Commercial vehicles are the most cyclical

                                                                 Data Source: SIAM

It is well known that the  auto sector is cyclical as its performance is largely dependent on the growth of the Indian economy. But the degree of cyclicality within segments tends to vary. Chart shows that commercial vehicles (CVs) are the most cyclical as compared to either passenger vehicles or 2 wheelers. And in CVs, the medium and heavy CVs (MHCV) are more cyclical than LCVs. This is largely because MHCVs are largely used for the transportation of various goods across the as well as in construction acitivities and so the performance of these sectors have a large bearing on how the CV industry operates. Indeed, in FY13 so far given the slowdown of the Indian economy, MHCVs have faced the maximum brunt as can eb evined by the dip in volumes.

India third largest importer of Iran crude oil

                                                               Data source: The Financial Times
                                                                      *First quarter of 2011

The US has been imposing sanctions on Iran in order to curb its nuclear programme. But an article in Financial Times points out that curtailing Iran's oil exports may be difficult. This is because Iran is a major exporter of oil, accounting for about 5.2% of the world's total output in 2011. As such, sanctions on Iran can have significant consequences on world oil prices. Today's chart of the day shows the countries that are major importers of crude oil from Iran. Emerging economies are among major importers of crude oil from Iran. It must be noted that India is free from US sanctions as the latter had granted exemptions to over a dozen emerging economies in June 2012.

Investing in 'new age' sectors can be dangerous!

"What industry will be the next growth driver in the 21st century and what do you see that supports that? " legendary value investor Warren Buffett was once asked. Can you guess what answer he must have given? He simply said, "We don't worry too much about that." He went on to elaborate with the example of the automobile and the airplane industry. It was impossible back in the 1930s how much these two industries would impact the world. They have indeed been a great boon for society. However, for investors both these sectors have been absolute disasters. Of the 2,000 automobile companies that had mushroomed during that period, only a handful have survived. The fate of the airline industry has been even worse, with perpetual losses of billions of dollars.

The fate of a much-touted emerging sector has reaffirmed that Mr Buffett's wisdom has no expiry date. We are referring to the solar energy equipment sector. It goes without doubt that the world has little choice but to gradually switch towards sustainable and renewable energy sources. And solar energy is definitely a sector with very high potential. But does a high growth sector necessary translate into shareholder wealth? In this case, the answer seems to be no.

The global solar photovoltaic demand surged from a little over 7,000 megawatts (MW) to nearly 20,000 MW in 2010. And as per certain estimates, the current global demand stands at about 30,000 MW. But you would be surprised to know that the Indian solar manufacturing sector is on the verge of collapse with over 80% of the units shut down. In fact, not just India, the sector is facing severe headwinds across the globe. What's the reason? The answer is extreme optimism. Currently, the manufacturing capacity is two times the demand. Over enthusiasm about the industry's high growth prospects led players to set up huge capacities. But in recent times, the sector has been facing the brunt of the crisis in the Eurozone, one of the main markets. Dormant demand in India coupled with intense competition from Chinese counterparts made matters only worse.

Whatever be the fate of the solar equipment manufacturing industry, there is one very crucial lesson that investors need to take home. Be very careful while putting your money in the so-called 'new age' sectors purely on basis of huge growth potential. At best, avoid investing in sectors that do not have a sufficiently long operating history. Another important lesson is to let go of the urge to predict the future. Stick to the basic of value investing. Invest in stocks with strong fundamentals, solid past track record and sufficient future growth visibility.

India leads in FII inflows in Asia this year

                                                     Data source: The Economic Times

Above chart shows that Indian equity markets witnessed the highest inflow of FII (foreign institutional investors) funds in 2012 so far. Foreign funds have invested nearly US$ 11 bn in Indian stocks during this period. A significant portion of the funds poured in between January and March and then resumed in July. While FIIs have been net buyers of Indian equities in the current year, domestic institutional as well as retail investors have been net sellers. Among other Asian peers, South Korea witnessed the second highest FII inflows of about US$ 6.3 bn. 

In India, the demand for office space has slowed down

The global slowdown has impacted the demand of office space in the country. Due to the slowdown, many multinationals especially from the IT and banking, financial services and insurance (BFSI) have started consolidating their operations in the country. And this is reflected in falling absorption rates across the country. Absorption rate is the rate at which available homes are sold in the market during a given time period.  It may be noted that during the first half of 2012, the absorption of office space has declined by 32%. The absorption rate in National Capital Region (NCR)-Delhi dropped to 21%while that from Mumbai dropped to 19%. Apart from global slowdown, high interest rate and property prices have been another dampener.  Due to the slowing demand, the supply has also been impacted. In fact, it has fallen by approximately 52% in the first half of 2012. And the situation is unlikely to improve in the second half as well. After the residential downturn, it seems now even the commercial segment is facing the heat.

In India, these sectors doubled shareholder wealth in last 4 yrs

Stock investing is all about identifying and adopting a goal and sticking to it with discipline. The goal could be anything from earning x% returns to holding the stock for your period. The important thing is to identify what works best and stick to it without compromise. But an important question that any investor would have in mind is which investment philosophy works best?

An article carried by Business Standard appears to be addressing this question. It has identified 8 sectors where investors have been able to double their money. But investors have been able to do so only by holding on to the stocks over a period of 4 years. The sectors include tobacco, FMCG, tyres, auto, pharma, auto ancillaries, banks and fertilizers. These sectors have seena robust financial performance even during the not so good times. And this performance has translated to healthy gains for investors who remained committed to them.

The driving force behind the performance of these sectors was healthy domestic consumption. With rising income levels particularly in the rural sector, consumption has been growing in recent times. As a result, these sectors have seen their top lines outperform the overall economic growth. At the same time the ability to pass on increases in costs, keeping their administrative costs under control and maintaining their brands has helped these companies in growing their bottom lines as well.

On the other hand the "in the news" sectors like infrastructure, construction, sugar, etc have actually doled out negative returns for the investors during the same period. Though they have seen a growth on the financial front, but neither has the performance been outstanding. Nor have they helped investors in any way. With compounded annual returns ranging between -1% to -33% over the past 4 years, these sectors have actually destroyed shareholder wealth.

This leads to one key learning for investors. Something we always keep talking about. That is that in order to earn healthy returns over long term, it is essential to identify businesses with strong fundamentals. And having identified these it is necessary to hold on to them for a long time period. Investing in hot news items rather than the stronger business fundamentals can only lead to one thing. And that is losses.

Transport benefits most in diesel subsidy

                                                        Data Source: Business Standard

The Government of India has drawn a lot of flak recently for its inertia with regards to fuel price reforms. As per a study done by leading financial daily, subsidies doled out on diesel are finding their way mainly to transportation sector and that too in private hands. Today's chart shows that transport sector accounts for nearly 67% of the subsidy benefits. Prominently, the truckers and cars account for nearly 45% of the total subsidy bill. On the other hand, the agriculture sector, on which the Government rests its case accounts for a mere 12.3% of the subsidies. With a flawed subsidy system leading to dieselization of economy, one should expect the share to go up. The argument that linking diesel prices to market prices will lead to inflation doesn't hold water either. Higher fuel subsidies and huge fiscal deficit are feeding the vicious circle of low growth and high inflation anyway. If it is well being of the farm sector stalling reforms, there is a better way to take care of it. The sector will be better off using direct cash subsidies and strong price support system. It's time that the Government stops coming up with lame excuses and bites the bullet of fuel reforms.