Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Wisely Speaking- 8

Posted by Muthu on October 7, 2012

Last week, we had a get together to celebrate completing 25 years after 10th standard. So you can guess my age. I’ll be turning 40 on November 3’rd. More than twenty of us, mostly with respective families met in a beach bungalow in ECR built by one of our friend. It was almost going back 25 years and we all ended pulling each other a lot. I was very happy to see one of our friends who has survived lung cancer and is back to his usual self. Except me everyone has become older:-)

I’m pleased to include my school group in the mailing list from now on.

I’m trying to meet 3 of my colleagues who worked with me 12 years ago. Some how it is not happening and hope they will after reading this.

In the last 3 weeks there have been lots of announcements by government. I’ve almost given up hope on this government and hence pleasantly surprised. The best thing which has happened is Mamata going out of the Government. An astrologer told me that 7 ½ years Sani is over for Dr.MMS:-)

There have been queries from you on FDI. Even 100% FDI in retail is already there for long. Wondering? Mutual fund industry has 100% FDI for nearly 2 decades. I don’t see anything adverse has happened to anybody. Because of FDI, Indian companies have not been shut. Other than Templeton, none of the foreign mutual fund is able to really survive in our market. Fidelity is going out. Daiwa also may go. HDFC, Reliance, ICICI, UTI, Birla… all Indian companies which dominate the mutual fund market in India. 

It is the BJP which first initiated the FDI in retail and Yaswanth Sinha is the one who started moves on  FDI in insurance and pension. BJP’s only aim seems to be not to allow parliament and government to function. If they want to come to power again, a lot more maturity is needed from them. Otherwise Arvind Kejriwal will become the next PM, Kiran Bedi as speaker and Anna as president. If that happens, I’m going out of the country:-)  I can stand Congress or BJP but not Anna or his pariwar. IAC does not mean India Against Corruption but Individuals Against Congress.

When we can entrust our money to foreigners to manage, what is the problem in buying potatoes and dhal from them? Out of 6 lakh+ habitations in the country, only 53 cities have a population of more than a million. Only in these cities FDI is currently allowed, subject to the concurrence of respective state governments. FDI is very good for consumers and farmers. Things would get cheaper for the consumers and farmers would earn more. Some middlemen like Mandis may be wiped out. Most important, improved infrastructure and logistics would ensure that food grains, vegetables and fruits are not wasted.

In 1991, the Bombay club industrialists fought against reforms saying that it would kill Indian industry and economy. We all know how both our economy and industries flourished after this. There is no need to get afraid of FDI in retail or insurance. We are a capital starved nation and our growth is not possible with out overseas capital.

Lot of people tells me that this is the most corrupt government they have seen. It is sensational to hear lakhs of crores siphoned out by 2G and Coalgate. A government is not a private company. Our mobile phone charges became cheap because spectrum was given cheap. The more the government charge for a national resource, the more expensive a product or services become. CAG counts foregone profits as scam. Money went into pockets of politicians is only scam and if a government forego profit, it is not a scam. Business media pretend not knowing this. Corruption has been there in both 2G and Coalgate but not to the extent media is blowing up.

People using Colgate are happy with hearing ‘Coalgate’ repeatedly. This is unfair to people like me who use ‘Himalaya’. I’m eagerly looking forward for a scam in Himalayas.

RTI and media are now bringing in lot of skeletons from government’s cupboard. If you have read about Nira Radia tapes, you would know how media is also corrupt:-) Ethics in corporate world is  very relative and the above tape reveals few not so good things about even Tata. 

All the governments in post independence era have always been corrupt. Some more corrupt than the other. The corruption happened in Indira Gandhi’s era was much more than today. The media was made powerless then and hence nothing came out. If you want to know more, you can read PMO diary by B.N.Tandon, who is a well respected officer and was in Indira Gandhi’s PMO for many years.

If you can recollect Tehelka tapes, the BJP is no better than Congress in corruption.

In fact, other than Indira and V.P.Singh (who was a crook), all the other prime ministers have done some good for the country. RTI has been brought by the same Dr.MMS government.

Like wise, when people say that the worst economic crisis in the world was in 2008, it shows that they have not bothered to read history. Always every crisis looks the worst so far. Some tell that banks are going to dogs because of high NPAs and this is the worst which has happened in India. No doubt public sector banks NPA is increasing but they are still very well under 5%. In late seventies and eighties, many banks proudly boasted NPAs of around 15%+ due to loan melas organized by Indira Gandhi.

Markets are agnostic to political parties and it is not impacted by the party in power. As I’ve written in the past, between 1980 and 1990, markets almost multiplied by 10 times, when socialist government of Indira Gandhi was in power and this was the period when she was assassinated, Punjab burned, government and parliament was crippled for 2 years due to Bofors scandal, a motley crowd of political parties with extreme ideologies formed a functionless government, with a politician like Devilal who had subzero knowledge on economy, governance and administration calling the shots.

Out of the 6 years of BJP rule, 3 years were marked by bull and another 3 by bear market- 50/50! 

The strongest leg of last bull run happened when UPA-1 was in power with day to day bickering by Left. Nobody would have forgotten the weekly breakfast meetings, constant threats and common minimum program.

As far as markets are concerned, many would have been happy with the recent spike. I get questions whether 23,000 would be top or at 25,000 would it get expensive and so on. The price of a stock or level of Sensex is meaningless unless it is seen in the context of earnings and the multiples of its earnings. It is estimated that Sensex EPS for the year would be around 1300. If market gives a multiple of 15, then the Sensex would be at 19500. If it gives a multiple of 20, then it becomes 26000! 

There is another way of  looking at it. The earnings for Sensex a decade ago was Rs.200/-. As mentioned, this year earnings is pegged to be at Rs.1300/-. Assuming a trading multiple of 15, Sensex level of 3000, 10 years ago is same as the level of  19,500 today. The valuations remain the same but the earnings (of the companies in Sensex) growth has resulted in 6.5 times growth in Sensex. 

Instead of looking at 23000 or 25000, look at like this. There is a good probability that earnings of Sensex may grow 18% per annum in future. So by 2020, at 18% CAGR, the EPS would be around 5000. If the market gives a multiple of 20, then Sensex would be 100000 in 2020. If it gives 25 PE, then the Sensex can even be 125000. Advantage of looking farther is that we would not be swayed by every top and bottom of Sensex. In the long term, each market cycle would find a fresh top and bottom.

How I got the above 18%? If you look at our GDP growth; it was 3.5% in 1960’s, 4.1% in 1970’s, 4.4% in 1980’s, 5.7% in 1990’s, 7.2% in the last decade, optimistic projection of double digit growth this decade if we get the infrastructure story right or even otherwise a good growth rate of 8% or 9%. If GDP grows at 9%, our nominal growth rate would be 15%+. If the economy grows at 15%, good companies can very well grow more than 18%.

Why I’ve assumed a multiple of 20 is our growth at some point may start commanding premium. This is because different investors have different risk profile and return expectations. A Japanese or American investor, whose capital can earn only say 1% to 2% in his home country, would be very happy to get a 8% return from an investment in India. While we may expect 15% returns from our markets and they being  fine with 8% returns would result in their willingness to pay a higher price.

This decade would be a golden decade for equity investing. The market capitalization (value of the companies in the listed space) tends to be equal to or more than GDP in a good economy. Since our GDP is expected to be $5 trillion+ by 2020, the market capitalization cannot be far behind. Our market capitalization now is roughly $1.2 trillion.

When we get our long term perspective right, we wouldn’t be bothered by short term noises. Going by both fundamentals and economics of demand and supply; owning equities makes lot of sense. After ensuring adequate risk coverage, emergency fund and setting aside money for near and medium term requirements, equities would be the best way to build one’s assets in our country.

All you need to do is to stay the course ignoring both pessimism and euphoria.

I would like to end this piece with the following quote by John Bogle:

 “Stay the course. No matter what happens, stick to your program. I’ve said ‘stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”

3 Responses to “Wisely Speaking- 8”

  1. Shinu said

    Dear Muthu

    Why is the above not applicable in Shanghai index?
    It is at a 11 year low despite an 8% GDP growth.
    So how credible can be the FII money in future in comparable investment markets?

  2. sendil said

    How I got the above 18%? If you look at our GDP growth; it was 3.5% in 1960’s, 4.1% in 1970’s, 4.4% in 1980’s, 5.7% in 1990’s, 7.2% in the last decade,

    if muthu sir could revert back with inflation percentage for the same period, its only for my general knowledge pls

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