Nurture India Consultants : Confusion of an Equity investor – what to do now ...

Nurture India Consultants : Confusion of an Equity investor – what to do now ...: Confusion of an Equity investor – what to do now   ? Last 2 years return from equity fund has been low to negative , present looks ba...

Confusion of an Equity investor – what to do now ?

Confusion of an Equity investor – what to do now  ?

Last 2 years return from equity fund has been low to negative , present looks bad and future many saying worse yet to come. Now many equity investors might be thinking

1.       Did we do mistake by investing in equity mutual fund ?

2.       Should we get out and stop our notional loss ?

3.       How long we need to wait ?

Today economy is slowing down , corporate earnings reducing , job cuts happenings in various industries , bad debt rising in banking sector .

If someone ask me how long this slowdown will continue or when we will see reversal in these negative trends it will be just a guesstimate based on what I am reading or hearing . There also what I am reading , hearing is contradictory. Some say nothing wrong but its structural issue, some saying its cyclical problem  , some saying worse yet to come ….. . some defensive , some optimist , some pessimist . whom to believe and whom to not ?

I have always believed that there is no other teacher in this world than your own experience and observation ?. Believe yourself and what you can cross check yourself. So here I have tried to answer based on what I have seen and I will like others to also cross check based on their own observation on what has actually happened and is supported by facts .

The biggest risk comes from economy and all good or bad we have seen or talked has been  emanating from state of economy and economic factors .

Economy has always been growing in long term ( > 7 years time horizon ) and have been unpredictable/uncertain /good/bad in short term ( < 3 to 5 years ) . In every long term please remember there are many short terms . So even if I take my 20 years of experience which is good that has mix of some small term bad experience also .

Market is a reflection of how the economy stands at that point of time . Again this also has to be viewed in long term and short term .

Market ( Stock market ) has always been growing in long term ( > 7 years time horizon ) and have been unpredictable/uncertain /good/bad in short term ( < 3 to 5 years ). In every long term please remember there are many short terms . So even if I take my 20 years of experience which is good that has mix of some small term bad experience also .

Market movement is also linked to behaviour of different participants in it . There also I have observed tow things – (1) Market always over react in both situation more bullish when economy expanding and more bearish when economy is slowing down (2) whether its speculators or arbitrageurs or investors ( different type of participants ) no one wants loss , all wants profit .

Lets look now life and analyse what it was 10 , 20, 30 ….years back and what we can expect 10,20,30….. years ahead . Lets answer one question were more products/services earlier ? Answer is No . Do we expect more products/services in future ? Answer is YES . But why it is so ?

Life for all is governed by GROWTH aspiration . Growth and Aspiration of what ? --- Better life , better lifestyle  --- and that is catered through some or the other product /service provided by some or the other company – so investment if done is some good product manufacturing company which is in demand by people it will earn good return as sales will lead to profit and profit will translate to better valuation of that company share and that will translate to NAV growth .

Yes the risk is of short term as explained above but since our life is of 60,70,80 … years and we do require any product/service every second of life and its demand growing due to growth aspiration in long term good positive return will come .

Life is uncertain in short term but life always want to be good . So in this uncertain world one certainty is we all want a good life .

Now let me answer earlier question which might be hounding the minds of many investors

1.       Did we do mistake by investing in equity mutual fund ? – Definitely NOT . It’s a right decision

2.       Should we get out and stop our loss ?  -- It will be a big mistake if you do now . If you invested without understanding short tern uncertainty then you were misguided

3.       How long we need to wait ? – any recessionary trend ( worst form of economic slowdown  ) does not last long for more than 3 -4 years so may be notional pain for couple of years . You have another 20.30.40…. years to live so why to worry of this short term .

One thing which you should always be taking care is no risk of your short to mid term liquidity requirement and that investment at any point of time should be in safe asset i.e debt and that is liquid, in better quality company and is less or not effected adversely by rising interest rate .

Zee Business Mutual Fund Helpline 19 Aug 2019 Mr Prakash Ranjan Sinha

Economy Slowdown reasons

Economy Slowdown reasons

Many experts are blaming demonetisation and GST as a cause of economic slowdown . Some are even going to the extent of blaming lower cash transaction , increasing tax net etc as a cause of slow business .I am not able to understand their logic . If that’s the case then in most developed economy businesses are operating on non cash , digital transaction basis since last many decades then how they have developed their economies all these years ?

It’s a very silly excuse in India . Where has cash gone ? RBI has pumped back the withdrawn ( 500, 1000 rupee notes ) currencies back into the economy in form of new currency . So cash within economy is at same level . Salaried employees are getting salaries as like earlier times .

Apart from global issues where we have lesser control lets analyse only domestic factors for this slowdown .

Reason is most corporates in order to chase high growth were targeting higher earnings as that would have led to higher valuation and net-worth of promoters . Many went for leveraged money to fuel their growth desire adding more cost on their balance sheet . Stock market also reached a good height in anticipation of better earnings through more sales and revenue . Post demonetisation its not the cash crunch but the unwillingness to disclose cash in a transparent way ( GST ) has left many perplexed . The way many corporates went fudging their financial statements earlier are now not able to do so very easily . Projected earnings which were shown inflated earlier now are muted or getting corrected in the financial statements . Government has also become more vigilant on borrowings of corporates and also the effective utilisation of the borrowed money .

My personal belief is there is no recessionary trend but a slowdown injected into the system more because as an effect of normalisation of the situation emanating from the cleaning process in the economic system. Today many promoters are hesitant to put more money in their business as they are also waiting for normalisation process to complete and reversal of fabricated gloomy situation .

Promoters and businesses in India have to understand that they need to accept the positive changes and move ahead . We might see many businesses dying but at the same time emergence of many new entrepreneurs also who are willing to take risk and operate in a clean manner .

Flaws in Indian Financial System

Flaws in Indian Financial System

The economy is slowing down , consumer activities are declining , corporates earning going down and that is bringing the risk of defaults . I read one research report some days back which stated that almost 40% of the corporates who have borrowed from banks their interest coverage ratio is 1:1 ( EBIT = Interest payment ) . Don’t know if this figure is correct or a bit exaggerated but it can not be totally wrong .

Already we are seeing some corporates under stress and promoters finding problem in paying back loans. The reason is very clear we are having a flawed financial system .

Long back ( early 2000) when I was in UTI Kolkata I remember there was one major corporate which used to invest in UTI schemes . One day I got a call from the CFO of that company and he in anguish expressed that most of his investment was not performing well . When I checked the investment I found big amounts invested in equity funds and this was the time after IT bubble market had tanked . In fact they had major investment in UTI IT fund also. I went and said very humbly to him , Sir when you have mobilised resources from small investors through your debt schemes ( FDs ) who are looking for safe , assured return how you invested that money in equity schemes .

The same mistake is happening . Banks are lending FD money to whom ? to those who are chasing growth . They are buying properties ( flats , residential premises ) or consumer items ( cars , luxurious items ) . Bank is lending to corporates who are looking for aggressive growth ( expansion, for increasing the size of market and their own market share as well ) . Nothing wrong in it . If India has to grow , there has to be clear growth strategies and  approach . But every growth has some limit . I think somewhere this is being overlooked .

Right from promoter/ entrepreneur to top management to consumer everyone have been running a blind race looking at others and not on own capabilities and limitation .We are living in integrated and relative world so any growth in isolation is unsustainable in long run.

Consider this – Lets say today all car companies make 10 lakh car and it is sold , next year they will increase the sales target and make 1.2 lakh and if that is also sold next year even more and process continues . If most car are bought on loan then most people living on leverage money ( debt ) . Add to this home loan , shopping and dining through credit card . So proportion of debt is increasing in our life . We all leverage our expense on assumption of increasing salary /income . But from where that is coming again ? from the increasing corporate earning or employers earning growth . there will be stage when interest payout will affect normal living and from there only problem starts . Suddenly there will be less consumer activities , less spending and now car manufacturers and other corporates stranded with inventory . Defaults happens , bail out exercise happens .

Banks are recapitalised by lakhs of crores to make their balance sheet look healthy . This money which could have been spent  on construction of dam and other infrastructure related projects gets diverted . So we will continue seeing people suffering from floods in Bihar , UP etc . Agriculture gets affected and so does consumer spending .

I am not an economist but I always remember and value what our elders said – “ Utni hi paav pasariye jitni lambi chadar ho “ ( Extend your legs only which fits the size of the blanket ) .  So growth is not bad but growth rate has to be sensible and sustainable . Leveraging ( use of debt ) is not bad but how much you should leverage that is important ?

But excessive greed ( greed of growth ) is killing the economy . Promoter want growth , Management want growth as that will help them get more salaries and bonus and down the line they keep putting pressure of sales target without realising the limits .

They day our banks and corporates learn to go for sustained , achievable , realistic growth on year to year basis the problems of default and slowdown will not be so visible as what seen today .

So the message is know your limit and take risk of borrowing , leveraging accordingly . Its better to go for economic development rather than economic growth . Businesses are failing today because combined cost of all outputs are not matching with the combined all consumer incomes . Both are interdependent and inter-related and so growth from both side has to happen simultaneously to maintain the proper balance .

Government should look at these aspects and come with right regulation :

·         Corporates should keep a minimum percentage of reserve and surplus at any point of time . Presently it’s a management decision and nothing binding.

·         Corporates should not be allowed to borrow beyond a minimum level of debt considering business volume and conservative growth prospect . This has to be evaluated on year to year basis . Again its all in theory ( Debt – Equity ratio ) not followed religiously. If business slowdown they should deleverage ( reduce debt ) using reserves and surplus .

·         Corporate lending from Banks should be maximum for 5 years even though fund requirement is for 10,15 ,20 years . This will put pressure on the Management for effective utilisation of borrowed money . Review every year and after 3 years of initial borrowing next lending again for 3-5 years .

·         Banks should have a sustainable profit target based on deposit base and not uncontrollable lending targets . Risk averse people will keep investing in bank FD but how much of it is productive and how much is default ? Loan base and loan growth should not be the basis of bank efficiency but sustained profit on that lending should be the key efficiency parameter.

·         Treat every adult / workable age citizen as an asset and judge his economic productive value . No freebies , no subsidy . Let all work for their minimum normal living.

Zee Business Mutual Fund Helpline 26 July 2019 Prakash Ranjan Sinha M...

Zee Business Mutual Fund Helpline 24 June 2019, Prakash Ranjan Sinha