India : From Fragile Five to Most favored Investment Destination

In 2013, Morgan Stanley cointed the term - FRAGILE FIVE. India was labeled as one among theM along with Brazil, Indonesia, South Africa and Turkey. It was due to weak currency and other slacking economic conditions. Since then India made a turn around to become one of the most favored investment destination since 2017. 

Article below sums up the interesting economic journey of India in these years. And all those who invested / stayed invested / topped up their investments can be contented that they have grown with the economic growth.

Predictable Markets

 Volatility is the inherent nature of stock market - whether we like it or not. But the kind of swings we are witnessing in 2022 could embolden any investor to venture into stock market investing.

Markets had given major 'entry' and 'exit' opportunity not once or twice... but thrice in past one year. Anyone who made use of these swings would have made decent money. The last (ongoing) swing from lows of 51360 in sensex on 17th June 2022 to  61795 on 11th Nov 2022 translates to a 20% absolute returns.

In hindsight it look easier to Buy Low and Sell High. But in reality each fall comes wish lots of negative news and each rise comes with host of positive news. A typical investor remains positive and optimistic when these negative news are floating around and remains negative when positive news gets built up. As a result precise entry-exit is easier said than done.

Many investors - particularly the new age / new generation investors - find this 'predictability' interesting and impressive. It has made them believe that making money is easy in stock market. As a result many got lured to equity investing - by opening record number of demat accounts in past two years. But in reality such 'V' shaped recovery - which typically happens over short term- could spoil the true sprit of equity investing. Infact, it has set the expectations wrong among budding investors.

Many of them have not seen bear markets which have lasted for more than 2 years - like in 2001- 2004 Tech bubble / WTC Collapse or Global Financial Crisis in 2007- 2009. The drawdown in each of these factors have been for more than 50%!.

While geopolical risks are common and has been happening every alternate hear, the debt market bubble and higher inflation are rare occurrences. Infact since 1790 - the debt market crisis has happened only 4 times in the past and each one has been followed by a long recession. According to Mr. Ray Dalio, American Hedge fund manager and author of 'Changing World Order, we are starring at the 4th such drawdown now. 

Infact, when debt markets collapse, there would be sell off's across asset classes - be it equity, debt etc. The only safe haven could be physical assets like real estate and precious metals like Gold.

While we try to learn from history and avoid disasters, it is the over reaction that creates newer problems. As a result, it is always wiser for investors to remain cautious and not put all eggs in one basket. It is like a musical chair - no one knows when the music will stop. Having an asset allocation across assets could be the best way to ride the tide - cautiously.

Advantage(s) of Investing in NCD's:

The term NCD stands for Non-Convertible Debenture. It is a form of loan raised by corporates raise to meet their expansion plans and businesses.  NCD is not new for Indian Investors. Many of us are used to investing in them in the past. But the fact is most of us have been looking at NCD as pure fixed deposit. There is a smart way of Investing in NCD. Before understanding the smart way, let us understand some of the basic features of NCD:

• NCD's offer fixed interest for specific duration like 3 years or 5 years. 
• Just like IPO's, NCD's are issued by the company for short period of time. Unlike IPO's, NCD's are issued only at face value. There is no premium. 
• Though there is option to get the NCD in physical mode or demat mode, demat mode is better from 'smart' investment point of view. 
• NCD's on allotment are listed on stock exchange like NSE/BSE. 
• On the stock exchange the listed price of this NCD may keep changing depending on prevailing interest rate conditions. If this prevailing rate is lesser than the rate at the time of allotment  of NCD, then the NCD starts trading at premium. For Instance, Rs.1000 face value NCD may trade at Rs.1100 if Interest rate is reduced. Vice versa is true in a rising interest rate conditions. 
• Investors who hold these NCD's will get the investment value, apart from periodic interest payments. 
• In the mean time, if the NCD's market price is more than the allotment price, Investor can sell them in the market and encash the market premium. 
• Interest is paid only if the NCD's are held on the book closure date for interest payments.

Now the Smart Way of Investing:

• For instance if you invest Rs.100000 in NCD, if the face value is Rs.1000 per NCD, you would have got 100 NCD's alloted.
• If this NCD offers 11. 5% interest rates, then you would get Rs.11,500 as interest once in a year.
• In the mean time if RBI reduces interest rates ( for lending and deposits), then this NCD offering higher interest rates start trading at a premium.
• If interest rate is reduced by 1%, Against its allotment price of Rs.1000, this NCD may trade at Rs.1050. It makes sense to sell this NCD now - since the investor gets 1050*100=105000, fetching him straight profit of Rs.5000 (5%).
• If this investor is smart enough to get his first interest rate and then sell it, then he would get Rs.11500 as interest and Rs.5000 as capital gain. In total he would have got Rs.16500 (16.5%) to be precise.
• Like wise, the below mentioned table would indicate the extent of capital gain on existing bonds, when interest rates fall.

• Above all, unlike Fixed deposits, NCD investors can always exit their investments at any time. They can sell their NCD's either in full or in part and liquidate their investments.

• All these facts make NCD an interesting proportion to invest. When equity market is stagnating and investors donot find anything interesting, Investing in NCD's can be rewarding.

Currently Shriram Transport has come out with a NCD offering 11.4% interest. Probably it may take one to two years for interest rates to get reduced. By then your investment would have appreciated apart from the interest you receive !

Global Rate Cuts : Are we facing another crisis ?

On 5-July-2012, In a span of 45 minutes, the European Central Bank and People's Bank of China cut their benchmark borrowing costs and the Bank of England raised the size of its asset-purchase programme. Their actions came two weeks after the US Federal Reserve expanded a programme lengthening the maturity of bonds it holds. US Fed Chairman has indicated that more measures will be taken if needed.

A Rate cut in these economies would lead to cheaper funds - fuelling up price of commodities and assets. No doubt commodity prices have crashed by 20% to 30% be it Gold or oil or iron ore. Though we are not sure why these economies are so agressive in rate cuts, we asume it is primarily to pull up the demand.

But the problem for India is : rising commodity price will keep the inflation higher preventing any possible rate cuts by RBI. No doubt it is going to be TIGHT ROPE WALK

Indian Mind

Corporate War

Advertisement campaigns by competitors could sometimes be interesting. Below mentioned is one such Ad., highlighting the intensity of competition.

Warren Bufftet in India

Many investors worldwide are fans of Warren Buffet of USA. No doubt, he is one man who could hold his head steady in adverse situations and turn such moments into great opportunities.

For long, close to six or nine months, there has been rumors that Warren Buffet is to invest in companies like ONGC and Bajaj Allianze.

And today there was news that, Warren Buffet's Berkshire Hathaway 'plans' to enter the Indian non-life insurance sector as a corporate agent of Bajaj Allianz General. Inface a company called Berkshire India has been incorporated to sell and distribute general insurance products in the country.Known for irrational behaviour, Indian Investors fell one over another to buy this stock which ultimately got locked up in the upper circuit of 20%, after gaining Rs.88 in a single day today.

We need to understand the basis of such scrambling and the real logic
(1) Plz note Warren Buffet is not taking a stake in Bajaj Allianze.
(2) He is just getting registered in this insurance firm as a Corporate agent.
(3) There is a difference in being a share holder and a distributor of a company.
(4) There needs to be no necessity for such great urgency in buying these stock, at such frency moment.
(5) If the client of Berkshire India had to make an insurance claim, it is for Bajaj Allianze to settle the claim. Berkshire will not be affected in any way. After all it earned its commissions.
(6) Given these situations, in what way Bajaj Allianze would stand to gain is yet to be seen, but for the fact that one of world's richest person is its corporate agent !

To read related article, click here

Savings Shavings

Below mentioned information appeared in The Wall Street Journal. It summarizes the cost of having a clean shave in 'Developed Nations'. I had my imagination fly and I had a few views:

(1) Cost of a shave in Newyork is US$ 35 which is equal to Rs.1575, and in London or Hongkong it is US$ 45 which is equal to Rs.2025.
(2) If this cost of shaving could be saved by two times a month, then at 12% returns per annum Rs.2000 * 2 would have grown to Rs.51000 (US$ 1138). And had this saving be done for three years in a row, then the money could have grown to a corpus of Rs.1,74,000 ( US$ 3867). Interest earned on this shaving corpus fund could be used for the ultimate purpose : have a clean shave without dipping on the kitty.

But as many of us know, citizens of so called developed nations never save. Further then run their life on credit cards and liabilities. As a result, neither the saving happens nor does he have money to have a clean shave. I am not sure if this is the reason for seeing many with beard in their face !!!

Why do people buy Rolex Watch ?

One of our client recently refered to an article that appears in Sunday Business Line. It seems this gentleman was collecting all these articles. At EASY Investments, we thought why not scan these articles and publish on weekly basis. Hence from now on you can read articles under label :Simple Economics.