian markets start going up in the next 2/3 years.

My expectations from these investments is 15% per annum plus (as it is tax free if you hold it for more than 1 year) - but I do not enter the stock till I see a 20% per annum potential - I also know that not all recommendations will make the 15% grade - overall I want to be ahead of the sensex by 3-4% annually. So if sensex is -10% and if I am -6%, I am fine.  After all when it rains, everyone gets wet – I aim at getting wet a little less.

I normally get an investment opportunity once or twice a month. As I invest, I will share it through my blog. If you want to follow me, you can just mirror my portfolio and buy the stocks in the same price range. 

I normally recommend companies that are large caps - in these companies, I invest 50K or more. Sometimes, I recommend mid caps (which are higher risk profile) - here I put only 10-20K. So you too need to pre decide some investment levels based on your ability to invest – but surely invest more in large caps and less in mid caps.

Here are some stocks that I have invested recently that are still hovering at a BUY range:

·   Infosys - the current price range of 2360 is a good price to enter. I entered at 2400 some 10 days back. They are going through a rough patch due to weak management and will hopefully resolve itself in a few quarters with Mr. Kamath, their new chairman, becoming more visible and taking more control.

·  Gruh Finance - this is a HDFC kind of story of home financing in rural areas - has Deepak Parekh on the board and is a good future story as India's rural areas are slowly getting lesser poorer and the company is well poised to benefit from this - I bought it at Rs. 680 two months back -it is currently at 670 - you can buy it at the current price. This surely is a long term solid investment opportunity.

·  Another mid cap that I recommend is LMW  -the company is a cash generator - supplies to the textile industry in India and has an export market as well - it's stock is down right now - I bought it last fortnight at 1673 - it is quoting now at 1642 - highly recommended - but invest 10-20K as it is a mid cap.

·   my last recommendation is Cox and Kings - I am investing in it right now – this company is growing and is cash rich as they have not yet utilised all the money that they generated through an IPO few years back. Currently the price is below 150 and it will grow well over the next few quarters.

So here were my current recommendations.

If you want, please write to me and I will share my calculations (one on one) for projecting the share price of the stock, based on the last 10 year financial data.

Happy Investing.

Come - Join the party

Three months back, Indian markets were one of the worst performing ones globally –and today we are one of the best performers. The market has gone up by 15% in the past two months and many people feel that they missed the opportunity to profit from the rally in Jan / Feb 2012.

This increase in market valuations was because of funds coming in from foreign institutional investors into the Indian stock markets - FII inflows in Jan and Feb 2012 were around USD 6 Billion and this was the reason why market valuations went up by 15%.

Why did the FII come into the Indian stock markets?

Well the FII’s did not just come to Indian stock markets - they went to all the emerging markets – to China, Indonesia, Brazil and to Russia - all these markets have given good returns in Jan/ Feb 2012– and this can be traced to an action of the European central bank ( ECB) towards December end.

Somewhere before Christmas 2011, the ECB gave away about 500 billion Euros to European banks at a low interest rate of 1% for 3 years. This injection of liquidity was required to support the European banking system, which was close to collapse due to the sovereign debt crisis in Greece, Italy, Spain and Portugal. However, this easing of liquidity in Europe resulted in the FII inflow to emerging markets and that in turn resulted in the 15% appreciation in our stock markets.

We had a very similiar situation just two years back - In 2010, the Indian stock markets gave a 70% plus return and that was because of infusion of liquidity by the US Fed in 2008 and 2009 ( it was then called Quantitative easing – QE, now it is called LTRO –Long term refinancing option).

So why am I giving you all this information?

Because last week, there was one more infusion of liquidity by the ECB – again ECB has loaned 530 B Euros to European banks at 1% for 3 years – just like in 2010 and in Jan/ Feb 2012, some of this cheap money will find its way to Indian stock markets and it will result in the markets again going up.

So for those who missed the Jan / Feb 2012 rally, there is one more on the opportunity in the coming three months – this is the time to enter the Indian stock markets.

So what are the stocks to buy – I recommend at present BHEL (around Rs. 280), Colgate (around Rs. 1025), Crisil (around Rs. 950), Dabur (around Rs. 100), ESAB India (around Rs. 530), Maharashtra Seamless (around Rs. 370), Mahindra Holidays (around Rs. 290), Sundaram Finance (around Rs. 620), Noida Toll (around Rs. 23) and Shriram Transport (around Rs. 535).

Each of these stocks have a potential to give 100% returns in 3-5 years (15- 25% returns per annum). The methodology of forecasting the future value of the shares has been shared by me in this blog in Sept 2010 you can refer to it ( it’s called Investing in equities –part 1 and part 2). This is a very well known methodology and is used by almost all well known long term investors in stock markets globally – the key to making money using this methodology is  to stay invested for 3-5 years.

Another way to enter this rally would be to buy an Index based mutual fund – I recommend the Goldman Sachs Nifty Bees – this tracks the Nifty and by investing in this fund, you will mirror the stock market movement.

So I would recommend that you invest in the Indian equity markets immediately and do not miss out on the party.