Inflation & agricultural produce

Inflation has been in news in India for a very long time. While the reserve bank is doing its best to tame inflation by increasing the rates, unfortunately the government of india is doing nothing to tacke inflation, mainly food products.

Inflation generally is due to lack of supply of products or increase in buying power of people (increase in supply of money). Economic theory states that by curbing the money flow or making the cost of funds higher inflation can be curbed. This is generally true for inflation other than food articles. Primary food articles prices can be brought down only by increasing the supply.

Government actions so far has been lacklustre, with no coordinated effort to increase supply. The key actions here will be to invest more in agriculture sector - investment is urgent in large scale irrigation projects, cold storage chains, reducing middlemen to drive down prices and increase efficiency of distribution of grains through both public distribution system (PDS) and private channels.

The goverment is clearly falling short in all of these areas. The whole subcontinent is dependent on monsoon for agriculture. We have seen cycles of drought and flood which have played havoc on production over the last several years. We need to have good irrigation facilities to store and use water for agriculture. Look at new technologies which will improve the per hectare output. A second green revolultion is a must now. If not, there will be a crisis in the next 20 years.

In the budget presented in March 2011, increasing cold storage chains as well as making it an infrastructure area for focus meant that there is going to be major focus and investment in these areas. But unfortunately, not much has happened. The public sector is not doing much here either. We need the government along with private players to join hands and invest in setting up cold storage chains. We cannot allow our produce to rot just because we do not have enough storage facilities.

The PDS has been an area of concern. We read several reports in the media on food grains rotting in food corporation warehouses, railway stations, open storage places etc and the only action taken is to suspend a few officials. The PDS along with storage will enhance our capacity to store more and distribute better, thereby reducing the price due to shortage.

The procurement of food grains is another inefficient area. On one hand, the government raises Minimum Support Price (MSP) which is good as the farmers get their due. But on the other hand, this increases the cost of food articles to the end customer. One main reason is the number of entities in the supply chain.

The next thing the government needs to focus on subsidies. While subsidies are given by both the central and state government for electricity, fertilizers, seed there is a big question if it reaches the right group of people.

Urgent action from government:

- treat agriculture as a focus area

- improve irrigation & cold storage facilities

- remove inefficiencies in storage and PDS.

- relook the subsidies and ensure that it reaches the right people.

What we need now is a second green revolution and we need it urgently.

BUY GOLD

While market experts are of two views on buying gold, given the fact that it has gone of significantly in the recent past and there has been a sell-off over the last few weeks, this analyst feels gold is a good buy for an investment period of 1 to 3 years.

Analysis:
- Euro zone still not out of the woods with problems in Greece, Spain, Italy and Ireland. The eurozone is more or less supported by Germany and France and both these countries are etting stretched both financially and politically.- US dollar is getting weak against a lot of currencies including Euro, Canadian Dollar, Singapore Dollar, Australian Dollar. With huge internal debts, slowing economy, Presidential elections in about 1 year, the US government will find it very difficult to take tough measures to cut down their spend. This in turn will mean that their currency will further weaken.
- Globally, commodities are cooling off, which means that spending has slowed down. This in turn will mean an overall global economy slow down for atleast another 1 to 2 years.
- For the developing countries (China and India), GDP is growth rate is slowing down and inflation is on the rise.- India especially has a clear problems with inflation, despite RBI raising interests over the last 2 years and a good monsoon. This mainly due to the effect of India moving from a saving economy to a spending economy and the first impact will be on inflation in the initial years
- Clear non-governance and no clear policy decisions, due to which the slow down is not getting addressed.

Finally, Festive season starts in India starting Oct and all the way upto next April when the demand for gold will go up.

Technically speaking, gold has a resistance at ~ Rs 2750 (Kotak Gold ETF) and can break thi due to the above mentioned factors in the next couple of months. Good support level is available at 2500, then 2250, 2150 and finally at 2000. The 50 Day average is around Rs 2500 which is the current levels and if this holds for a week, then the prices will stabilize and move up from here. Also, Rs 2000 acts a good support level for over 1 year now. Buying gold, best form is ETF and can be done as SIP over the next few months.

Disclosure: This analyst has invested in Kotak Gold ETF.
ps: caveat emptor.

Markets Trending Down
The last few months has been a roller coaster ride. The markets have gone up too fast. The FIIs have pumped in too much too soon.
This analyst feels that the markets (sensex) will trend down to 17500 as a first support level and might even go down to 16000 to 16300 in medium term.
Key factors - hardening of interests and expectation of further rise, inflation is still a worry, Europe has still now come out of woods and to top it middle east / northern africa is in a turmoil. In view of this, the developed markets despite not giving the high returns as the emerging markets will provide the safety.

Trying to get back to the markets..

After a long time, I am trying to get back to the markets. ITC has always been one of my favourite stocks. Over the years, ITC was always considered as an FMCG stock, called defensive bet and all that, but in the last 2 years, it has more than doubled.

ITC - The retirement stock
ITC has diversified in the FMCG sector and the percent of revenue from cigarettes has come down, a clear statement to move out of the high risk tobacco area. Also, the merger of the hotels has made this stock stronger. The recent 1:1 bonus clearly shows the long term growth of the stock. With more liquidity in the market, a good monsoon the stock will move up in the short term.

As a long term investment, I consider this to be a "retirement stock". One needs to keep buying into ITC on a regular basis. This can be considered as an "SIP stock" and hold until retirement.

The company's entry into the biscuit segment (Sunfeast) and flour (Aashirvaad) has given good returns over the last few years and both these are now a big brand by themselves. Also, the company's diversification into packaged food and the recent foray into personal care products (vivel) can only grow given the marketing and the distribution reach. The package foods is an interesting area for expansion with more disposable income and increased spend on food in the metros.

Back In Action...

After a long hiatus imposed by my work, I am planning to get back into action. Given the current scenario - high inflation rate, possible slow down in economy, volatility in stock markets, the best bet would be to go back to companies with good fundamentals and growth strategy.

At this point in time, I have not done much research, but still feel Tata Teleservices is a good bet. The Tatas are finally getting into GSM space with an investment of about 2 billion USD. The tower business spin-off may also unlock value with this company. Too early days, but I will come back after some detailed analysis.

Given the current scenario, it is good to get into defensive sectors like Pharma and FMCG. Infrstructure is still good for a long term of 3 years and above.

10K and on...

Great day yesterday ahead for the stock markets with the bse index touching 10k. but what is in store? just a quick analysis.

The markets reached 10,000 on a day when not many people expected. after last weeks correction most of the predictions were that we might be in a correction mode this week as well. To add to this sentiment was theincrease in oil prices and yet another spat between the ambani brothers..

so where are we heading this year.

The next couple of months till the budget is going to be volatile. but there should not be any surprises in the budget this year since 4 states are going for the election. already the petroleum minister has said that there will not be any increase in kerosene and lpg in the budget (earliest indication of a populist budget).

the mutual funds have collected nearly 10,000 crores from New Fund Offers. Franklin Templeton Prima Fund has stopped accepting new applications since they have enough funds.

the Q3 results have been pretty good across different sectors.

these factors and many more will have a positive effect on the index.

the worrying factors are increase in oil prices, problems in reliance, increase in lending rates of banks, stretched valuations of the bse and nse indices as well as the companies and the general pre-budget flutters.

considering all these factors, this analyst feels that the market after a correction should stabilise around 9800 to 10,300 before the budget.

sectors to watch this year
cement, infrastructure, fmcg, service industry (incl hotels, travel and tourism, IT, financial services).

Index to touch new highs

The BSE Sensex is poised to touch new highs in the next 3 months. In the new year 2006, the index will cross the previous high in the first 2 or 3 months.

The reason for the markets to reach new highs
- New Global Players are poised to enter into India. A lot of Global Investors have collected funds specific to India. This needs to be invested and normally the investments start flowing in the first quarter in the new year. This includes a major inflow from Japan.
- The indian mutual fund is sitting on a sizeable cash pile. With clarity coming up on ELSS schemes, the retail investor will definitely invest in these schemes. Also, the salaried people invest their funds for tax benefits during this quarter.
- Several sectors are poised for good growth including hospitality, travel and tourism and retail. The other booming sectors like IT and pharma will continue to do well.

The key local factors which might induce a correction are
- HNI and Operators selling to square of their year end during march
- Budget proposals

This writer feels that individuals can invest in mutual funds especially the Bluechip related funds since these are the stocks that will take the BSE Sensex to 5 digits and beyond. SIPs in these funds can be considered to average the cost of holding for a time period of atleast one year for good returns.