Value-Stock-Plus

By Pratish Narayanan and Janaki Krishnan – Reuters

Maverick investor Rakesh Jhunjhunwala believes bold reforms such as opening up the country’s insurance and pensions to foreigners will be critical to quell concerns about the market being pricey and sustain a stock market rally.

Expectations for economic reforms in India have gathered momentum after the ruling coalition was re-elected with more seats in parliament nearly two weeks ago.

“Insurance, pension reforms are going to be extremely important for the stock market because the kind of money we’ll get from that is unbelievable,” Jhunjhunwala, dubbed by the media as India’s Warren Buffett, told Reuters in an interview.

The main stock index, which has jumped 16 percent since the election victory, taking gains to three-quarters from a 2009 low in early March, could rise another 10 percent to 15,500 by the end of December, he said.

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This world map shows a list of countries that are considered least affected by the global economic crisis.

International Perspective:
The countries perceived to be surviving the economic crisis the best, as voted by international businesspeople are:

The recent equity market rally has caught a lot of people by surprise, whether they are investors, brokers, or seasoned fund managers. In fact, many have dismissed this rally as not sustainable, while reasoning why they weren’t able to catch the trend early on. In a short span of a couple of months, markets globally have witnessed a surge of 30-50 per cent. Indian markets too have witnessed a sharp rally having risen over 40 per cent post March.

While a lot has been written about how much would have an investor gained had he/ she invested in the best performing stocks in the last two months, the question is: how prudent was the investor?

Given the global financial turmoil, would anyone have risked investing huge monies in the equity markets in the last couple of months? Leave the hindsight for a moment, just go back to the environment in March and ask yourself if it was a good time to risk a new investment? You would probably not be alone in saying you saw no rational reason in doing so.

Even, if for a moment, one were to assume that someone had the courage to invest a lump sum (not more than Rs. 10,000 – 20,000) in one shot, around early May? An investment of Rs. 10,000 in the BSE Sensex in March would have fetched 50 per cent returns, and the investment would have grown to Rs. 15,000 today.

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There is now a long shelf of books about Warren Buffett, but this is the first time he has gone to any trouble to add to it. Reportedly Buffett now regrets his decision–he has apparently put some fresh distance between himself and his official biographer. If so, it’s not hard to see why. Alice Schroeder is a former Morgan Stanley research analyst, able to understand and to explain Buffett’s money-making, but she declined to confine herself to the business at hand. She has sought to describe Buffett’s psychological landscape as clearly as his financial one. For the reader, the results are pretty terrific–there are not a lot of 838-page narratives that leave you wanting more–but for Buffett they are no doubt upsetting.

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Analysts’ “buy” and “sell” tips have almost no effect on share prices, according to research that confounds long-held beliefs over the influence of stock-pickers and calls into question investors’ and banks’ need to pay for their services.

The study will fuel the debate over the role of research at a time when the the crisis has forced cash-strapped financial groups to slash budgets and lay off thousands of analysts.

Previous academic studies found that when an analyst changes views on a company, its shares move by up to 4 per cent in the direction of the new recommendation.

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That’s where the other argument comes in—that although central banks have all been increasing liquidity, that is more than offset by the deleveraging that has gone on in the “shadow banking system”, and the closing down of the “credit factories” will mean liquidity will again not be as abundant as it used to be. The problem with that view is that stocks have been going up quite sharply in recent weeks across the world, fuelled by the reappearance of liquidity. Commodity prices, too, have moved up. Crude oil prices have improved quite a bit.

The case against inflation is pretty straightforward. With gross domestic product (GDP) growth slowing all over the world, demand for commodities has fallen off a cliff. And since the mainstream view is that the world economy is not going to go back to its previous rate of growth any time soon, the demand for commodities, too, will not rise so much. Hence, inflation will be kept in check. Another point is that the central banks may increase money supply, but the velocity of money has gone down because consumers don’t spend and as a result the excess funds do not translate into inflation in goods and services. That may be correct, but what about asset inflation?

Seth Klarman Interview at Endowment Management Seminar of the TIFF Education Foundation, July 2008, is available here. (pdf)

Excerpt:

David. How often do you find mispriced
talent?
Seth. I would say we’re not really looking
for mispriced talent. I’m happy to pay full price, and
I’ve sometimes intentionally chosen over the years to
pay people more than absolutely necessary. I think in the
talent search for investment professionals, for example,
there’s a big gray area between the least you can get
away with and the most you could possibly justify;
and that might be many hundreds of percent different.
And frankly, it’s true for operational talent, too. I hate
turnover; I really value long-tenured people. So I’d
rather pay up for people that I might be able to attract to
make their entire careers at our firm rather than try to be
cheap about it and hire bargains but ultimately pay the
price for that in turnover or other things.

Last Friday, a day before the election results were announced, Bloomberg reported that the hedge fund managed by HSBC Holdings Plc. asset manager Sanjiv Duggal had reduced its net India exposure to zero because of “uncertainty over election results”. Now that the elections have not only removed that uncertainty, but have also replaced it with a hugely positive surprise, investors who had withdrawn from India are likely to scramble to get back in. That’s why everybody expects the markets to open with a big upward gap on Monday. This initial tidal wave will lift all boats. But the question is: Will it lead to a re-rating of the Indian market? There’s every reason why it should. That’s because investment into the Indian market has been hobbled by the government’s lack of headroom on the fiscal front.

Equity strategists and economists have for long compared India unfavourably with China in this respect. As HSBC economist Robert Prior-Wandesforde writes in his recent research note with the telling title of “New Government, Old Problems”, “An expansionary budget in June would prove counter productive by preventing the RBI (Reserve Bank of India) from cutting and risking a sovereign credit downgrade. The challenge for the government will be to cut the structural deficit, without reducing the capital/infrastructure spending share in GDP (gross domestic product).” But with the absence of the Left, that constraint may ease a bit, since disinvestment of public sector units and incentives for investment can now be back on the agenda, while the auction of 3G (third generation) spectrum will also bring in money. The stability of the government will allow it to concentrate on structural reforms. In short, the risk-reward outcome for the Indian market has improved considerably.

It cannot be denied that the Great Depression of 1929 and the Wall Street crash that followed was perhaps the most humbling experience for investors at the time. Life was tough and there was no hope to clutch on to. After crushing losses, most stocks were available at ridiculously cheap prices over the next decade as the markets remained trapped in a bear grip.

But as any stock expert will tell you today, behind every market disaster lurks opportunity – if you just look hard enough. It was the same for Benjamin Graham, who, despite suffering heavy fi nancial losses himself, began a conscious campaign of snapping up stocks that suddenly became available at bargain prices.

Graham’ strategy was simple: buy companies that he likened to cigar butts – typically abandoned but still good for a puff or two. And you could pick them up for virtually nothing. Stocks quoting below their liquidation values after keeping a ‘margin of safety’, allowing for any contraction in prices, were his key bets.

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