Give Me Money: Print it or Release the Repo Floodgates

This is what I’ve been telling some people around me these days…

Now that we all know that the latest quarterly GDP growth number is 6.1%, I guess my thoughts on inflation & interest rates (here) will turn true and the RBI will start easing down policy rates. I guess if that happens then I will finally be able to redeeem the Axis Banks and the HDFC Banks that I have on my books.

What’s a good bond fund to go long on now? Need to find out. I resolve everytime not to practise the ‘trapper’ style of investing, but always fall prey to it.

A ‘trapper’ style of investing is a personal term I’ve created to remind me on the numerous opportunity losses I have incurred investing on a hunch and waiting for that event to play out, snaring my capital in the process – not to mention some real losses as well. I guess. An example is the big hue and cry around the possibility of IFCI being converted into a bank. I had given in to the temptation and put in a modest amount, laid the ‘trap’ and waited, waited, waited for the poor animals that make our financial jungle to fall into it. I guess the only trap that played out here was that my capital got trapped. :) I can recollect so many other examples from my personal trading journal – the government is about to come out with a favourable policy on cement and lift the restriction on cement prices: so lets pick a clinker crusher or two and wait by the trap! Ditto with sugar stocks some time back. Even before there was that shine which many had taken to PSUs under the hope that they’ll be monetized by the Government’s disinvestment program. Cut to today – have you noticed all those articles and pop-ups, emails, even sms’ and tweets advising “stocks to buy ahead of the budget”, “hot sectors during budget 2012″ etc etc. Avoid this noise please. If you remember conditional probabilities and Baye’s Theorem from your maths classes, your chances of making money are highly conditional – probability of (BEL going up) given that budget makes provision/announcement regarding defence etc etc.

Emerging Markets: 2012-’18

Foreign Institutional Investors (FIIs) had mostly stayed away from Indian equities during 2011. While around 20,000 crores were brought into the debt markets some 3,000 crore worth of net equity positions were withdrawn from India. I guess it took the softening of  inflation and the subsequent cessation of the interest rate hikes that got this hot money back to India. Its FII money that mostly contributes to the volatility of Indian stocks. So, the more one studies whats happening across the globe – what the top fund houses, hedgies etc are saying, the better prepared you are to take a stance wrt to the Indian scene.

This calendar year, we have seen the return of this fickle capital to India and other emerging market stock exchanges. They are saying that FII flows into Indian stocks have already reached $4 bn in 2012! Mind you, we have seen 56 days in 2012 till now – a good 300+ days are yet to pass us by. Will this deluge of foreign capital continue to build up? Most certainly not. But before the tap runs dry and the vacuum switches on, I think it looks likely for the NIFTY to at least climb right all the way up to 5900? While that’s a good 8.7% points away from current levels of the NIFTY, I think it’s certainly achievable given the very bullish set-up and the decent correction/pause in the rise of the Index given the option expiry/rollovers for the Feb series. So with all that covering up and rolling over completed, I am hopeful of another 7% – 8% rise of the NIFTY. It will then be a good time to unwind the non-core positions.

There is however an interesting view put out by Jeffrey Frankel (Professor of Capital Formation & Growth at Harvard University) who points out to the cyclicality in the occurrences of troughs or crises in emerging markets asset class. He serves on the “Business Cycle Dating Committee” in the United States – whose job it is to declare the official start and end dates of recessions. So, he has a view on past emerging markets’ economic cycles and where the emerging markets are in the current cycle. Frankel draws attention to the earliest references to economic cycles perhaps came from the Old Testament, where the Pharoah orders Joseph (the chief architect) to build stockpiles of food grains as the Nile flowed in plenty for 7 years and then it relatively dried up for the next 7 years. So there were 14 year cycles then. While I am not sure if Egypt of biblical times could be called an emerging market, but closer to our times, Frankel notes that during 1975-81 (7 years) we had a phase which marked plentiful capital flows to emerging markets [recycling of petrodollars in the form of loans to developing countries]. Then the period from 1982 – 89 saw the international debt crisis which spread out from Mexico with these 7 years being referred to as the ‘lost decade’ in Latin America. 1989 saw the issue of the Brady Bonds [where the Latin American countries dunked their currencies and issued bonds denominated in US Dollars] which helped the Latin American nations move over from the capital drought. The period from 1990 -96 was obviously marked by crazy capital flows to emerging market countries. Then came the East Asia crisis of 1997 and another 7 years of capital drought. So that took us to 2003/04. Now, the period from 2003/04 to 2010/11 has seen the third cycle of net capital inflows into emerging markets – will the period from 2011 – 2018 be the next drought period? We can answer these questions only in hindsight. A lone swallow does not a summer make – i.e. the eagerness which the $4bn of today has shown in coming over to the Indian stock market can easily turn into a nervous stampede out of the country. Then this would be a mere blip in the 14 year cycle charts. If you look at the chart at the start of this post, the period of rapid rise of the MSCI Emerging Markets Index during the period 2003 – ’08 was really the time when capital flowed in so freely into emerging party spots. Now, the preceding 7 year period was from 1997 – ’03 during which time the index lost ~50% of its value. Scary? So if this logic holds good then is it appropriate to surmise that A) we are headed down and B) the top of 2008 will not be taken out till 2018 at least.

There are ends of beginnings of ends and then there are beginnings of ends of beginning. It’s difficult for simple people like me to say what is beginning and what is ending, but there is a neat little tidal wave of money coming in on the bourses where my hard-earned money rests and I am going to ride the wave for now. Amen.

Redignton, Pennar on charts

Redington India is a very low margin game (PAT margins ~ 1.3%) and the company is piling on foreign debt to finance buyback of stake in one of its subsidiaries from a private equity investor. Now interest servicing costs and its core business are both long the INR. It’s anyone’s guess really, but there could be some who are predicting that the INR will rise up from here – will that be able to take up the price of this stock to 100? If look at the price chart on the right (trailing 18 months), it does look like a coiled spring – what remains to be seen is which way will it uncoil. Up or down?

Now there is a company headquartered less than a kilometer from my residence: the integrated engineering company called Pennar Industies. Is proximity to where you live a good reason to invest in a company? The stock really has just dropped and dropped but I read somewhere that a venture capital investor has picked up a 7.74% stake through secondary market purchases spread over the past 6 months. Well, they certainly managed to strike their purchases within the narrow 37 – 40 price band. This gives a valuation of ~450 crores to the company. The current market cap is ~ 414 crores so that looks like fair. The investors’ presentation on the company’s website puts the replacement value of the business at 700 crores as compared to its gross block of 345 crores. Now, on a consolidated net sales of ~ 1,200 crores, the mcap looks like well, ummm. Even with a net profit margin of ~ 6%, the mcap to sales ratio looks a bit low. Its chart (on the right) also shows what looks like a bollinger band squeeze. Is this the nadir for this stock? Good to plonk a small amount? I guess i’ll sleep over it and at least wait for the 50 SMA line to cur above the 200 SMA line. Have to check leverage and shares pledged, if any.

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