Author - Tanmay Gadre

How to Invest during High Inflation period?

 

Before we answer this question, let’s know how exactly does inflation affect investing:

How does inflation hurt?

In an inflationary environment, input costs for product-based businesses rise. Therefore, businesses have to increase the selling prices of their products. The end consumer ends up paying a high price for the same product which used to cost less before. Else, the business can keep the prices same and reduce the quantity of the product. Here, the consumer pays the same price, but for less quantity of the same product.

If the prices remain inflated for a prolonged period, it starts affecting the purchasing power of the consumer. It affects the demand for the company’s products. Sales volumes of the companies reduce. The company’s future growth is also negatively affected in such an environment. This has negative effect on its stock price, thereby reducing the returns for its investors.

Is there any way to invest in such an environment? There is! Let’s look at it:

  • Service based companies may not be affected by high inflation. Eg- Software companies.
  • Some companies can increase the selling price and still retain demand. Such companies have a good pricing power.
  • Some companies sell luxury products at very high prices. The demand for their products remains constant even if they increase the price of their products. That’s because their customers are not affected by inflation as much as the common man.
  • Some companies come under the category of consumer essentials. Their products are essential in the day-to-day life of their customers. The demand for such products doesn’t go away.

An investor can look for such companies that provide these products/services. They can invest in these companies even in a high inflation environment. An investor should keep it in mind that this environment doesn’t last for life time. But the stock prices may decline during such an environment. An investor should use this opportunity and invest at low prices in companies with sustainably growing businesses.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Luck vs Skill in Investing

 

Luck and skill play a part in investing. But the author Mr. Jeremy Chia says that many of us attribute our poor performance to luck and good ones to skill.

So, let’s learn more about luck and skill, shall we?

Understanding luck:

In a world full of unknowns and wide range of possibilities, luck plays a significant role in the final outcome. More than we want to believe. This wide range of possibilities can be seen in the profession of investing. Short term prices are volatile and random, and are influenced by luck. The long-term prices are also influenced by luck.

Long-term stock prices tend to be around the present value of the company’s expected future cash flow at the given time. The future cash flow is influenced by many factors. They result in a range of different cash flow possibilities. On many occasions, the market may also misprice certain securities. Hence, we should acknowledge that when it comes to investing, the future is not certain. There always will be a range of different possibilities.

Identifying skill

The next step is to separate luck from skill. Skill in investing is hard to quantify. We need to analyse a sufficiently long track record. An investor can outperform his peers for decades rather than just a few years. Then the odds of skill playing a role become significantly higher. Warren Buffett may have been lucky in certain investments. But no-one can deny that his long-term track record is due to being a skilful investor.

How to identify?

Focus on the process. Analysing an investment manager’s process is a better way to judge the strategy. Compare his original investment thesis with the eventual outcome of the company. If they matched up, then the manager may by highly skilled in predicting possibilities and outcomes. Find a larger data set. Your investment strategy may be based largely on investing in just a few names. Then it is difficult to distinguish luck and skill because you’ve invested in only a few stocks. The sample is too small. But if you build a diversified portfolio and were right about the investments, then skill was more likely involved.

Our investing success comes down to both skill and luck. Hence it is hard to separate luck and skill.

 

Source: thegoodinvestors.sg,

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

How do Interest Rates affect Stock Valuation?

The central banks around the world are raising interest rates to reduce inflationary pressures. But do these rising rates affect stock valuation? Let’s find out:

A change in the interest rate changes generally impacts the stock market immediately, whereas, for the rest of the economy, it may take about a year to see any widespread impact. Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions.

Companies that have borrowed debt will experience an increase in borrowing costs. This will impact the profits and cash flows of such companies. This in turn will negatively affect their stock prices. Higher interest rates will increase the fixed income yields and make them more attractive. Stocks would now require a higher rate of return to compete with these higher-yielding instruments.

Higher interest rates tend to negatively affect earnings and stock prices (with the exception of the financial sector). In theory, higher interest rates impact high-growth companies more than low-growth companies. Most of the current value of high-growth companies is derived from cash flows generated much later in the future.

But there are still 2 reasons to stay invested in high-growth companies:

  • Many high-growth companies are capable of providing a higher rate of return even if interest prices keep on rising.
  • Interest rates tend to impact valuations only temporarily.

The central banks can’t keep on raising interest rates forever. They reverse the rate change once the monetary policy measures taken are effective enough. These are short-term changes and shouldn’t affect an investor if it’s a long-term investment. Once the central banks announce an interest rate cut, the assumption is consumers and businesses will increase spending and investment. This can cause stock prices to rise.

What to do in such situations?

Instead of being worried, one should stay invested in companies having good long-term growth potential. Investors should invest in companies that have low or zero debt. Low debt companies can service the debt even if the interest rates go up. An investor should focus on the quality of the business. Good quality businesses can do well even in a high-interest rate environment. Understanding the relationship between interest rates and the stock market can help investors understand how changes may impact their investments. They can also be better prepared to make better financial decisions.

 

Source: thegoodinvestors.sg, investopedia.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

What if Stock Market Remains Closed Forever!

Mr. Jeremy Chia suggests that long-term investors shouldn’t bother even if the stock market remains closed forever. He says that even if we are never able to sell our shares, a truly good investment bought at the right price should still pay off over time. How? Let’s read:

An investor can’t sell the shares if the stock market will remain closed forever. Yet, the investor will remain entitled to future dividends of the company. The goal of a long-term investor shouldn’t be simply to sell off an asset at a higher price to a buyer. It should be to hold an asset for its cash flow creation capability.

Many companies are in different phases in their lifecycles. If a company is growing rapidly, it may not pay dividends. After some time, once it matures and it starts building up excess cash. It can then start paying dividends to its shareholders. But one has to remain patient for that. If the stock market remains closed forever, these patient shareholders will eventually start receiving dividends. These dividends will eventually exceed what they paid to buy the shares.

Therefore, an investor should invest in a stock after checking the following:

  • How much cash flow can the company potentially generate?
  • Can I receive back what I paid for buying the stock by simply collecting the cash flow over the years?
  • Will I eventually get more than paid for even if no one offers to buy the stock in the future?

If an investor has paid too much for the stake in the company, the investment may not pay off. Even a high-growth company may not generate enough cash to reward such a shareholder. In today’s market, many investors have bought a stock hoping to sell it to a “greater fool” at a higher price. They don’t buy it to benefit from the cash flow of the stock and are unlikely to make back their capital.

 

Source: thegoodinvestors.sg

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This week in a nutshell (11th July- 15th July)

Technical talks

NIFTY opened the week on 11th July at 16,136 and closed on 15th July at 16,049. It made a loss of 0.5% during the week. The index is trading above the 10DMA level of 16,020 which might act as a support. On the upside, the 20DMA level of 16,557 might act as a resistance. The RSI (45), and MACD turning downward suggests a further possible downside.

Among the sectoral indices, ENERGY (+2.5%), Pharma (+2.3%), and REALTY (+2.2%) led the gainers, whereas IT (-6.3%), BANK (-1.3%), and FINANCIAL SERVICES (-0.9%) led the losers during the week.

Weekly highlights

  • The US indices closed the week in the red as investors worried that inflation and rising interest rates may adversely affect the overall demand and performance of businesses. The S&P 500 was down by 0.9%, Nasdaq 100 by 1.2%, and Dow Jones by 0.2%.
  • Israel will sell Haifa Port, a major trade hub on its Mediterranean coast, to winning bidders Adani Ports of India and local chemicals and logistics group Gadot for USD 1.2 bn. Gadot and Adani made it to the end of a two-year tender process. Adani will hold a majority 70% stake and Gadot will hold the remaining 30%.
  • The government has offered 10 blocks for finding and producing oil and gas under its Open Acreage Licensing Programme (OALP). ONGC, Oil India, and GAIL won a total of 6 blocks out of the 10 blocks by the 7th round of OALP. The government expects an investment of USD 600-700 mn in the 10 blocks.
  • The Murugappa Group will launch an electric three-wheeler brand called Montra by September and invest Rs 2,000 mn in the segment. The company will manufacture Montra three-wheelers at its Ambattur facility in Chennai. The initial capacity for three-wheelers will be around 75,000 units per year and the company will have distributions at around 40 locations.
  • Exports in June were up by 23.5% to USD 40.1 bn while the trade deficit increased to a record high of USD 26.2 bn, both YoY, mainly due to a jump in gold and crude oil imports. Crude oil, coal, and coke imports doubled to USD 21.3 bn, and USD 6.76 bn on a YoY basis. Gold imports too were up YoY by about 183% to USD 2.74 bn.
  • Exports of finished steel from India more than halved in June on a YoY to 0.64 mn tonnes following the levy of a 15% duty on all outbound shipments by the government in its efforts to increase domestic supplies and curb inflation.
  • The inflation in the US was up 9.1% YoY in June, which was the highest increase in 41 years, whereas India’s WPI inflation eased down to 15.2% from 15.9% on a YoY.
  • FII (Foreign Institutional Investors) were net sellers of shares worth Rs 59,160 mn and DII (Domestic Institutional Investors) were net buyers of shares worth Rs 21,730 mn this week.

Things to watch out for next week

  • With results season picking up, quarterly numbers are to be watched out for. IT companies like TCS, Mindtree, LTI, and LTTS have already reported earnings that were a mixed bag. Kotak Mahindra Bank and ICICI Bank are set to report earnings next week. While the provisions are not expected to be a big surprise, there could be an impact of MTM losses on banks’ earnings. Commentary from HUL would help understand the impact of inflation on margins and rural-urban demand.
  • We expect the markets to remain volatile as investors show sentiments of fear guided by news related to the macro-economic aspects like supply-related constraints, and rising inflation.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Bear Markets- A test of Investors’ Emotions

 

During a bear market, your portfolio’s value is falling. You are receiving news highlighting the harsh realities of the stock market. It can become tough to escape the negativity that one feels. It is not just an uncomfortable experience; negative emotions affect one’s ability to make rational decisions.

There are 3 ways in which emotions can materially affect an investor during a bear market:

  • Emotions can affect rational decision-making: Emotions may impact rational decision-making and lead us to irrational decisions. Elements that affect investors in such cases are powerful images and stories that amplify the emotional response. Fear and sense of increased risk will be increased due to anxiety and panic of other people.
  • Emotions can lead to short-term decisions: Severe negative emotions make investors vulnerable and drastically reduce their decision-making time. Acting rapidly to respond to strong emotional cues is clearly a natural instinct many times. But it impacts their ability to withstand tough periods in the market or to invest for the long term.
  • Emotions can make us ignore probabilities: In a bear market, one’s fears increase by the stories of how much worse things will get. Provoked emotions make one far less sensitive to changes in probability. The ability to reasonably assess the probability of future developments gets severely reduced. The strength of feeling outweighs the strength of evidence.

 How to reduce the influence of emotions?

  • An investor should remove oneself from the emotional stimulus. Turn off the financial market news and check the portfolio less frequently. Long-term investors should not do things that would provoke a short-term emotional response.
  • One should never make in-the-moment investment decisions. These are likely to be driven by how one feels at that specific point in time. One should always step away and hold off from making a decision. Reflect on the decision with a calm state of mind.

These aren’t solutions as one cannot disconnect oneself from the impact of emotions on investment decisions. However, one must be aware that the negative feelings of stress, anxiety, and fear that one experiences during a bear market. These may encourage some of the worst behavior and one must do the best to avoid/reduce them.

 

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Money related fears and how to conquer them

 

Mr. Hemant Beniwal says that ‘fear’ is a constant emotion among people that is brought up by money. This emotion influences our financial decisions. Following are the 5 most common money related fears and how one can overcome them:

1) Fear of losing all the money: Many people work hard to earn money and save it. But some end up losing money due to bad investment decisions. Losing all of their money is something that people scared of. Instead of having irrational fears, it is better to take small steps toward managing money. One can take help from professionals to invest the money. By doing this, one can become more confident of the investment decisions and not make big mistakes/losses.

2) Fear of never having enough money: People are always worried of outliving their created wealth, and that they will never have enough money considering medical expenses of old age. One should make a financial plan for one’s retirement goals and also consider the money needed to sustain the lifestyle and other goals post retirement. One should then work on executing the financial plan and review it regularly so that enough money is retained.

3)  Fear of making mistakes while managing one’s money: People are very scared to lose their hard-earned money, and hence let it lie idle in the savings account to avoid making bad investment decisions and avoid losing money. One should take steps to increase one’s investment knowledge, and first start with zero or low-risk investments and then riskier (volatile) investments. Help from financial planners can be used to match investments with the risk-taking ability from an emotional and financial perspective.

4)  Fear of financial identity theft: A lot of money-based transactions are done using of debit, credit cards, etc. which leads to the fear of account getting hacked or credit card duplication. This is not irrational and cybercrime cases are increasing. Don’t share usernames and passwords of online accounts with others, regularly check financial statements, update your contact number and address with the bank, and don’t click suspicious links. This can help you control the security of online financial transactions.

5) Fear of talking about money: People fear of losing money if they talk about it. They may feel that others have too much or too less in their comparison. But it is important to talk about money with trustworthy people like one’s parents, life partner as they may have gone through many situations at different stages of life. It is important to have frank and open discussions with one’s financial planner as it will make the financial plan realistic and help in achieving financial objectives.

Source- 6 Common Money Fears and how to Conquer them by Hemant Beniwal (https://www.tflguide.com/)

1) Many times, we have our own mental picture about saving money and using it. We should discuss it with more experienced individuals, read more articles on money management that can help in getting a better clarity about the mental picture.

2) We must not accept the status quo, neither must we be under the impression that we already understand everything that is there to understand about managing money. Keeping an open mind and a learning attitude can help us in taking better monetary decisions.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

The Evolving Chemical Sector

The Indian Chemical Sector has developed well in the last 10 years wherein, the companies built their initial capabilities to cater to the demand in the domestic and the international markets. Stepping in the FY23, the sector has many opportunities and growth drivers, and a few headwinds. Let’s discuss them in detail:

Opportunities and Growth Drivers:

  • China plus one: Supply chain disruptions and raw material unavailability from China caused during the Covid-19 pandemic have made many countries re-think their strategies and their over dependence on China as a raw material supplier. These countries have started reducing their dependence on China and investing in India as a part of the strategy “China plus one”. The Indian Chemical companies will benefit from this arrangement, and due to relaxed policies regarding foreign investments in the companies in this sector.
  • Hydrogen based energy: The world is looking at hydrogen as a clean alternative for fossil fuels as they aim towards carbon neutrality. The Chemical sector can benefit from this opportunity by becoming key material suppliers (for electrodes, electrolysers), operating hydrogen production assets, distributing or selling hydrogen, and thereby engaging in the emerging hydrogen market.
  • PLI scheme: The Indian government may bring PLI (production linked incentive) scheme for the chemical sector to boost domestic production and exports. This will help in manufacturing all core chemicals and supplying them to domestic as well as global markets.
  • Indian opportunity: As India is pushing for green energy and mobility shift to EVs, the Indian specialty chemical companies are well positioned to use their capabilities to create chemicals for batteries, electrolysers and solar panels.
  • Other tailwinds: The Indian chemical sector is experiencing strong global tailwinds coming from demand for chemicals from pharmaceutical companies, chemicals required for batteries, EV batteries, etc. The companies are expanding their capabilities so as to meet these ever-growing requirements.

Headwinds:

  • Supply- side issues: Many chemical producers are still dependent on China for procuring their key raw materials. The supply side issues persist as many of the suppliers in China remain shut, or are functioning at little capacity. This has led to increased raw material costs and reduced margins.
  • High freight costs: As the world struggles to contain high ocean freight costs, many chemical producing companies have to either take a margin hit or have to pass on the costs to their customers.

Is it the right time to invest?

  • We believe that the headwinds faced by the industry are temporary in nature, and can be dealt with in few quarters. The long-term growth story of the industry remains intact with a growing demand for its products across geographies.
  • As the stocks remain affected by multiple issues including the Russia-Ukraine war, rising interest rates, high raw material costs, high freight costs, etc. this may be the right time to look at the listed chemical manufacturing companies from a longer-term perspective.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

To sustain ~7 percent NIM in FY23– Shriram Transport Finance

 

Update on the Indian Equity Market:

On Thursday, NIFTY closed at 16,478 (+0.7%) near its intraday high of 16,493 level. Among the NIFTY 50 stocks, DRREDDY (+3.0%), BPCL (+2.8%), and RELIANCE (+2.6%) led the gainers while TATASTEEL (-4.2%), SHREECEM (-2.0%), and GRASIM (-1.6%) led the losers. Among the sectoral indices, OIL & GAS (+2%), HEALTHCARE (+1.3%), and PHARMA (+1.2%) led the gainers, while METAL (-1.3%), and PSU BANK (-0.3%) were the only losers.

Excerpts of an interview with Mr. Umesh Revankar, Vice-Chairman and Managing Director at Shriram Transport Finance (SRTRANSFIN) with CNBC TV18 on 9th June 2022: 

  • The down cycle of commercial vehicles started 4 years ago. Mr. Revankar believes that currently, the industry is in an upcycle which will continue for the next 3-to 4 years.
  • New vehicle price hikes limited the industry’s growth scope last year. Going forward, there will be a gradual increase in the cycle instead of a steep increase due to geopolitical aspects, and higher fuel cost considerations.
  • The government’s goal is to build long-term logistics infrastructure and road transport which will create a demand for commercial vehicles in the next 3-4 years. This will work in favor of the transport industry.
  • Most of the company’s borrowing has a tenure of 2-4 years. Its cost of borrowing was higher 2 years ago compared to right now. The company is now borrowing its loans at much lower rates than 2-3 years ago.
  • The company believes that the RBI’s repo rate hikes won’t impact it much and that any increase in the borrowing costs can be easily passed on to its customers without losing any credit demand.
  • The company believes that it can sustain the NIM (net interest margin) of 7% from 4QFY22 even in FY23.
  • Fuel cost is 40% of the operational cost for the company of running a vehicle. Transporters either pass it to end-users or manufacturers and don’t bear any of these costs. In case of low demand, and higher vehicle supply, the transporters have to bear the costs and take a margin hit.
  • He believes that the demand for transporters has been robust and the transporters are not facing any challenge in passing on the fuel costs.
  • He believes that there is a good demand for vehicles in rural areas. The demand had dampened in between due to the increase in prices of vehicles. As the prices of the output of Rabi crop, wheat, and oil have increased, it has benefitted the farmers in the rural areas. So now, the people have adjusted themselves to the higher-priced vehicles.

 Asset Multiplier Comments

  • We believe that the company is bound to benefit from the economic activity rebound which will drive demand and cyclical recovery in new CVs.
  • With the current provisions at 7.2% (Provision Coverage Ratio at 50%), we expect loan loss provisioning to normalize at ~2% levels.

Consensus Estimates (Source: market screener website)

  • The closing price of SRTRANSFIN was ₹ 1,170/- as of 09-June-2022.  It traded at 8x/ 7x the consensus earnings estimate of ₹ 146/ 162 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,495/- implies a P/E Multiple of 9x on the FY24E EPS estimate of ₹ 162/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

This week in a nutshell (16th May- 20th May)

Technical talks

NIFTY opened the week on 16th May at 15,845 and closed on 20th May at 16,266. It made a gain of 2.7% during the week. The index is trading below the 20DMA level of 16,514 which might act as a resistance. On the downside, the 10 DMA level of 16,072 might act as a support. The RSI (44), and MACD turning upward suggests a further possible upside.

Among the sectoral indices, AUTO (+4.8%), FMCG (+4.5%), and REALTY (+4.3%) led the gainers, whereas IT (-2.8%) was the only loser during the week.

Weekly highlights

  • The US indices closed the week in the red as investors worried that inflation and rising interest rates may adversely affect the overall demand and performance of businesses. Broad-based selling led to S&P 500 closing down 3%, Nasdaq 100 by 4.5%, and Dow Jones by 3%.
  • International Holding Company PJSC (IHC) announced the completion of Rs 154bn investment in Adani Group’s companies namely Adani Green Energy, Adani Transmission, and Adani Enterprises. IHC’s investment will support and accelerate Adani Group’s growth plan to supply the country with 45 gigawatts (9% of India’s non-fossil energy) by 2030.
  • The Adani Group has entered into agreements to acquire Swiss cement major Holcim Ltd.’s stake in Ambuja Cements and ACC Ltd as ~ USD 10.5 bn. After this deal, the Adani group will become the second-largest cement maker in the country with a capacity of about 70 Metric tons Per Annum.
  • Maruti Suzuki India has planned to invest Rs 180bn in its new manufacturing facility in Haryana to roll out 1 mn units per annum in 8 years. The first set of vehicles is expected to roll out of the facility in 2025.
  • Indonesia, the world’s largest supplier of palm oil said that it will lift a ban on exports from Monday (23rd May). Indonesian President Joko Widodo said that the decision will take place despite bulk cooking oil being at higher prices than the target, as the government considers the welfare of 17 million workers in the palm oil industry.
  • The Union Cabinet on Wednesday approved the National Biofuel Policy-2018 with several amendments, the major one on advancing the blending target of 20% blending of ethanol in petrol to 2025-26 from 2030 earlier. The policy is intended to help in meeting the target of reducing import dependence on fossil fuels.
  • India’s power ministry said that it would cut domestic fuel supply to state government-run utilities by 5% if they do not import coal for blending by June 15, as officials struggle to address rising power demand. A heatwave pushed power use to a record high and forced India to reverse a policy of slashing coal imports.
  • Data released on Tuesday showed that India’s wholesale price index (WPI) based inflation rose to 15% in April 2022, a double-digit figure for the 13th consecutive month. It has spiked further due to the Russia-Ukraine Conflict, and headwinds arising out of disruption in the global supply chain. Fuel Inflation rose to ~39%, and food inflation was ~8%.
  • FII (Foreign Institutional Investors) continued to be net sellers, selling of shares worth Rs 114,013 mn and DII (Domestic Institutional Investors) continued to be net buyers, buying of shares worth Rs 94,729 mn this week.

Things to watch out for next week

  • The next week’s focus will be on the world economic forum (WEF) to be held in Davos from 22nd May to 26th The key topics that would be addressed during the sessions at WEF include ease of doing business reforms, energy transition, digital economy, startups, emphasis on innovation, and research in the healthcare ecosystem.
  • We expect the markets to remain volatile as investors show the sentiments of fear guided by news related to the Ukraine-Russia war, supply-related constraints, and rising inflation.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”