Cricket is a religion in our country. Is there anything else that binds the whole nation together? Is there anything else that generates so much passion within each individual? Right from the street side hawker to five star restaurant, from small work table to corporate corner office, from normal tree side primary schools to world class management institutes, cricket allows us to speak a common language. Everybody understands this language.
And yet, we forget that it’s a team game. It’s a game where every individual has to do its part and perform his role. In our wins, we forget negative, while in loss we demonize individuals. We forget somebody has to score runs, somebody has to catch in the field, and somebody has to take wickets. In this game, we tend to applause showmanship (even when if it is without any substance), while hard work just becomes a regular talk and not celebrated.
Our team had a dream run from middle of 2000 to 2004. In this we all applause certain leader of the team who takes off his shirt in enemy territory, but we do not seem to remember folks who worked tirelessly to make it happen. We continuously praise this leader, without recognizing that he had excellent team mates who always bailed him out. He had two great batsmen of this era and one great bowler who were always ready to stand up and make the contribution.
Alas! We keep praising the leader and fail to understand that we had a great team.
Investing is like a game of cricket. It is team game. You may be leader to run your portfolio, but your portfolio is your team. You need few rock solid performers like our wall, who time and again will bail you out. You need few intelligent ones, think Mr. Mumbai, who has ability to adapt as per the situation, and will become a grand daddy of your portfolio. You need few stocks like Mr Najafgarh, who smacks the ball out the park. You need few no names which occasionally complete the equation or may become the new superstar. You need few who zip through your portfolio or who goggles your portfolio in upward trajectory.
Therefore, a long term winner portfolio cannot be constructed or sustained if you chase those hot stocks, chase those market leaders, and chase those once in blue moon performers. In order to win, your portfolio needs to be filled with winners. Every stock that you buy should have a role to play.
Its not really news when I say that we’re in a bear market (the widely accepted definition for western equity markets is a sustained 20% drop is much smaller than the 50% drop of the Nifty from our January high of 6357). But the question on everybody’s mind is - where are we in this bear market? The beginning, the middle, or at the end (the bottom)? Let’s have a look at the past three Indian bear markets and see if we can get some clues (data below sourced from Morgan Stanley Report, “India Strategy: How to Cope with a Bear Market”, published on 13 March 2008):
First: 2 April 1992 (top) - 26 April 1993 (bottom)
12 months trailing PE at the Bull market peak: 33.9
At the Bear market bottom: 13.6
Decline of 60%
Time taken in days to cross the previous high: 1425 (4 years)
6 months return from the bottom: 34%
From the above data we can see that:
A bear market leads to an average decline of 51% of the index, and upto 60% decline in PE ratios
If you managed to invest at the bottom, 6 months down the line you’d have made an average of 35% return (although spotting the bottom is near impossible - so this is rather misleading)
It lasts anywhere between 1-2 years
It takes anywhere between 2.5 to 5 years for the market to ‘recover fully’ to its previous peak - therefore the bear market is accompanied by a considerable ‘horizontal’ market
The bull market peak is over 32x earnings (PE ratio), and tends to more than halve at the bottom.
Now lets compare the above learnings from above to the ‘Bear Market’ of 2008:
Tipping point: Subprime leading to FII exit
If October 27 low, was the bottom then it has only lasted about 9 months
Sensex peak at 21,207
Sensex October 27 low at 7697
Decline of 64%
Nifty peak at 6357
Nifty October 27 low at 2253
Decline of 65%
12 months trailing Nifty PE at the Bull market peak: 28.3
At October 27 low: 10.7
Decline of 62%
Clearly we have overshot the average index decline of 51% that we have seen in previous bear markets, by a significant 13 percentage points. We have also seen large declines in index PE ratios - 4 percentage points more than the last bear market. Moreover, the PE on October 27 was an astoundingly low 10.7 - the lowest ever for the data since January 99, as I talk about in my post here.
This begs the questions - how much longer do we have to suffer such a market?
History tells us that there seems to be 3 ‘phases’ of a bear market:
First phase: A sharp initial fall - ‘capitulation’
Middle phase: A bear market rally on low volumes, where some investors a lulled into the false sense that the bear market is over
Final phase: Long slow downward grind in price where market valuations hit rock bottom
Clues that the bear market is coming to an end:
Indiscriminate selling leading to sharp falls
A major potential corporate or political crisis
Highly negative but irrational rumours about financially sound companies
Very low PE ratios for blue chip companies - often in single digits.
Based on history and what we’ve seen above, I’d wager that we’re at the beginning of the final phases of the bear market. We have seen a lot of volatility, and quite a significant rally over the last week, from 7967 to over 10,000 - a rally which seems to be coming to an end as I write this.
Globally, we have already seen unprecendented collapses in the banking and insurance sector - AIG, Lehman, Bear Stearns, HBOS etc. just to name a few. We haven’t seen an bankruptcies / defaults in India at such a significant scale, although rumours of ICICI bank collapsing, and then Unitech defaulting were rife. As far as PE ratios are concerned the Nifty’s trailing PE was at its lowest in a decade last week. All these point to us having crossed the bottom.
Do note however, that the 7697 low was not lower than the previous bull market’s peak, something that seems to be a pattern. Moroever, as I reported here, FIIs have only pulled out 20% of their investment in India, and I expect that this is not the end. Whether they like it or not, they may be forced to pull more out of our market even at these attractive valuations, in order to meet liabilities or liquidity pressures due to redemptions.
Well, the interest rate cycle has already turned, indeed quite aggressively with the Congress government trying do do everything it can before the elections in March next year, including leaning on banks to cut rates (which has worked). Inflation is on its way down, so that’s also pretty good news. Corporate earnings results have been really bad this quarter and we might see another couple of quarters of bad results before they start to improve. Therefore I think there is a lower bottom down the line. When will we see it? After another round of FII money getting pulled out, optimistically, I think we’ll probably see it over the next 6 months, pessimistically - given the grave global scenario - 12 months. That would make the bear market period 15-21 months.
As far as recovery is concerned, ’strong economic fundamentals’ can be cited in favour of the arguement for a shorter horizontal period. Fundamentals, however, doesn’t really seem to help when the global economy is in the toilet, and there’s no foreign money to push the market back up to the levels that it saw in this bull run.
Somebody called me early this morning telling me that they had heard fresh rumours that ICICI bank was going to collapse in the wake of the credit crisis. Clearly, a number of people in Hyderabada also heard this rumour, and panicked. According to this TOI story, people were lining up at ATMs to pull their money out.
On September 17, ICICI bank’s management strongly denied rumours that the management was offloading ICICI shares. Share prices dropped from Rs. 720 on September 8 to Rs. 560 on September 17. They rose again to Rs. 634 on September 22, and are currently trading at Rs. 493, marginally down from yesterday’s close.
In my opinion, while ICICI may have not insignificant Mark to Market (MTM) losses from its exposure to credit derivatives, there is *no way* that ICICI bank would collapse. It’s India’s AIG, for all practical purposes. As the second largest bank in India, the regulator would never let such a thing happen. Moreover, even if it did face large MTM losses, given the fact that it recently raised $5bn in equity capital - I imagine that this is more than enough to tide it over in uncertain times.
If you don’t believe these rumours, then ICICI is looking pretty attractive, trading at a PE of 15, and almost a third of its yearly high in January of Rs. 1440.
Disclaimer: This post or any other content advice is not investment advice and should not be construed as such. All views presented here are solely the opinion of the author’s.
Disclosure: I don’t hold any shares of ICICI Bank.
In this meltdown of stock market, realty sector is bleeding the most. It is down 65% from its peak. The sector is under performing due to hardening interest rates and rising commodity prices. Many of the realty are now available at attractive valuations as a result of re-rating in this sector.
One of the growth pick in this segment is HCC. HCC is an integrated group with eight decades of experience and has interests in construction, real estate, and infrastructure development. HCC specializes in technical complex, new age construction in infrastructure projects, as well as EPC, BOT, integrated projects and townships. Read the rest of this entry »
Analysts blame the high interest rate environment on the poor results. Some 70% of car sales are financed, and high interest rates make it more expensive to take out loans to pay for their car purchases. The small car segment is thought to be more sensitive to interest rate fluctuations, as the middle class families that buy from this segment cannot afford to make outright purchases.
I largely agree with the rationale presented above. However, the high interest rate environment should have had an equally damaging effect on Hyundai’s sales as well. Even if you take into account that Hyundai’s August 2007 base of 16,000 cars was lower than Maruti’s base of 60,000 cars – you cannot explain away such a dramatic a dramatic difference in results.
The reason for Maruti’s poor performance goes beyond the interest rate environment. Since the Swift Maruti hasn’t had any new launches of note. Moreover, its marketing has been limited and unfocussed. Its strategy of driving sales through schemes in the rural and semi-urban segment – although intuitively appealing (tap into less served segments) – failed to provide results. The likely reason is that households in these regions, who have fewer financing options, are even more interest rate Read the rest of this entry »
There has been a lot of chatter in the market about FIIs staying away from the Indian markets because they feel that the valuations in India are still relatively quite expensive. Index PE ratios, when looked at in comparison to historical levels are a good way to determine how cheaply/fairly/expensively the companies that make up the index are relative to their historical levels.
But first, an explanation of how an ‘Index’ is calculated: There several ways to create an ‘index’ but the method commonly used is the ‘free float market capitalisation methodology’ where very crudely Indices are calculated adding together the market capitalisation of each of the companies chosen for that index based on some sort of criteria, dividing that figure by the sum of the market capitalisation of those companies that met the same criteria in a base year and then Read the rest of this entry »
Marshall Wace has taken the concept of social investing / wisdom of the crowd investing to a whole new level. These guys created a trading system called Trade Optimized Portfolio System (TOPS), which basically ranks analysts from brokerages on the performance of their tips, benchmarks them, and follows the investment recommendations of the best performers. They’re not exactly small fries either - with an estimated $15bn dollars in Assets Under Management (AUM), they’re responsible for some 3-4% of the daily volumes of all equites traded on the London Exchanges, and are ranked amongst the 10 biggest hedge funds in Europe.
As one investment banker put it, the idea behind TOPS was simple (in concept, though probably fairly complex in the algorithms used). It was the equivalent of ’skimming the cream to get the best investment ideas’. The incentive system is clearly in place, as well - if you rank highly according to the the ranking table spat out by the TOPS system, then Marshall Wace will not only take your advice, but transact through your brokering outfit - and this means millions of dollars in Read the rest of this entry »
Meet Rajesh (embarrassingly despite numerous conversations with him, I actually don’t remember his name, so I’ve made one up) – the paanwaala that sits next to a chai shop outside my office:
He’s a pretty enterprising guy – he used to own a textile factory specializing in shirt fabric, in Lukhnow, Uttar Pradesh. Unfortunately, a few of his big buyers that were based in MG road in Delhi (the road that connects Delhi to Gurgaon) were forcibly shut down after the Supreme Court gave the order to demolish illegal developments / encroachments.
I remember just a couple of months ago – he used to sit on a footpath to sell his wares (he didn’t have the fancy table-cabinet that you see now). Now he’s not only got a paan shop in Tardeo, but one in Bandra as well. Hats off to him for getting back on his feet!
The reason why I’m writing about him though is not because of his entrepreneurship qualities. It’s because I overheard a fairly amusing conversation Read the rest of this entry »
Given the recent news SEBI considering (but not doing anything yet) about revoking the P-note ban, I thought it might be a good idea to revisit the topic. Thank you to Akshay for passing on info that has helped me better write this post.
In India, only domestic investors, or ‘Foreign Institutional Investors’ (FIIs) - those foreign institutions that have registered with SEBI, are allow to invest into the equity markets directly. Participatory notes (P-notes) allow foreign investors, such as hedge funds, which are not registered with SEBI to invest easily in the Indian equity market.
Practically, the way that P-notes work is that a foreign investor - say a hedge fund - would deposit funds with an FII that is authorized to issue P-notes, who would use the funds to purchase shares as instructed by the hedge fund. The FII would then issue a P-note to the hedge fund, which is essentially a certificate that says that it is entitled to X shares of company ABC, and any capital gains or losses and dividend payments would be passed onto the hedge fund. In return for this service, the hedge fund would pay the FII a fee.
A crude example: If a hedge fund not registered with SEBI wants to buy one share of Hindustan Unilever Limited (HUL), their FII would pick up a share of HUL for Rs. 240 and write a contract that says that in return for a fee and the Rs. 240 paid by the hedge fund, when the hedge fund asks the broker to sell the share they will comply and pay back the hedge the Rs. 240 plus or minus the rise or fall of the share price and the dividends if there were any.
Because foreign investors bought P-notes from reputable FIIs (they knew that they wouldn’t go back on the agreement), and there was a healthy supply of P-notes going around, foreign institutions were able to trade these P-notes amongst themselves.
On October 16, 2007, N. Damodaran, the then SEBI chief issued a decision to curb foreign participation through P-notes as he felt that there was excess money being pumped into the Indian market unchecked leading to volatility - which is always bad thing, especially for the retail investor Read the rest of this entry »
With the emergence of large domestic (Pantaloon’s Big Bazaar) and international players (Metro AG, Tesco, Tesco/Trent- read my post on this, Bharti/Wal-Mart) in large scale organized retail, I got to thinking – how does this affect the margins of consumer product companies such has Hindustan Unilever, Colgate-Palmolive, and Cavin Kare? On one hand, you might see margins (the different between how much you sell for and how much it costs you) on goods increasing due to a lower distribution cost – its easier to distribute 100,000 bars of Lux soap to one Metro AG in one go, than distribute that amount in rural India.
On the other hand, since these stores buy in bulk, they’re in a much better position to negotiate on cost – therefore pushing margins down. Moreover, many of these stores Read the rest of this entry »
Cricket is a religion in our country. Is there anything else that binds the whole nation together? Is there anything else that generates so much passion within each individual? Right from the street side hawker to five star restaurant, from small work table to corporate corner office, from normal tree side primary schools to world class management institutes, cricket allows us to speak a common language. Everybody understands this language.
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