Stop sitting on the fence

This article was published in Business Standard on Sunday, September 30, 2012


After lying low for a number of years, there are several reasons why retail investors should look to the stock market

For the past two years or so, if any retail investor asked a ‘financial expert’ whether this was the right time to invest in the stock market or not, the answer would invariably have been, ‘Refrain for the time being and enter when there is more certainty’. Investors appear to be taking this advice rather seriously.

We read reports in various media as to how retail investors have jettisoned stocks and fled to safer havens such as gold. This phenomenon is not restricted to India alone. The abiding global sentiment prevailing today is that stocks are ‘risky’ and should therefore be avoided. The grief-inducing headlines in various newspapers are further cementing this belief (the past two weeks notwithstanding). Everyone says that they will invest when times are ‘more certain’. Continue reading

How to build a portfolio

Jayant Pai |

Before jumping to build a portfolio of stocks impacted by the recent reforms, choose the ones which will benefit the most.

This article was published in Business Standard on September 23, 2012.

Three Fridays and three sets of good news – ECB President Mario Draghi’s promise to buy unlimited bonds, Ben Bernanke’s commitment to purchase mortgage backed securities worth $ 80 billion a month, along with diesel price hike by the Indian government and Mulayam Singh Yadav’s commitment that the UPA will not be destabilised soon – has brought the smile back on stock investors’ faces.

While the exultation is, no doubt, justified, this may also be a good time to dwell on how the impending changes may affect our investments going ahead.

While the hike in diesel prices and a reduction in the number of subsidised LPG cylinders may have invited the ire of consumers, it is expected to help equity investors in two ways:

Other things being equal, an impending reduction in the fiscal deficit will accord greater flexibility to the Reserve bank of India, who have so far, been lamenting that yawning deficit is acting as a big barrier to any further interest rate cut.

A cut in rates, apart from helping borrowers, also results in the lowering of the hurdle rate for investors in equity markets, by reducing the attractiveness of fixed income instruments.

Currently, the earnings yield for FY13E (calculated as 100/PE ratio) is around 6.50 per cent while the yield on one year fixed deposits is around 8.50 per cent. As rates taper off, this yield differential will reduce and PE ratios should expand even if earnings remain constant.

Also, an improvement in the country’s fiscal will reduce the threat of a credit rating downgrade. This in turn, will help corporates keep their overseas borrowing costs in check, which could percolate down to healthier earnings. The positive effect on the Indian Rupee also cannot be understated. It has already perked up nicely over the past few days. All-in-all, if all goes according to script, equity investors should be awakening to a new dawn and the golden age of high fixed income returns may be ending.

While all this sounds enticing, it would not be remiss if investors asked “What next?”. In other words, while the entire market will benefit, which stocks should they pick? Well, here are a few pointers for avid stock-pickers who want to build a reforms-oriented portfolio.

Don’t judge a book by its cover 

While the changes announced in certain sectors will contribute to their overall growth, it does not mean that all the listed companies therein will benefit equally.

For instance, the entry of foreigners (albeit through joint ventures with an Indian partner) could actually increase the competitive intensity in a low-margin sector like retail. Also, incumbents may not be attractive enough to be bought out. Besides, if a listed Indian player enters into a joint venture with a foreign entity, their focus in the listed entity may get diluted. Even if that does not happen, future expansions may happen through the unlisted entity.

In the case of aviation, while most of the current crop of listed companies are in dire need of resuscitation, foreign investors will only be deem them attractive once clarity emerges on operational fronts such as aviation turbine fuel pricing, sharing of airport infrastructure etc.

Also, while liberalising the FDI regime in a complex sector like pharmaceuticals is welcome, foreign companies who have bought out Indian promoters have not had a very good experience so far, as various issues have cropped up after their purchase. Even today, issues like compulsory licensing dog the sector. Hence, here too it may not make sense to blindly chase Indian pharma companies these scrips in the hope that they will sell out soon.

Read between the lines

There are some other reforms that have still not happened and does sound ‘marquee’ but which can have far-reaching implications.

One of them is the restructuring of the State Electricity Boards and the other pertains to the Land Acquisition Bill.

The former should not only assist several banks who have lent to these companies, but also inspire greater investor confidence in the power sector. Clarity on the latter will certainly help most of the large Indian corporate houses who are involved in infrastructure and extractive industries.

Even property developers may benefit. However, once again, invest only after assessing the beneficiaries and the approximate extent by which they will benefit.

If all this sounds too daunting, participating in the stock market through mutual funds is a good option. If choosing a good scheme is too laborious, an index fund may suffice.

‘Estimates’ or ‘Guesstimates’ ?

Jayant Pai |

Every quarter, sell-side analysts embark on an activity which I find perplexing….making and disseminating ‘Earnings Estimates’. Every brokerage house, releases such estimates for many large-cap companies (and a few small companies). There are a couple of points which are common across all quarters:

1. Clustering: It is remarkable that there is hardly any difference in the estimates which are made prior to the results, irrespective of whether it is a globally reputed brokerage house or a hole-in-the-wall broking outfit. My guess is that the larger ones base their estimates on the figures given out by the managements during ‘closed-door’ meetings, as well as the periodic ‘guidance’ given by them. The smaller ones simply piggyback on the larger brokers’ estimates and pass them off as their own. In either case, there is not much of analysis involved.

2. Variance: Often there is a significant variance between the estimates and the actual figures. Sometimes, even the direction of the actual results is not the same as that estimated. So much so, that in the USA, there is an indicator known as the “Earnings Surprise Indicator” which measures the variance of the variance. Confused….Well, you are not the only one.

To me, the whole exercise is quite absurd. I mean, in most firms each analyst tracks three to four sectors. Now, each of these will have a couple of humungous companies / conglomerates involved in a diverse range of activities. Given the number of moving parts, I think even the managements of these companies know that it is futile to indulge in quarterly predictions. However, the analyst at the brokerage house (who is often a multitasker and not an industry specialist) apparently can do what the top management of the company dare not, i.e. give precise predictions.

I also wonder who really tracks and believes these estimates. Seasoned investors may not even look at them as they have proved to be wrong on too many occasions. Maybe the media is more keen on knowing these numbers more than anyone else.

I am happy to see that some companies are desisting from providing quarterly guidance, as they believe that this practice encourages short-termism. If this trend gathers momentum, then, maybe, analysts will have to begin analysing and not merely reporting….

The mutual fund industry: Waiting for Godot?

Jayant Pai |






A journalist called me up last week asking for my views for a story that she was working on. It dwelt upon the fact that investors were deserting mutual funds in droves as they were disillusioned by a lacklustre market. So much so that the Prime Minister himself was sorry to see the state of the industry and was keen to lend a helping hand. She then asked me what could mutual funds and the Regulator do to ‘attract’ investors once again.

If she was hoping for some revolutionary ideas from my side she must have been disappointed…as I told her that nothing more or new was required. I was neither being defensive nor escapist when I said this… Continue reading