Day: 4-12-2009

This mega-investor is long on Indian bluechips

In this issue:
» LIC keeps its faith in the India story
» IMF readying exit plan for stimulus packages
» India agrees to emission cuts
» Bank hikes pay by 150%
» ...and more!!

00:0
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Long term investing is a lesson preached by everybody but practiced by a select few. One of the
few that seem to practice it is the big daddy of local institutional investors - the life insurance
corporation of India (LIC). In 2009, the insurance giant has raised its holding in several blue
chips, ranging from public sector banks to industrial heavyweights in the private sector. As can
be seen in the table below, LIC has invested right through out the year. Its investments in the
early part of the year have certainly paid off well for the insurer.

Buying on the way up: LIC's acquisition in 2009

Company Stake During
Indian Overseas Bank 2.86 Feb - Mar
Bharati Shipyard 2.62 June
Cummins 2.18 Jan - Mar
Bharat Electronics 2.10 September
Tata Tea 2.09 October
Andhra Bank 2.09 October
PTC India 2.06 July - Sep
Chennai Petro 2.02 Jan - Oct
Ultra Tech Cement 1.92 June
Tata Coffee 0.44 June
Dena Bank 0.35 June
Canara Bank 0.10 January
Container Corp 0.04 October
Syndicate Bank 0.04 September
BHEL 0.03 March

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Source: The Economic Times

Interestingly, LIC's investment in listed stocks has on an average been around 37% of the BSE
Sensex's market capitalization over the past nine years. Insurance companies have a steady flow
of insurance premiums that they need to invest, which certainly helps them maintain a long term
outlook. It may be noted that it is this characteristic of insurance companies that fuelled
legendary Warren Buffett's investment vehicle Berkshire Hathaway. In our opinion, credit is due
to any investor, individual or institutional, that had the good sense of buying great companies
when they were being offered at a bargain. On that score, LIC certainly does well.

00:4
 Chart of the day
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Today's chart of the day shows how the economic packages meant to stimulate economies out of
the recession are taking their toll on government finances. In India, the government had to cut
excise and customs tax rates, raise government salaries and step up spending on roads and
power. As a result, India's national budget deficit, including central and state government
finances, may reach 10% of the GDP in FY10 as per the Organization for Economic
Cooperation and Development (OECD). In fact, the situation isn't likely to improve rapidly in
the years ahead given that measures such as salary hikes are permanent in nature.

Source: OECD Economic Outlook, Nov 09

01:1
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SEBI has cracked the whip on brokers after receiving complaints from investors that brokers are
misusing their funds. SEBI has now made it mandatory for brokers to maintain member-
client agreement, know your client (KYC) form and the risk disclosure document.
Furthermore, the investor will specify the stock exchange as well as the market segment where
he would like to execute the trade. SEBI has also directed that actual settlement of funds and
securities shall be done by the broker. This settlement shall be done at least once in a calendar
month or quarter, depending on the preference of the client. In our view, these guidelines will
help make the process of trading more investor friendly and transparent. Furthermore, these

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guidelines will help provide a stricter client broker agreement, and give investors more control
over their funds lying with the broker.

01:4
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After being adamant on not caving in to the demands of the developed nations especially when it
came to the prickly issue of climate change, the Indian government has agreed to soften its
stance. The government has said that it was willing to extend more concessions if the rest of the
world could arrive at a fair and equitable climate change agreement in Copenhagen. As reported
in a leading business daily, the government has pledged a 20-25% cut in emissions intensity
per unit of gross domestic product (GDP) by 2020. This is what the environment minister
Jairam Ramesh had to say, "India has not caused global warming, but the country will try and
make sure that it is part of the solution." Earlier, the stance adopted by India was that cuts should
be distributed on the basis of per capita carbon emissions. According to this measure, India is
well below the global average and the two lead polluters, China and the US. The fact that the
environment minister has chosen to adopt a different approach and also that he was well
supported in Parliament means that the country is ready to consider climate change as an
important issue and accept moral responsibility.

02:3
3
 
How would you like a 150% hike in salary? Yes, that means getting paid two and half times your
current salary. If your reaction is 'it is probably too good to be true', think again. Financial
services firm Barclays is set to award its 22,000 investment bankers a pay hike of up to
150%. That too with retrospective effect; backdated to June 2009. This is something it has
resorted to off late to dodge the government's moves to clamp down on multimillion-pound
bonuses. Hefty bonuses have been blamed as one of the biggest causes for chasing short term
profits by many banks. That eventually led to the credit crisis which almost took down the entire
world's financial system. But financial companies are almost sure to find ways and means around
these bonus clampdowns, and this is just one of them.

03:0
5
 
While everyone seemed almost unanimous in their view that the subprime crisis was easily the
biggest since the great depression, the speed with which the global economy recovered was
nothing short of miraculous. And besides having to thank the governments, who kept pumping
money into the economy without worrying about near term deficits and public debts, investors
also owe a good deal of gratitude to the multilateral lending agency IMF. Of course, IMF's hand
was strengthened by the G20 nations who chose to provide more funds to the former but IMF's
role in ensuring speedy disbursal of the same and reducing conditions for providing the
assistance should also be lauded. As a result of all these efforts, we seem to have avoided the
crisis, which was threatening to become far worse.

IMF, however, is not wishing to rest on its laurels. While the withdrawal of stimulus may still be

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some months away, IMF has declared that it is shifting from rescue efforts to helping take
the world economy to its steady state, something it has not been in for over a year now. It
would soon develop a set of principles that would ensure an orderly and cooperative exit from
fiscal, monetary and financial sector support, observed Reuters. Looks like the IMF wants to
have a greater say in global economic affairs and this indeed is a welcome sign. Surely, someone
was needed to help prevent the huge imbalances like the US trade deficit and the Chinese trade
surplus from pushing the global economy on the brink of a collapse. Hopefully, IMF will
discharge its duties just as skillfully this time around as well.

04:0
6
 
Political and economic pressures on the dragon nation are rising by the day. Primarily for the
China's manipulated currency devaluation and willful support to asset bubbles. However, the
country is in no mood to mend its ways. On the contrary, China has squarely placed the blame
for the losses in derivatives posted by its companies on foreign banks! A leading Chinese
bureaucrat has been quoted by Bloomberg calling the foreign banks 'fraudulent'. He has further
blamed the banks for mis-selling the complex financial products to Chinese government owned
entities. Chinese companies bought oil and interest-rate linked derivative products from the
foreign banks. These brought them derivative losses to the tune of 11.4 bn Yuan in 2008. China
has nonetheless rescued its state owned companies from any blame. As in the past, the country
seems to be making an attempt to hide its internal loopholes.

04:3
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Meanwhile, Indian markets witnessed a relatively choppy trading session today after a weak start
and the BSE Sensex was down nearly 30 points at the time of writing. Stocks from the realty,
auto and banking sectors were among the ones that failed to garner investors' interest. Asian
markets are trading a mixed bag, while Europe is in the red currently.

04:52 Today's investing mantra

"In security analysis the prime stress is laid upon protection against untoward events. We obtain
this protection by insisting upon margins of safety, or values well in excess of the price paid." -
Benjamin Graham