A contrarian solution

Some extremely attractive opportunities for enterprising investors ready to think out of the box

A typical retail investor is at his or her wits end today. Most people sold out their equity positions and stopped their SIPs at the time of the financial crisis thinking that there was further downside risk. The pace of the subsequent rise was too fast for investors to re enter the markets.

Interest rates in India are firmly in the negative territory in a real sense as the returns do not match the inflation rate. Purchasing real estate is beyond the means of most people and the prices are not attractive for investment. Gold prices are at stratospheric levels and gold does not give any cash flow. This is unlike equities,debt and real estate which give dividends,interest and rental income respectively.

However,if one is a bit enterprising and is willing to think out of the box,there are some extremely attractive investment opportunities out there.

Here is what these opportunities can provide:

1. A recurring annual income of more than 8 PLUS

2. An opportunity to get capital gains by participating in top notch blue chip equities at share price levels which prevailed 10 years back.

This sounds too fantastic to be true but these opportunities do exist today. Here is how it would work.

Indians citizens are now allowed by RBI to invest up to US 200,000 per financial year per person in international investments.

Since interest rates in India at higher than in the developed countries say the US,Indian Rupee trades at a discount in the forward and futures market. This gives an additional currency yield of around 5.25 to investors in foreign assets. This when added to the dividend yield gives more than 8 per annum in Indian Rupees on a recurring basis.

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Today most large corporations are global regardless of the country of listing

Tata Global beverages Tata Tea gets most of its sales from foreign countries and sales from Indian tea brands is just 29.

A company like Unilever gets 49 of its turnover from developing and growing countries.

There is a big disparity in valuations of Indian arms and the parent companies. For example while Nestle India trades at 45 PE. The parent trades at 15 PE. If one were to assign a 45 PE just to the emerging markets earnings of the parent Nestle 34 of total business,the remaining 66 of the business comes free to the shareholders of the parent Nestle.

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The markets in US and UK at below the levels seen 10 years back and the last decade is being called the lost decade.

These global MNCs have a significant global and emerging markets exposure and are thus not vulnerable to the economy of one country. The pessimism on these companies is over done.

The shares of these global blue chips like Pepsico,Procter amp; Gamble,Nestle,Unilever,IBM etc are quoting at very attractive levels relative to their earnings. There is a strong likelihood of increase in share prices and participating in capital gains on account of re-rating,Mamp;A activity,share buy backs fuelled by record low interest rates prevailing internationally.

An illustrative trade would look like this

Buy 100 shares of Pepsico at 65 per share Price Earning ratio of around 16. Total cost 6,500. Total cost is Rs 295,750 if 1 is Rs 45.5

Total Dividend to be received in 1 year 192

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Sell 6,692 principal dividend one year forward / future at Rs 47.90 giving a total realisation of Rs 320,547 or a yield of 8.38 per annum.

Caution:

These investments carry the normal equity risk. There will be taxation and foreign currency matters on which professional advice should be sought.

The writer is CEO,PPFAS