What’s Next After The Recovery?
January 7, 2011
The first India Investment Management Conference was organized jointly by CFA Institute, NISM and IAIP. It was a huge success with more than 350 people registering and participating during this full day event on January 7th 2011 at Grand Hyatt, Mumbai, India. Members and candidates attending the conference were eligible for CE credits.
The conference started with Welcome Speech by John Rogers, CFA, President and CEO, CFA Institute, followed by Opening Remarks by Sunil B Singhania, CFA, President, Indian Association of Investment Professionals and Keynote Speech from K M Abraham, Executive Director of SEBI.
This was followed by the Plenary Sessions of Global Investment Strategy & Outlook by Abby Joseph Cohen, Chief Strategist, Goldman Sachs with moderation by Uday Kotak, Executive Vice Chairman & MD of Kotak Mahindra Bank and Valuation Inferno –Dante Meets DCF, by Aswath Damodaran, Professor of Finance, Leonard N Stern School of Business, New York University. The podcasts of Abby’s and Aswath’s are available on the CFA Institute’s website and qualify for CE credits.
There were total of 4 Concurrent Sessions in the afternoon with panel discussions on Performance Measurement & Reporting and IFRS Update on Track One and Fixed Income and Private Equity, Venture Capital and Real Estate on Track Two.
Session 1 – Performance Measurement & Reporting
Session 2 – IFRS Update
Session 1 – Fixed Income
- Panelists: Jayesh Mehta as moderator, Anjan Barua, Rajesh Mokashi, CFA, H K Pradhan, Nilesh Shah, Naresh Takkar.
Session 2 – Private Equity, Venture Capital and Real Estate
* The brief profiles of all the speakers are provided in the conference materials.
The conference Co-Chairs were Anil Ghelani, CFA and Professor Sunder Ram Korivi.
The event had following sponsors:
- Gold Sponsors: Edelweiss, ICICI Bank, and ICRA
- Silver Sponsors: Factset and IDBI Mutual
- Dinner Co-Host: Iris
Some of the Corporate Delegates were Reliance Mutual Fund, American Appraisal, Dolat Capital, DSP BlackRock Mutual Fund, Fidelity Investments, TrustPlutus.
Excerpts from the Conference:
K M Abraham
In his Keynote speech from K M Abraham, Executive Director of SEBI, emphasized on winning back the clients and their trust following the global financial meltdown. He cited a survey wherein clients trusted the financial advisor a lot in making a investment decision as most skimmed the investment documents. SEBI has come out with Investor centric initiatives like asking the mutual funds to bring out new and cost effective distribution channels and make the investment products safe and trustworthy. Likewise efforts have been made to bring takeover regulations at par with global progressive jurisdictions, improve corporate governance and increase the holdings for triggering the code.
Abby Joseph Cohen
In her presentation on and Q&A session moderated by Uday Kotak, Abby Joseph illustrated how most economic indicators for the USA were performing. Business fixed investment and exports seemed to have recovered. The residential & non-residential real estate, construction and consumption were stagnant. The US equity issuance has picked up. Corporate bond spreads have narrowed. Bond issuances are up as corporations are taking advantage of lower rates. In the recent survey banks have reported that credit is no longer weakening. However, banks were more afraid to lend.
Unemployment levels were high at 9.5%. Here she gave interesting perspective of employment gap by education. The unemployment rates were highest in the category where people were less qualified or had education less than high school diploma. The unemployment rates were lowest amongst those having bachelor’s degree and higher. Likewise unemployment was higher amongst people aged between 20 and 24 years and lowest amongst those above 55 years. The recession during 1958 was followed by sharp recovery and workers were recalled faster by auto and steel manufacturers. However, since 2001-02 more jobs were lost in traditional manufacturing and new ones created in advanced manufacturing, technology and financial services. This is a structural change and needs to be addressed by the government. In the late eighteenth and early nineteenth century as jobs shifted from the agricultural to industrial and migration took place from rural to urban areas more workers were dislocated. It was in 1890s that the US instituted free education to all in the country. Now with the sophistication of the economy and various sectors public policy needs to be changed once again and more emphasis has to be given to address the gaps in education and requisite skill sets.
Fed Reserves assets have increased. Congress has asked who were the beneficiaries of QE1 and it is expected that most were from Europe and Asia. The effects of QE1 and QE2 would taper off by the middle of 2011. This will reduce liquidity and later tighten interest rates.
Currently 47% of the US treasury is owned by foreigners. Of this Japan, China and Hong Kong held 20.4%, 21.0% and 3.2% respectively. Likewise foreigners owned 12.3% of US stocks.
The outlook for commodities and energy is good on account of favorable demand for industrial metals from BRIC nations. Goldman expects crude oil to trade over $100/bbl over a year or two from now. Commodities do not have much impact on the US inflation as 2/3rd of the corporate cost is wages where there is enough slag. However, it could affect countries like India.
Between 2002-2010 Nominal GDP of the US grew by 42.4% to $14906bn, S&P500 returned 43.9% while S&P500 operating earnings increased by 104.2% to $94 per share. Exports form 30% of S&P500 as against 15% for the US GDP. When inflation has been in the region of 4.5-5.5% the P/E has traded at 14.2 times and when inflation fell below 2.5% the P/E multiple expanded to 18.6times. So according to Goldman S&P500 should trade at 1460 one year down the line. The volatility has sharply declined and global correlations which were higher during the fall have dropped once again which is good news for active fund managers.
The long term issues for the US continue to be higher fiscal deficit. For CY10 the same runs at $1294.2bn or 8.8% of the GDP. During
Bush administration it was at 5%, Reagan around 6% and Clinton it was in surplus.
The total imports of India from the US stand at $29.7bn or 1.6% of the US GDP where as exports from India to the US stand at $18.6bn or 1.5% of the US GDP.
Nearly 40% of trades in Japan are carried out in USD.
Aswath Damodaran – Valuations Inferno
Professor Aswath Damodaran took two sessions of the valuations workshop illustrating DCF (Discounted Cash Flow) model and avoiding common mistakes in valuation analysis. While carrying on DCF one has two choices of doing the exercise on equity or on firm. The value of equity or operating assets of the business rests on cash flows (FCFF or FCFE), growth rates (during high growth phase and stable state), discount rates (cost of equity or weighted cost of capital), and terminal value. The valuation model could throw different values for some minor changes in the assumptions. In order to get better results the professor chalked out “Nine Circles of Valuation Hell” as given in the figure. These are base year & accounting fixation, taxes, growth rates, changes in debt ratios, terminal value etc. He elaborated on each of these points with examples. For example in case of Exxon Mobile 2008, one of the best years on financial front, was taken as base year. One needs normalization which may not be easy task. One will have to look at history, look for relationship, run simulation etc. Usually companies come out with IPOs after they had their best financial years. Likewise what are the growth rates one needs to take into account for young company? In majority of the cases the growth fades quickly especially post IPO. Firms are not able to scale up quickly. Again while calculating cost of equity, betas regressed from covariance with benchmarks may
not be the right way especially when single stock dominates the index like Nokia which forms 80% of Helsinki Index and Gazprom forms 93% of RTS Index. One need to look for the nature of product or services offered, operating & financial leverage to calculated levered beta from unlevered beta. He demonstrated beta calculations for Tata group companies like Tata Steel, Tata Motors, TCS and Tata Chemicals.
Some of the other interesting points made during Q&A sessions are:
Equity risk premiums change over long periods. So do default spreads and debt equity ratios.
There is globalization of revenues and risks. Hence one needs to add country risks.
Whether one should be taking current debt or target debt?
For terminal value whether one should be taking stable growth model or take a multiple of EBITDA.
For banks re-investment rate of their capital is important.
No need to adjust risk in cash flows. Do
it in cost of capital.
The complete podcast of this valuation workshop is loaded on the website of CFA Institute.
India Investment Outlook – Power Panel Discussion
Venkatraman Anantha Nageswaran – Moderator. Unlike the optimistic views expressed Abby for the US market in the morning, Anantha has been negative on the developed market. The US Debt to GDP has ballooned from 150% in 1982 to 350% in 2007. The next recession is likely to start by middle of 2011. Shiller P/E is at 22 times. And technicals are just a gentle reminder. After quickly running through his presentation he moderated the panel discussion.
Akash Prakash – Akash is cautious for 2011. The economy is slowing, liquidity is tight, interest rates are hardening, projects are stuck & execution is slow despite high order book. Earnings growth could disappoint. India is not a cheap market. FII flows will be lower. Bihar election results show that development will be key factor for the parties to come back to power. He expects government to focus subsidies, forming 10% of the GDP, more tightly to the target groups.
Madhu Kela – According to Madhu 2011 is going to be tricky & challenging. But at the same time it is going to throw good opportunities to investors. Markets are behaving faster. Economic indicators like inflation have been much more stickier and is likely to ease only around Sep or Oct-2011. He emphasized on stock picking to generate better returns and continues to be optimistic on the long term trend of the market. He expects government to become more transparent and open doors for long term capital.
Navneet Munot – Navneet feels that the recent scam & scandals are not likely to have lasting impact. Institutions like SEBI, RBI, Supreme Court are amongst the best in developing economies. He is betting on good businesses with large size of opportunities. Volatility will be high and stock picking will be important. For the last 3 years domestic investors have not invested into equities and they are likely to come back. He expects government to improve execution.
Rashesh Shah – In the short term the outlook was cautious. One will see contraction of margins as input costs go up. The foreign portfolio inflows will come down as the US economy recovers. Inflation should come down by April. He is optimistic on the second half. He expects government to bring out financial sector reforms.