Growth of the Indian auto industry

The Indian economy has been witnessing one of the most severe slowdowns in several years. During the April-June 2013 quarter, India's GDP increased merely by 4.4%. This is the slowest growth rate since 2009. The slowdown in the economy coupled with high fuel prices and interest rates have had an adverse impact on the growth of the Indian auto industry.

In a bid to beat the slowdown blues, auto makers have been focussing on the overseas markets to boost exports. In addition, the foreign currency earnings would also help hedge higher cost of imports due to the depreciating rupee. The chart of the day shows the top 5 auto makers with the highest exports in terms of unit sales. These auto makers have reported robust year-on-year growth in their export sales.

Data source: Mint

Are Indian stock markets 'scary'?

Indian stock markets have been on a roller coaster ride lately. After plunging to sub-18,000 levels during the latter half of August 2013, the benchmark BSE-Sensex is back close to 20,000 levels. From the very bottom to the very top, it's a neat 12% rise in a short span!

Many have attributed the bounce back to the new RBI Governor, Raghuram Rajan. The rupee has also gained about 8% from the recent all-time lows.

How should you read this recent spurt in stock markets? In fact, that's a wrong question. The question should rather be- should you read too much into the recent optimism?

Our answer is no. For one, the 'Raghuram Rajan' effect has been overhyped. We respect him for his talent and the initiatives that he has announced. But to believe that India's long term problems have been addressed would be nothing short of wishful thinking.

Secondly, there has been some seemingly short term relief on certain external fronts. And the markets have found enough reason to cheer.

But does that mean India is out of trouble? If Jeffery Gundlach, a widely respected bond guru is to be believed, the outlook for Indian stock markets is negative. He thinks Indian markets are "very scary" in the medium term. Why so?

The answer is the risk of capital outflows. As you know, Indian stock markets are heavily driven by foreign capital flows. So anything that may cause foreign institutional investors (FIIs) to exit Indian stocks could bring Indian stocks tumbling. One big factor is any change in the monetary policy of major central banks. The US Fed had hinted about a likely tapering in its QE program starting September. If that happens, it could trigger a mass exodus of capital from emerging markets. And India would be among the worst affected.

A point to be noted here is that India has been a big beneficiary of the ultra-easy monetary policies of developed economies, especially the US. And hence the risk of capital flight in the case of change in monetary policy.

The point we want to drive across is that India is very vulnerable to external shocks. Any negative trigger could put the recent stock rally in reverse gear.

But this does not mean you keep away from Indian stocks. In fact, a market meltdown triggered by capital flight would be a great time to lay your hands on fundamentally sound stocks. For disciplined value investors, market meltdowns are always very exciting times. Because that's when there's too much fear and people are dumping stocks out of panic.     

What is Technical Analysis?

The Technical analysis is a methodology to assist you in deciding the timing of investments, which is very vital to make wise investment decisions. The technical analysis is based on the assumption that history tends to repeat itself in the stock exchange. If a certain pattern of activity has in the past produced certain results nine out of ten, one can assume a strong likelihood of the same outcome whenever this pattern appears in the future. However technical analysis lacks a strictly logical explanation. Technical Analysis is the study of the internal stock exchange information and not of those external factors which are reflected in the stock market. All the relevant factors, whatever they may be can be reduced to the volume of the stock exchange transactions and the level of share price or more generally, the sum of the statistical information produced by the market. Few of the most commonly used technical analysis methods for share market Trading are Japanese Candlestick (most powerful stock charting method), Price Curves, Trend Lines, High Low Charts and Moving averages. Even you can become technical analyst on your own.

Indian markets Graphs Getting Grounded part -4

Rupee flat on its back 
With this combination of a demand for oil, a demand for gold (due to lack of faith in India's capital markets), and a policy log jam that adds to the import bill, the recent sell-off in the Indian Rupee is not surprising. But its velocity - and ferocity - is. The forward rates would indicate that the INR will weaken further (Graph 4). But the forward rates are more a function of traders running in where they see weakness as opposed to a fundamental argument for the weakness. 

Graph 4: INR Forward premia

Source: Bloomberg

The Real Effective Exchange Rate of the Indian Rupee may be closer to USD 1 = 55 (Graph 5). The blue line of the actual fx rate tends to sway around the red line of the theoretical REER. 

Graph 5: INR is undervalued in REER terms,
which suggests an INR rate of Rs 55 per USD

Source: RBI, Bloomberg; data used is RBI 36 country REER

But markets don't always care about the underlying theory. 
The markets know best - at least for a while. 

As long term value investors, we can feel the moment to buy a truckload of Indian equity is approaching. 
The recent weakness in the Indian Rupee and the sharp sell-off in many stocks have seen an emergence of value. 
We are not yet "upping" the weight allocation to India for international clients but, with a little bit of patience, the stocks of companies we like run by managements we can depend on may come our way in the next few weeks. 
No, we're not there yet...but...stay tuned...its possible we may turn bullish on stocks pretty soon.

Indian markets Graphs Getting Grounded part -3

Another source of demand for US Dollars has been the elaborate and inconclusive battle between the environmentalists and the cheerleaders for go-go-growth. Iron ore mining has been banned. Coal mines are not connected to railway tracks so, though India is rich in coal, it imports coal (Graph 3). This mismatch of approximately USD 12 billion per year has added 1% to the current account deficit, as a percentage of GDP. 

Graph 3: Export of iron ore no longer pays for import of coal

Source: CMIE/Monthly data

Indian markets Graphs Getting Grounded part -2

India imports gold and oil
The current account deficit is due pretty much to India's thirst for oil and gold: fuelled by the distrust that most Indians have of the so-called Indian "industrialists". For many, the Indian elite represent robber barons who have successfully stolen their savings - ably supported by the financial firms with well-established credentials in global markets. Indians yearn for gold since IPOs and corporate bonds have been unreliable.

Graph 2: Current Account Deficit - excluding imports of oil and gold -
is steady at a surplus of 3% to GDP

Source: RBI, Bloomberg

Yet another fuel price hike

Continuing our discussion on the oil bill, the rising crude oil prices have resulted in yet another hike in petrol prices in the country. The increase this time the hike is for Rs 2.35 per litre. This is the sixth hike in the past 3 months. As shown in the chart, petrol prices in the key metro cities now range between Rs 74.17 per litre to Rs 81.57 per litre. The oil companies also plan to increase the price of diesel by Rs 0.5 per litre (excluding local taxes and VAT). Post the revision, diesel prices would range between Rs 51.97 to Rs 58.86 per litre. While the move would certainly help the that have been battling fuel under recoveries thanks to increasing crude prices and falling rupee. But it would certainly add to the woes of the common man as it would drive up consumer inflation in the country. Source: Economic Times

What is the gold silver ratio saying?

Above Rs 34,000 per 10 grams, the price of gold has gone up nearly 25% in couple of months! Given the possibility of global economic crisis and war with Syria, the possibility of investors rushing to the safe haven asset seems more real. Even the so-called gold bears, who were sounding its doom few months back, have now changed opinion.

But should one only focus on gold? Would other precious metals, for instance silver, have some upside? Well, the gold silver ratio could answer that to an extent. As per Investopedia, the ratio shows how many ounces of silver it takes to purchase one ounce of gold. The ratio between gold and silver over the past 50 years has averaged around 50. That is, on an average at least 50 ounces of silver is required to buy an ounce of gold. Hence, one can conclude that if the ratio is above 50, silver is a good buy. As per goldprice.org, the ratio currently stands at 58. So, probably investors should be looking at precious metals beyond gold.

Having said that, like any other investment, the exposure to precious metals should be limited. Also instead of looking for short term gains, they should be held in the portfolio as a hedge against inflation and currency risks.

Source: Goldprice.org

Does 8% tax-free return sound appealing?

We are living in times when return of capital is a bigger worry than return on capital. Needless to say, investors are willing to compromise on returns, to any extent, for safety of their capital. The poor economic and earnings outlook have got investors averse to the idea of investing in stocks. Bonds and fixed income instruments, which were mis-sold on the premise of safety, have also eroded investor wealth in recent months. Thus, there is hardly anything beyond bank fixed deposits that investors wish to park their hard earned money in. 

Every now and then, we get investor queries asking why they should remain invested in equities. That most stocks will return less than FD interest rates over the next one year is a no brainer! Well then, should anything beyond fixed deposits even feature in the asset allocation for retail investors? Our answer to this would be absolutely yes! While fixed deposits can offer assured returns for short term, they can hardly cover for inflation over the long term. And gold, although a necessary hedge against inflation and currency risks, cannot be a major portion of one's portfolio. It is therefore important to remain invested in equities. More so, in such times when the dividend yields are making up for the lack of capital gains. 

Take the case of PSU banks for instance. Most of them have been battered over the concerns of treasury losses and non performing assets. The fundamentals of these entities have certainly deteriorated over the past one year. Some have the worst behind them. Others are yet to see some pain. Markets therefore have discounted the valuations of these entities to such an extent that they are now more valuable dead than alive. That is, most of them are trading at 50% of their networth. Important to remember that the PSU banks together corner 60% of India's banking sector. And their future, although bumpy, is secured by government holding. Thus the dividend payouts of these entities too are guaranteed to a great extent. And at current prices, the generous payouts can fetch investors yields that are very close to FD interest rates. What is more, unlike FD interest rates, the yields can only go up as the payouts increase year after year. Also, that dividends unlike FD returns is tax free in the hands of the investor makes the case stronger for the former. 

Now, this is not to say that investors should grab every PSU bank or other stocks offering mouth watering dividend yields. The risks that some of them carry can indeed wipe out portfolio returns. Also one must avoid getting carried away by the lure of dividends. The exposure to such stocks, if at all, should be keeping in mind their balance sheet and management quality. 

Source: Equitymaster

Is your fixed deposit earning you any return?

As an investor you invest to earn a certain rate of return. In the volatile world that we live in today, these returns are getting more and more hard pressed. Stocks are getting battered. Gold has been falling too. This has led many to park their funds in fixed deposits. With interest rates hovering at high levels, most individuals who took this option were happy with their choice. Even though the Reserve Bank of India has brought interest rates down, the returns being offered by the fixed deposits continue to be attractive. At least this is what most people think. However the truth is far from this.

The reason for this is the concept of real interest rates. In simple words, real interest rate is the interest rate being offered by the bank less the prevailing inflation rate. As individuals, the inflation that affects us is the consumer price inflation. Therefore, this is the one we ought to look at when we are looking at the real interest rates on our investments.

The chart below shows that the rate of interest being offered on fixed deposits has not even covered consumer inflation. And this is considering the higher end of interest rates being paid on fixed deposits by the banks.

Source: Reserve Bank of India * Interest rates on fixed deposits with more than 1 year of maturity

This makes you wonder whether keeping all your money in fixed deposits is really worth it. After all, the returns generated here hardly even cover the increased cost of living that you suffer on account of higher inflation.

So should you completely avoid fixed deposits?

Though fixed deposits do not offer returns that cover inflation, but they are still a relatively safer form of investment. Therefore, giving them a complete miss would not be a prudent idea. The thing is we believe keeping aside some safe cash as absolutely necessary. Not only will this cash take care of your liquidity needs, but it will also come handy during market declines. Particularly when there will be opportunities to pick up fundamentally strong stocks at cheap valuations. And fixed deposits as such present a good avenue for parking this safe cash. After all, these deposits still offer better rates when compared to a simple savings bank account.

In today's scenario, you may be tempted to put your safe cash in the higher interest rate fixed deposit schemes being offered by some corporate houses. That in our opinion would be a disastrous mistake. You see despite the fact that bank FDs may offer returns that may not cover consumer inflation; they are still a relatively safer place to keep your cash in. For the chances of banks defaulting in returning your deposit are almost negligible as compared to the corporate.