Which companies will emerge stronger in 2010?

Jan 5, 2010

In this issue:
» India has poor fiscal balances as compared to BRIC peers
» US Fed seeks to wash its hands off the crisis
» Foreign inflows not a problem, says RBI
» Goldman is bullish on Russia
» ...and more!!

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Nobody is likely to forget the global financial crisis of 2008-09 anytime soon. After all it is not just the intensity and scale of the crisis but the timing of it as well. Readers would do well to recall that there was considerable exuberance between 2003 and 2007. This was the time when interest rates were low. Credit was available and that too cheaply. Not just that, corporate profits were growing at a healthy rate. Stockmarkets were notching strong gains.

Not surprisingly, corporates wanted to cash in on this abundant liquidity. So they went on a capacity expansion and acquisition spree. For this, they loaded their balance sheets with considerable debt. Companies were confident that these 'exuberant times' would continue and they will be able to repay the debt without a hitch. But the global credit crisis changed all that. The abundant liquidity, not surprisingly, led to asset bubbles that finally burst. This adversely impacted nations, companies, investors and people alike.

That for companies, a strong balance sheet is a must is not some hidden secret but a well established fact. The problem is that this was easily forgotten in the heydays before the crisis. Its importance was sadly brought to the fore only when the crisis erupted and companies struggled to keep their heads above water. Therefore, it can be said with certainty that those companies with a strong balance sheet will be the ones to watch out for in 2010. These would be companies with less debt, enough cash and strong return ratios. These are the ones who will be able to tide over the crisis and generate strong returns to shareholders in the long term.

 Chart of the day
Fiscal balances are one of the most important indicators of the health of an economy. These highlight the state of the government finances. If government expenditure exceeds revenues then it is coined as a fiscal deficit. A bigger fiscal deficit is detrimental to any country's development in the long term as it restricts the government's ability to spend on much needed reforms and social sectors. Today's chart of the day shows that India's fiscal balances are the poorest as compared to its BRIC peers. Having said that, since 2001, while the fiscal deficit did manage to reduce, things took a turn for the worse in 2008 when the financial crisis was at its peak.

Data Source: World Economic Outlook 2009

There's a very old but a very relevant saying. 'Success has many friends but failure has none'. Clearly, there cannot be a bigger failure in recent times in the field of global finance than the subprime crisis. Thus, it came as no surprise when one of the biggest perpetrators of the crisis, the US Fed, sought to wash its hands off the crisis. Ben Bernanke, the current US Fed Chairman told a gathering recently that the widespread disbursal of exotic loans to people who could not afford them in the first place, was the main reason that the crisis took place. While we agree that corporate greed played a major role in laying the seeds for the crisis, it was the US Fed's decision to keep interest rates at near zero levels for an extended period of time that is also equally if not more responsible for the crisis. And the US Fed's non-acknowledgement of the same is a dangerous sign indeed. This, in effect means that the US Central Bank is non-remorseful of what happened and is willing to tolerate low interest rates for a long period of time even now. To sum up, be prepared for few more asset bubbles down the line as the Fed Chairman continues to live in a fantasy world where artificially low interest rates do more good than harm.

Who would not prefer parking money where it will fetch higher returns? Especially, if the other option is as good as tucking money under your pillow. Investors in the developed economies have been facing exactly this challenge. They could either park money at near zero interest rates or even earn negative returns (in case of stocks). Else they could seek better options. That got them interested in emerging markets which ensured sufficiently higher returns. However, this does pose a risk to the latter. A relatively strong revival of the Indian economy has led to large capital inflows into the country. Unfortunately it is at a time when inflation is threatening to pose a major problem. Foreign fund inflows stood at over US$ 17 bn in 2009. As against this, foreign direct investment stood at US$ 24 bn in the first nine months of the calendar year.

However, RBI's deputy governor Ms Shyamala Gopinath is positive about it. Ms Gopinath believes that the 4.7% appreciation in the rupee-dollar exchanged rate in 2009 is not a concern. Having said that, rapid and volatile capital flows can present policy challenges. It could mean extreme volatility in asset prices. It could also pose financial instability for emerging economies, including India. We believe that the RBI has done a good job of sustaining financial stability in the economy so far. Nonetheless, it needs to walk on a tight-rope to skirt inflation going ahead.

Like most emerging markets, Russian markets had a strong 2009. Its benchmark stock index more than doubled during the year. Now into 2010, the BRIC nation continues to be amongst the favorites for higher foreign investment. If one were to believe Goldman Sachs' Chief Economist Jim O'Neill (who coined the term 'BRIC' way back in 2001), Russia can outperform other BRIC markets during the current year. As for his rationale, he puts it as - low interest rates and higher oil prices.

While the first factor also looks positive for India, higher oil prices will be a negative for the country. This is given that we import around 70% of our annual oil requirements. This is unlike Russia, which is one of the biggest exporters of the commodity outside the OPEC.

China's GDP growth may seem too far ahead for India to catch up with. But it might just do so, and infact India could exceed the dragon nation's scorching pace of growth in the next 4 to 5 years. Or so believes Kaushik Basu, India's chief economic advisor. According to him, India's relatively large young population will help increase its savings rate from its current 38% to more than 40% of GDP. This he expects will spur economic expansion at the fast pace needed to overtake China.

However, all else equal, we believe that there is one defining factor that differentiates China from India. This is one thing that can put the proverbial spanner in the wheel for India. And that factor is 'Infrastructure'. Wherever one looks, be it roads, power, land acquisition, transmission and distribution, ports etc., all arterial for the unbridled growth India seeks, there are delays and bottlenecks in capacity expansion. These delays span years sometimes, and growth continues to get hampered. In contrast, China seems to have almost completely mastered its infrastructure needs. Thus, if such myriad issues continuing to stifle infrastructure expansion in India, we don't think it will be realistic to expect that India will overtake China on the GDP growth front even in the next 5 years.

Indian IT majors have another set of rivals to contest with now. This time it's the near-shore vendors in geographies like Israel, Brazil and Mexico. Niche IT vendors in these locations close to the big customers in the West are eyeing the Indian IT industry's pie of outsourcing. Big ticket customers are happy to work with relatively nearer specialized vendors rather than outsourcing all the way to India. After all, they also want to diversify their IT supply chain. This new crop of IT vendors tends to outdo the offshore IT firms while bidding for 'first-time-outsourcers'. We believe these near-shore vendors are surely a cause of concern for our IT mega-vendors. However, the silver lining in the cloud is that they can also be considered as adequate acquisition targets for big Indian IT companies. Thus, IT majors scouting for sizable opportunities in the emerging markets need to notice this.

Meanwhile, led by buying across index heavyweights, the BSE-Sensex was trading higher by 111 points (0.6%) at the time of writing. Metals and banking stocks led the pack of gainers. While most Asian markets were trading in the green at the time of writing, European markets are trading mixed.

 Today's investing mantra
"Based on my own personal experience, both as an investor in recent years and an expert witness in years past, rarely do more than three or four variables really count. Everything else is noise." - Marty Whitman

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15 Responses to "Which companies will emerge stronger in 2010?"


Jan 14, 2010

Not the first time that the title of the piece is irrelevant to the content



Jan 6, 2010

Please send Which companies will emerge stronger in 2010



Jan 6, 2010

I am a financial adviser from London living presently in India in semi-retirement.
I have been impressed with your unrelenting ability to provide wide-ranging information in a succinct and digestible form.


Balakrishna Panicker,former, Exe Director, COSE LTD

Jan 5, 2010

Very thought provoking remarks.I think in addition to what is said,we need to add few lines to 'strong balance sheet' concept.These may be the 'SINCERE' CORPORATE GOVERNANCE HISTORY of the company, promoters holding pattern,their selling-buying habit of the company shares(may be for value creation),the pivotal roles of PI Directors(not for stamp sake/ to satisfy SEBI)etc.But the real problem for small investors is that they have no or very little source to get these cats out of the cage ,while taking an investment decision in capital market.



Jan 5, 2010

information and views on 5 minutes wrap up are normally are not easy to comprehend or act. Try to make it simple to understand


O P Narayan

Jan 5, 2010

M&M, RIL, Hindalco, L$T, Aurovindo Pharma



Jan 5, 2010

Indian market is definitely heading for a correction in 2010 because of a inflation correction and end of party because of a hike in interest rates and removal of fiscal stimulus.



Jan 5, 2010

i completelt agree with VS Gurumani, we should put our house in order and do some basic thing corretly then only think about being global leader.



Jan 5, 2010

I think investor are aware what u hav said.

one is more intrested in knowing the names in YOUR OPINION . This is missing, after the research work is at your end

I some time feel , sometime I am wasting my time


Wg Cdr R KI shukla



Jan 5, 2010

Dear Gurumaniji--I fully agree with you. In addtion to that the 'netas' who sit in positions of power should be eligible only Two term like in USA. and also all rivers should be connected then only India can see agriculture Green revolution. Not till then.

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