Recession Ahead? Is Wall Street Catching Gold?

It's true that when Wall Street sneezes the whole world catches cold. But this time, the situation is quite unique and slightly unpredictable. It's like a huge meteor hit the world and we are now faced with an apocalypse like situation which has never been confronted before.

According to the latest report by New York Fed Consumer Credit Panel, there has been the largest debt accumulation in the US economy amounting to a whopping $14.3 trillion. Student debt loan sits at $1.51 trillion, credit card debt at $1.41 trillion and car loan at $1.33 trillion.

The pictures are quite alarming and sure have created a bubble that may wipe out huge amount of investor's money. However the irony is that in order to stop the bubble from popping, the Fed has been on a printing spree to support business and ignite consumer spending, which in turn is actually fueling the bubble by startling the equilibrium in the money market.

The money market equilibrium demands that the real demand of money should be equal to real supply of money, but the change in the equilibrium taking place will alter the strength of global currencies adversely, thereby marking the beginning of stagflation around the world.

 

Again, in an attempt to suppress this situation, the Fed lowered the interest rates to near zero level so that people and business borrow more and the economy kick-starts.

But what the Fed is not realizing probably is the lack of consumer and business confidence which allows the feeling of uncertainty to overtake and instead of spending, people save the extra bills they have.

The actions of the Fed and the US government hints that the government “is following and not following” the “Keynesian School of Thought” at the same time.

“Lowering the interest rate would not play significant role in kick-starting the economy since the wages are downward sticky and the uncertainty in the market still exists”, which the government is not realizing.

“Government should come up with fiscal and monetary policy to keep the capital and labour employed even if it means huge fiscal deficit”, which the Fed is blindly following.

 

The problems with money and fiscal policy are not just impacted by US's monetary policy but also because of its geopolitical decisions. The self-pleasing policy and show of power by the country is now hurting its currency.

China, the largest creditor of US dollar has been planning to dump $1 trillion for a long time. Not only China, but countries like India and Russia have also been working on the implementation plan. Since these countries do not have the infrastructure or a bond market like US to do so, they have found an alternative to it by forming their own development bank and lending billions of dollars to other countries with weaker financials and infrastructure.

Due to US's sanctions act, these countries were frustrated with the dependency on dollar and were thus inspired to trade among each other in their local currency. BRICS's “New Development Bank” is their biggest step to achieve their common endeavours, and is seen as a rival to World Bank and IMF to such an extent that some of the biggest mega projects are now funded by them. Thanks to their easy collateral demands and convenient and flexible payment methods. This has attracted numerous smaller nations to join hands with BRICS community in joint development projects. As a result, the member countries are able to dilate their influence on these smaller developing countries.

 

All in all, the prospects of the global economy are at an all-time unacceptable rates and the bubble everyone was talking about is now a distressing reality. However, there is no turning back from here and the passage we are heading towards can only result in two outcomes.

Either the bubble deflates eventually and the economies around the world are able to adjust to the loss of wealth in the long run and the governments are be able to ensure consumer and business confidence throughout the process, or the bubble bursts and massive amounts of wealth is wiped out from the global economy, furthermore humanity will see the downfall of one of the most pronounced recession that may make the great depression of 1929 seem like a kid.

 

The views expressed above are personal and belong to the author.

This post has been written by Rishav Kumar.

Also See : Is Indian Ocean the Next Battleground?, Bleeding China!! Is this the Beginning of the End?

Investor's Pick : Return on Equity

 

 

Warning: This article is filled with quirks which you never knew about a ratio which you've all heard of. Be it Novice or a Veteran investor, both use this metric extensively for picking quality stocks. Read at your own discretion!

 

To run a Business there are broadly two sources from where an entrepreneur can get funding money aka equity:

• The primary being the Shareholder, in which a venture capitalist invests a certain amount in a company, and in return is given some percentage ownership and is also entitled to take part in major decisions and policy reforms.
• Then comes Debt, which you all know is borrowing money from banks at the cost of collateral.

 

Now, before I start my surgical analysis on ROE, there is something you guys need to understand. Most people have this pre-conceived notion that these financial ratios are some hi-fi figures that economists calculate and it requires a qualified expertise to do so but truth be told that anyone can do it, be it a soccer player or an English teacher. No I'm not going to tell you some gibberish formula which will simply go over your head and frankly mine too.

Let’s illustrate this with a simple example. Say you own a company whose management team is highly efficient and recently your performance has been sensational compared to your peers as you shattered your own records by a high margin. So as an investor I would be interested in your business & do a simple analysis to find the ROE. Assuming your company has a total equity of 500cr. 250cr from shareholder's money and 250cr from Debt. Let's Say, 2019 was a profitable year & your Company netted a revenue of 100cr. Now keep in mind that this isn't the final amount which will come to your company's coffers as you'll also have to pay taxes and the interest amount on your debt.

 

 

To find out the net profit, I'll make use of basic math by deducting the interest amount say 10% of debt from the revenue. 10% of 250cr gives 25cr. So the net profit comes out to be 75cr, which I found out by subtracting the interest i.e. 25cr from the revenue i.e. 100cr. Now to calculate ROE I divide the net profit by 250cr which is the shareholder's equity. Finally, the ROE of your Company comes out to be 30%, which is phenomenal! But before coming to conclusions I would also check your peer company's ROE, which will give me a true insight on how your business is doing. Let's say that your peers have an average ROE of 25%, which would lead me to conclude that you are an amazing CEO.

Kudos!!

Now that you've got a hold of how to find out ROE, let me define it for you.

Return on equity (ROE) is a measure of financial performance which is calculated by dividing net profit by shareholders' equity. This provides the investors an insight into how effectively a company’s management team is using its assets which is the shareholder's money to create profits. Simple right? Let's delve deeper!

 

General thumb rule is, higher the ROE, more efficient a company's management is at generating income and growth. But this isn't always the case and I'll cover this later in detail. The formula I mentioned above is especially beneficial when comparing companies belonging to same industry since it tends to give an accurate indication of which one is operating with greater financial efficiency. Whether a company's ROE is deemed good or bad will depend on what is the average among its peers.

 

Pro Tip : Target an ROE that is equal to or above the average for the peer group.

 

Now you might be wondering why an average or slightly above average rather than an ROE that is double or triple the average of their peer group. Aren’t stocks with a very high ROE a better value?

 

Sometimes a higher than usual ROE is a good thing if net profit of a company is extremely high compared to the shareholder's equity because that would indicate a next level efficiency. However, an extremely high ROE can also be an alerting sign.

 

An unusually higher than average ROE can happen mainly due to inconsistency in generating profits. Imagine there's a company ABC that has been unprofitable for several years. The losses keep adding up year after year and because they are a negative value on the balance sheet, shareholder's equity is used up to neutralize the losses. But in the most recent year ABC has a turn around and makes a profit. Going by the formula, the denominator which is the shareholders equity in the ROE calculation is now very small after many years of losses, add to that the recent profit which when used in numerator to calculate the company's ROE will make it misleadingly high.

 

Pro Tip : Whenever you come across an unusually high ROE, make sure that you check the past profit records so that the ROE doesn't mislead you.

 

By Now I'm sure you must've understood why ROE is a really important metric for all the stock investors out there. For financial nerds, my article on P/E Ratio is worth checking out. More importantly, you have now taken the first step in learning how to pick quality stocks to add to your portfolio and grow your wealth.

Happy Learning!!

Note : All images used in this post has been taken from Google Images and the copyright of each of the images lies with their copyright holders.

The views expressed above are personal and belong to the author.

This post has been written by Somaditya Singh.

Also See : P/E Ratio

Bleeding China!! Is this the Beginning of the End?

Image Source : IMF

Ever since the rise of China in 1980, it has been seen as a rival to challenge the US supremacy. Never the less, China has proved itself worthy of becoming the next power-house of the world with its world-class infrastructure, supply-chain, monetary and military might. However the recent clashes of China with the US is hurting both the economies with China taking the maximum hit, thanks to US's superior economy and say in the international forums.

 

China's GDP growth has been slowing down consistently and the numbers projected by Chinese Communist Party (CCP) has been under constant scrutiny by economists around the world.

Post trade war and ongoing COVID-19 crisis, country's industrial growth has also been hit hard.

Image Source : Statistica

 

China's manufacturing sector has been performing well throughout trade war and has recovered post peak COVID outbreak. Manufacturing sector has outperformed the global manufacturing index partly because of the massive dependence of the world on the raw materials and world-class supply-chain of the country. The country has also emerged as an unparalleled and unmatched destination for integrated industrial solutions.

 

The current rage against China has pushed its current account deficit to $29.7 billion, which I personally feel won't be a disaster for them considering the fact that the country maintains a Forex reserve of $3.399 trillion as of July 2020, and will be able to efficiently fund their future endeavors without much friction. But the worrisome part is the ever increasing pace of national debt to GDP which has mounted to 70%.

A figure like that is sure to scare away investors in the long run and hurt the overall business sentiment and confidence.

Image Source : Statistica

 

However, the area which is hurting China the most is the defaults made by many African countries that has huge Chinese investments under BRI (Belt and Road Initiative).  Africa owes more than $150 billion to Beijing, but the recent global events have pushed these financially unstable African countries into defaulting on their payments. Though these fundings could have been a part of the larger plan of China's debt trap diplomacy, it seems that it has backfired and triggered a chain reaction of voices speaking against China.

 

“Stop treating Africa as if we are unable to govern ourselves. When you talk to us, talk to us about how we can partner with you – and in a faster way",  Amani Abou-Zeid, the African Union’s commissioner for infrastructure and energy said.

 

China is a huge economy but not huge enough to write off 1000 loans to 49 countries just in Africa for the loss of the BRI and no debt trap in action.

 

Image Source : Statistica

China's domestic market is massive and is still not tapped completely. According to the "Consumer Meet 2020",  average household expenditure has touched $3000-$12000 in 2019.

 

Sales of premium product grew at 20% YoY.

Sale of luxury SUV saw a 10% YoY.

28% people buy impulsively, 46% buy from renowned brand, 14.5% buy online and 5% through retail creating a $3 trillion market.

 

But the year 2020 saw a drastic decrease in demand hitting the economy and stock market to reach an all-time low of 6% negative. And finally the government was forced to come up with a stimulus package of $173 billion.

 

Number of NPA (Not-Performing Asset) is at an all-time high.

Small and Medium size banks are at high risk of declaring bankruptcy.

 

Most of the Chinese markets are suffering from Coronavirus which has added to the burden of slowing domestic demand. The impact of Trade War has also played its part in ensuring decline of China.

 

Image Source : Statistica

The world saw the rise of USSR, but also the decline of USSR. The world saw the rise of China, and the world may also see the decline of China if it continues on its path of territorial expansionism.

 

China is a country which has proved everyone that democracy is not the only option and has pulled hundreds of millions out of poverty, prioritized education, spent on technology, and took tough stance to protect their national integrity.

 

China is a natural leader but if the leader fails to respect everyone, the bleeding wound never clot and the leader will be finally replaced.

The views expressed above are personal and belong to the author.

This post has been written by Rishav Kumar.

Also See : Is Indian Ocean the Next Battleground?

Simple Yet Revealing : P/E Ratio

Most people currently invested or trading in stocks know what a P/E ratio is. Simply put, it's Market Price of a Share/Earning per Share or EPS. For those of you who don't know what EPS is, it's calculated by dividing the total number of shares of that company from its Net Earnings. Now for example if P/E ratio of a stock is 24.5 then this means that on an earning per share of 10 rupees the buyer is ready to pay 245 rupees. So 24.5 is 245 which is the stock price divided by 10 which is EPS. Simple! Right. But wait there's more.

 

 

Broadly P/E helps an investor take decision, on whether a share is expensive or cheap. General thumb rule followed by all is, a Lower P/E ratio implies that the stock is cheap/ undervalued and higher P/E ratio means that the stock is expensive/ overvalued. At the same time investors are willing to pay a huge premium to buy it which tells us the investor's confidence in that company. Now keep in mind that these numbers are relative to the other competitors in that industry.

 

 

Take for example the IT industry, consisting of tech giants like TCS & Infosys. P/E of TCS is 23.49 and that of Infosys is 20.05 as of June 2020. From these figures I can say that I'm getting Infosys at a more discounted rate as compared to TCS due to its cheaper PE. But there's more to it than meets the eye. Just because P/E of one company is cheaper than the other doesn't mean that the stock is valued at a bargain. There can be a lot of factors as to why it might appear cheaper than its competitors like for example a bad news which temporarily crashes the stock price or fluctuations in EPS.

 

 

Now I'll let you in on a secret, a secret which is unheard by many. Let's start with a hypothetical case consisting of 2 companies, A & B. Assuming that Share price of A is 1000 whereas that of B is 2000 and Current Earnings of both the companies is 100cr. From here i can say that current P/E of A is 10 whereas that of B is 20. Now in general sense, most people would go for company A as it's P/E ratio is less in comparison, add to that its earnings is same as that of B. But without knowing the full reason as to why A is cheaper we cannot ascertain for sure that buying stocks of company A would be a value decision.

 

 

Let's see what I'm trying to imply by checking the past 2 year history of both Companies. In the first year company A made a profit of 80cr, whereas B was at 20cr. Second year A made a profit of 90cr and B was at 50cr and in the third year both Companies netted a profit of 100cr.

 

 

What most people see here is, Hey!! A has more earnings than B, but what I'll tell you to see is Hey!! Look at the rate at which the profit margins of B are growing. In just 3 years it caught up to A considering it had significantly less earnings in the first year. Company A has a slow earnings growth compared to Company B in past 3 years so I as an investor expect company A to grow at this rate in the near future. Now coming to B, it is growing at much faster rate when compared to A, and in future too this growth rate is expected which tells me that investors are optimistic about this company because of its higher P/E and double the share price of A.

 

 

Many people use the past or the trailing P/E to make investment decisions whereas Smart Investors use the future or the projected P/E to analyze the stock and this gives them a better insight on how a company will perform in the coming future. So in a nutshell, cheaper projected P/E will be the top choice among smart investors due to which its current stock price will increase thus placing it at a premium valuation.

 

 

Also, if a company is increasing its EPS at a fast rate like the company B in above example, its P/E can fall. Though it never happens because the share price appreciates which keeps the P/E steady. But the price at which you brought the share, when divided by the increased EPS will make the P/E less, implying that the expensive price at which you bought the share is no longer expensive. It's cheap.

 

 

The stock price appreciates because investors like you are also willing to buy that stock at a higher valuation, so what you basically did was buy low and sell high....that is if you want to sell. Frankly, as an investor I won't care about the high P/E knowing that the company will grow at a really fast rate like it's previous track record.

 

 

Sometimes P/E ratio can also deceive you. So in cyclical sector like real estate or sugar industry, due to seasoned earnings, one cannot correctly judge the company based on P/E as 1 year their EPS might increase 10 fold thus reducing the P/E and the next year it could fall by 50 %, leading to a more expensive valuation.

 

 

So maybe buying these companies when their EPS has fallen will be better, knowing that their earnings will be better in the future, but that's not a method I would recommend. A better judge here would be the Price to Book ratio which I will leave for a later discussion as for now you guys have had enough.

 

Note : All images used in this post has been taken from Google Images and the copyright of each of the images lies with their copyright holders.

 

 

The views expressed above are personal and belong to the author.

This post has been written by Somaditya Singh.

Also See : Return on Equity

Is Indian Ocean the Next Battleground?

Satellite Image of Chagos Islands
Image Source : Wikimedia Commons

Connecting Gulf of Eden and Gulf of Oman, Indian Ocean emerges as having both strategic and economic importance to the world.

Indian Ocean is the region that caters to 40% of world's oil supply amounting to 64% of oil trade. And with over 34% world population residing in the coastal economies, countries like India, USA, France, UK and China are adamant to increase their military presence here. Stretching across three continents and acting as a junction to various strategically important straits and passes, the ocean comes with a wide range of economic and strategic opportunities.

The ocean is believed to have rich petroleum and oil deposits due to the fact that Persian Gulf which is the largest oil producing basin in the world is located here. The region also provides huge deposits of Manganese nodules, Titanium oxide, Zircon, Chromite and so on. Indian Ocean is home to 23 out of 100 largest sea ports in the world. It carries about half of the world's sea-borne oil. The intra-regional trade accounts to 27.2% of total trade which supports many marine industries. It caters to raw materials for biotechnology, chemicals, pharmaceuticals, seaweed harvesting and marine derived bio-products.

Contributing immensely to the GDP of various economies sharing maritime borders with the Indian Ocean, the power sector has definitely found its way into the huge empire of marine industry with offshore wind, wave and tidal energy production plants being set up at an unprecedented level. Marine tourism, Engineering consultancy, Meteorological Consultancy, Environment consultancy are some of the major beneficiaries of this industry with Marine tourism taking the maximum share of the business.

However the region has seen an increase in piracy cases contributing to 40% of global piracy incidents, and is accompanied by concerning actions by few regional superpowers which has added to the instability in the region.

Economically powerful countries don't shy away from claiming what's not theirs', and in the name of national interest, they have turned the Indian Ocean into a battleground. This battleground is one of the most prosperous regions in the world but due to the ongoing tussle among the neighbours here, one spark can bring down the entire global economy and can very well be the breeding ground for World War III. Certainly Indian Ocean in this present situation has become an OCEAN THAT MATTERS.

 

The views expressed above are personal and belong to the author.

This post has been written by Rishav Kumar.

Also See : Bleeding China!! Is this the Beginning of the End?, India's Nuclear Ambitions, India's Future Plans: Exploring Space, India's Strategies on Space!! Defending the Space!!