The Week That Was:- 22nd Nov to 29th Nov

Posted by Team Niveshak on Sunday, November 29, 2009 , under |




Market Watch
It has been a turbulent month with respect to the stock markets globally. The current trend is in confused state and needs to get a clear direction to determine the market conditions. It is difficult to sustain any upside on the market due to these fluctuations.
Though the last week started on a positive note and touched a high of 17,290 but due to Dubai debt fear and derivatives expiry, the markets crashed to a low of 16210 at Sensex. Yet the markets recovered and closed at 16,632 points. It was down by 2.3 per cent as compared to previous week’s closing, a fall of 390 points.
The affected stocks included majors like TCS, ICICI Bank, Rel Com, and NTPC by 3-5 per cent each.
The another major index of India, Nifty soared up to a high of 5,138, and fell down to a low of 4,807 in past one week. The week end saw Nifty settling at 4,942, a loss of 111 points.

Satyam lies yet again
The CBI claimed yet another incident of fraud at Satyam Computers on Tuesday, November 24, almost two years after Raju, the founder of Stayam, had admitted to fraud in his company. This time it was a scam of around Rs 5000 crore. As per CBI, people indicted for Satyam fraud case had pledged their share in the stock at an inflated price. Also, they forged the board resolutions to raise loans and divested stocks at a higher value. These new fraud charges are different from the previous Rs 7000 crore fraud.

TATA plans to buy out Actis’ stake in Swaraj
Tata Motors seem to be planning to extend its hold in the automobile industry as it eyes the equity shares of Actis in Swaraj Mazda, CV and bus maker. Actis currently owns 17% share in Swaraj, out of which 7.7% is is own and 9.3% through unit CDC. These were bought at Rs 370 crores in 2004. Tatas’ took notice of this when Actis, the private equity major, indicated that it may divest from Swaraj Mazda. But there are other auto majors and new entrants also who have shown their interest in this deal.

Debt-laden Dubai stirs world
This week Dubai stirred the entire world as its debt problems raised concerns about corporate exposure. It also stands a major risk of the repatriating funds by its foreign investors.
Dubai’s economic growth depends largely on its Dubai world. Hence the creditors of Dubai world and Nakheel property group have been asked to consent on a debt standstill.
India reacted as the gold lost its shine, stocks collapsed, rupee weakened and the returns on bonds dropped. Though, India would not be affected much by this crisis.
In this scenario of predicament, Abu Dhabi has agreed to help Dubai come out of its debts but it clearly said that it will not write-off their debts. Abu Dhabi has already given $15 billion to Dubai indirectly through 2 private banks and UAE central bank.

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Niveshak November Issue

Posted by Team Niveshak on Thursday, November 26, 2009 , under , , |



Dear Niveshaks,

As the Sensex kisses the 17,000 mark and the DJIA fiddles with the 10,000 level, it may seem that the Bull which almost seemed to be resting in peace for the past six quarters, has returned. Economists and Analysts have started to have a short look back at the reason of the crisis, a deep look at the extent of its effect on the world economy and a long look at the road to recovery ahead. But in this discussion, did we notice one thing – Recovery is taken for granted. Can we afford to take this as granted? Let me throw a word of Caution.

Huge bailout packages, lowering of interest rates and opening of multiple liquidity windows to flush out the menacing bear from the markets has created a huge problem. Firstly, this has pushed most of the countries into a severe fiscal deficit, in the 8-10% range which may take governments a couple of years to bring them down to 2-3% range. This can have fatal impacts leading to lesser government spending in the next few years leading to lower growth rate. The value of major currencies with the dollar has been very volatile over the past few months. Problems with huge inflow and outflow of money, heavy volatility in currency values, fiscal deficit prevailing in most of the countries may lead them to taking drastic measures on capital account convertibility. So the possibility of a Currency bubble also may not be ruled out.

The billions of dollars bailout packages rolled out in the west found greener pastures in the emerging economies. As a result, these economies defied earnings positions of companies & negative market forces and continued to rise up since March’09. The BSE Sensex for instance was trading at 8-10 times P/E during the recession is now trading at 21 times P/E. This can be attributed to the formation of an asset bubble in the emerging economies. When liquidity starts to dry out, investors will be seen running for cover pulling down the market.

In its last quarterly review, Reserve Bank of India, the regulator, marked an end to the easy money era which was continuing since the recessionary times. Now credit would not be as easy as it was until now. This so-called start of liquidity squeeze may have an impact on the expansionary plans of corporate India. This month credit growth recorded single digits for the first time in last fifteen years. This is not just the case in India, many economies of the world have tried to control fiscal deficit and overheating of economy due to drastic recovery steps by marking an end to the easy money regime. Now this may stop the economy from recovering at the rate at which it was earlier expected.

Earlier we have mentioned that the Chinese have set out on a misadventure of going on a buying spree and have been stock piling inventory which was then available at a very low price. Now this led to rise in commodity prices all over the world. Indicators like the Baltic Dry Index pointed that there in heavy shipping of commodities across the world. No one was wrong. But the reason was deceptive. There was not much increase in consumption in China, rather it was stock piling for future use. After a few days, the largest buyer in the commodity market will be on leave and consume from its stockpile.

Now as the dust settles and the smokes clears, we join the dotted lines and one thing will become clear - The recovery in was not for real. We may fall back again but not as much as we fell last time but after that the recovery will be real. Let us wait for the best times to come back soon and in the mean time let us go through some really insightful articles that our friends from across all B-Schools have penned down. Hope you find this an interesting read.

Happy Investing!
Biswadeep Parida
(Editor-Niveshak)


(click on image or here to view)

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Sovereign Wealth Funds

Posted by Team Niveshak on Wednesday, November 25, 2009 , under |



Santosh Anil Patil
IMT, Ghaziabad

Introduction

There has always been a debate on saving an economy in distress, which nearly went unanswered during the early 2000. But now there is a saviour for such economies. Developed economies did not realize the potential of developing ones, which formed funds of nations called Sovereign Wealth Funds (SWFs). These funds have flown to the rescue of capitalism’s finest. This established the flavour of a new type of investment fund, which otherwise would have gone unnoticed.

These funds have existed since 1950s, but their total size has increased dramatically over the last 10-15 years. In 1990s these funds probably held about $500 billion, but the current total is estimated about $3 trillion. SWF is a state owned investment fund composed of financial assets such as stocks, bonds, property or other financial instruments. SWFs are the most sought after funds these days and come to play to bring in market stability, liquidity and support in times of dire need and have comfortably taken place of central banks. SWFs have been around for years, created from national budget surpluses and huge reserves of oil and US treasury bills. The governments do not have an option since they cannot pump in the entire amount into their respective economies for the fear of inflation and they cannot just pile up the cash and stock it. So the alternative is SWF.

Concept

The idea that governments should mitigate the risk in the future has a long and respectable history. Kiribati, a pacific island country that mined guano for fertilizers set up the Kiribati Revenue Equalization Reserves Fund. Now the guano is long gone but the pile still remains and boosts the GDP of the island by a sixth. Many oil producers run similar schemes. Oil Producers have realized that it is too extravagant to spend everything in one go and it is wiser to save for times when oil prices are low or for the generations when oil production will start depleting. Kuwait Investment authority is also one amongst the oldest SWFs created in 1953 from oil revenues even before Kuwait gained independence from Great Britain.

Trading

SWFs trade using funds earned from
• commodity export revenues
• foreign exchange reserves

Commodity funds can be used
• For fiscal revenue stabilization
• As a check to prevent foreign exchange funds for fanning inflation

The non-commodity funds are used to make stand alone investments.

SWF – Relative Presence
Although SWFs make up only 2% of the world’s $165 trillion worth of traded securities, they come up with enormous potential having more equity than private equity and more funds than hedge funds. The growth
curve is fascinating with the expectation of SWFs crossing
$10 trillion dollar mark. But even with such a growth potential, the funds account for only 3% of global traded securities.








Leading Nations

Assets under management of SWFs increased by 18 % in 2007 itself. Most of this growth resulted from an increase in official foreign exchange reserves from Asian and Middle East countries. Amongst these funds, the top seven are classified as “Super Seven Funds” all of which have assets over 100 billion dollars. The Abu Dhabi Investment Authority, established in 1976, is the world’s largest sovereign fund. The Norwegian SWF is receiving great interest these days. The fund is acknowledged for its transparency ever since its inception in 1996. The fund has invested in low risk non-strategic assets and the investments aim to follow environmental and human rights standards. Along with these major funds, smaller funds are held by Azerbaijan, Trinidad and Tobago, Ecuador and Nigeria which account for around 100 billion dollars.

Investments Made

The SWFs can invest in each and every corner of this world and can function just as an independent investment fund. Since the investments are not revealed, it is always difficult to sense the strategies employed. But the reasonable assumption would be that Sovereign wealth funds invest towards long term investment strategies while at the same time speculating and gaining in the face of short term market volatility. These funds do not borrow money from investments and hence are not highly leveraged, which sets them apart from other funds.

Recently there have been investments in big businesses across many corners by various SWFs. China’s Investment Corporation (CIC) hit headlines recently for investments in major U.S financial firms. In 2005, a United Arab Emirates owned company, Dubai Ports World stirred a controversy in the United States by purchasing a British owned shipping company which gave it a control over certain parts of many US port facilities. Although Dubai Ports World is a state owned business and not a sovereign wealth fund, the incident reflects parallel concerns over the purchasing interest of the SWFs. Recently Singapore, Kuwait and South Korea aided in bailing out of two companies, Citigroup and Merrill Lynch which had lost their lifeline in the financial crisis that had plummeted the financial health of many big firms in America.

Future

The financial stability of a company entirely depends on the efficiency with which its assets are managed and here the investment strategies play a key role. This has become a trend in the recent developments of the financial world. But when it comes to Sovereign Wealth Funds, there is a lot to be known since very few countries publish the information about the investment strategies, assets or liabilities which causes a growing concern in the minds of people all over the world. The solution is simple in the form of transparency which would go a long way to ease the growing concerns. Disclosure of certain information about the investments or assets in one form or other will serve as a proving factor from the investors. Investments through other funds like hedge funds can mitigate the risks and provide a layer of protection against the money laundering schemes. The diversification can be achieved by investment across various indices anytime. Moreover a scandal of one sort or other is inevitable. When there are stakes of trillions, involving hundreds of fund managers who invest in hundreds of investments employing various strategies, there is every possible chance of a blunder as corruption or foolishness creeps in. Hence it is always advised to sense the risk involved in such profound investments and try to mitigate the risk of conflict in every possible manner. It always boils down to the decision of the sovereigns as to make these funds a future or a past, while staying out of controversies which can tarnish their brand image.

On the whole, Sovereign wealth funds have been in the spotlight in the 21st century having set their footprints right into the heart of wealthiest nations and the gargantuan businesses in not more than a decade. The flow of investments with an unregulated ease backed up by the global rise in the economy is a clear indication of their growth. However, with lots of speculation surrounding these funds on ethical issues and the influence of Middle East, the future of SWF remains a mystery. Nevertheless the opportunities that lie ahead are growing at such a pace that these funds can be on top of all funds by 2050.


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The Week That Was:- 8th Nov - 14th Nov

Posted by Team Niveshak on Sunday, November 15, 2009 , under , |



Market Watch

After a sudden collapse on the stock exchange, last week saw Sensex rise by 690.55 points, or 4.27 per cent, at 16,848.83 compared to the previous week, while the Nifty closed at 4,998.95, up 202.80 points, or 4.23 per cent. Nifty could not touch the 5000 mark. This rise could be attributed to the increase in global markets and government’s reform initiatives. Also, the robust growth data lifted the spirits of steel and auto sectors. This increase was the best weekly gain in 11 weeks.

States speak about GST

The much awaited discussion paper on GST was released on November 10 communicating the proposed framework in India. The paper also discusses about administrative and threshold aspects. It was a broad consensus among the various states on GST. The final law would be passed by the central government. The two-tier structure was proposed to enjoy concessional rates for some goods by states, though it would raise the GST rate.

L&T strengthens Power sector, reduces stake in Satyam

The last two weeks has seen two major acquisitions by L&T driving company’s growth in thermal and nuclear power sector. Immediately after bagging the Rs 6897 crore order from Mahgenco- Maharashtra for 3 supercritical Boiler – Steam Turbine Generator Package of 660 MW capacity, L&T entered into yet another deal with Madhya Pradesh Power Generation Co. Ltd. (MPPGCL) on turnkey basis. This Rs 1635.30 crore Balance of Plant (BoP) contract was signed for two Coal fired plants of 600 MW each. L&T faced a tough competition from domestic BoP bidders for this project.

On the other hand, L&T plans to sell one-third of its 6.9% stake in Mahindra Satyam fetching them around Rs 304 crores. It is accounted as a strategic move to book profits as the markets recover.

Inflation surges to 1.34% in October

The new monthly index launched on 14th November, declared a 0.50% increase in the WPI-based inflation to 1.34% in October. Though the fruits and vegetables became cheaper by 11%, still the heightened prices of a few commodities including wheat and rice in the previous month highly affected the inflation. The fuel and power category also rose by 0.1 per cent during October, mainly due to higher prices of furnace oil (3 per cent) and bitumin (1 per cent).

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Value Investing: An Inside Perspective

Posted by Team Niveshak on Friday, November 6, 2009 , under |




Neha Katyal
IMT Nagpur

Value Investing relates to selecting stocks which are under-valued in the stock markets. This under-valuation necessarily means stocks which are selling at less than their estimated fair price and not just any stocks selling at low price.

History

Benjamin Graham is regarded by many to be the father of value investing. The concept of value investing was given by Benjamin Graham and David Dodd in 1934.

Analysis Done for Value Investing

The indicators used for value investing, as given in “Security Analysis” by Benjamin Graham and David Dodd, 1934, are:

1. Price to Earnings ratio (P-E Ratio) should be at least double the AAA bond yield

2. PE ratio of the stock should be less than 40 percent of the average PE ratio for all stocks over the past five years

3. Dividend Yield > Two-thirds of the AAA Corporate Bond Yield

4. Price is less than Two-thirds of Tangible Book Value, where tangible book value is calculated as difference between total book value and value of intangible assets such as goodwill

5. Price is less than Two-thirds of Net Current Asset Value (NCAV), where net current asset value is defined as liquid current assets including cash minus current liabilities

6. Debt-Equity Ratio (Book Value) has to be less than one

7. Current Assets > Twice Current Liabilities

8. Debt is less than Twice Net Current Assets

9. Historical Growth in EPS (over last 10 years) > 7%

10. No more than two years of declining earnings over the previous 10 years

Other investors may indulge in estimation of future growth and cash flows. All these indicators help to identify the under-valued stocks which may be used for value investing. These are the stocks defying the efficient market hypothesis, that is, their market prices do not reflect all the information, existing or new, about the stocks in their market price.

En-cashing Upon the Opportunity

People using the value investing technique make money by buying the stocks of these specific companies when the market price is deflated and selling in the better times. As the intrinsic value of these stocks is higher than the price at which there are trading, these are available at a discount, the discount which later translates into the profit.

People without much experience in investing in the stock markets can use the value investing technique to their advantage by observing the P-E ratios and other indicators. As the stocks are available at less than their fair value, the novice investors can use the value investing technique to their advantage as in this they are able to keep a higher margin of safety, for probable errors. This defensive investment in stocks trading below the fair value acts as a safeguard to adverse future developments common in the stock market.

Precautions while using Value Investing

The investor may wrongly consider an under priced stock as undervalued as well leading to loss of investment. In a bear market, the price of all stocks are low, but that does not have to mean that all of them are undervalued as well and have high earnings potential over the investment horizon.

Value Investing in Current Scenario

The financial sector crisis in the US has seen stocks around the world tumble to levels, which were unthinkable less than a couple of years ago. In a market when most people would agree that the best strategy to play the stock market right now is to stay away from it, value investors, have a different view. The value investing philosophy suggests that the current condition provides an excellent opportunity to pick up shares at very cheap prices. Talking in Graham’s language, this could be one of the times when the market is unjustifiably pessimistic on a large number of stocks. This however, does not imply that all stocks should be bought just because they are trading at way below the bull-run highs. In every bear run, although there are stocks which fall due to genuine falls in their values, there are many which decline simply because of the widespread pessimism among investors. Obviously, the intrinsic value of the company does not swing with the mood of the investors. A large number of stocks consequently end up taking a huge beating without any rational reason and hence trading at huge discounts to their intrinsic value. Thus, every bearish phase brings about some excellent opportunities for the value investor to capitalize upon. In the later part of this article, we will evaluate the performance of some such opportunities provided at the end of the dot-com bust, over the subsequent boom in the Indian stock markets.

Conclusion

In practice, value investing is similar to deriving gains through arbitrage pricing theory, in that, it involves finding stocks which are under priced in a certain market. Using the value investing technique for creating a portfolio of stocks is a better option than buying only a few stocks. The creation of a portfolio may be done by a novice investor as well to reap the benefit of having a higher margin of safety and the obvious benefit of diversification of risk.

For using the value investing technique, the investor must ensure that proper valuation techniques have been used and no extra optimism has been shown. The evaluation may be done using simple fundamental analysis techniques such as Economy-Industry-Company analysis (EIC), estimating future discounted cash flows or may be studied in relation to the market using techniques such as Capital Asset Pricing Model (CAPM).

An assumption made while using the value investing technique is of the marketability of the security. It is assumed that the stock would be easy to sell at the end of the desired investment holding period as the prices of the stock would have risen, making it easy to book profits.


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