Why India is the best bet among BRIC nations...

Jan 6, 2015

In this issue:
» Greek crisis back to haunt Eurozone
» Has disinvestment helped the government?
» Will equity markets be stable in 2015?
» ...and more!

It is well known that the BRIC countries - Brazil, Russia, India, and China - were brought into the limelight in 2001 by Goldman Sachs which had predicted that the economies of these four countries would surpass those of the West by 2025. But, in the context of the current state of things, is there any merit to this prediction or is it all hype?

In an article in Moneynews, David Stockman, who was the former White House budget chief under President Reagan does not appear to attach too much merit to the BRICS story. According to him, the emergence of BRIC nations in the limelight has been more a product of the reckless money printing policies of central bankers. The spirit of capitalism and growth has hardly played a role.

Mincing no words, Mr Stockman is of the view that China's booming export growth has been fuelled by loose policies of the Chinese central bank. What more, Russia, whose economy is largely driven by commodities, saw its economy prosper on the back of a commodity bubble that was fed by the US Fed. He spared neither Brazil nor India.

Given that BRIC countries in recent times have considerably slowed down, Mr Stockman's arguments are quite compelling. But let us go back a bit. The years before the 2008 global crisis saw China and India especially grow at scorching rates. China's GDP growth was bolstered by rising exports and investments in infrastructure. The domestic consumption story contributed to India's GDP growth. This did not immediately impact both these countries when the global crisis unraveled in 2008. That is why, when the Western central banks turned on their printing presses full time, excess liquidity began to find its way into India and China as investors looked for better yields. It was presumed that strong growth in India and China will continue and they will be instrumental in balancing global growth.

Six years since the crisis, that has hardly happened. China and India have considerably slowed down. Weakened exports and formation of asset bubbles have hampered China. India has slowed down because of lack of reforms especially during the reign of the erstwhile UPA government. What more, Russia currently is floundering because of the plunge in oil prices led by a glut of crude in the global market.

Mr Stockman is right in pointing out that US and Europe central bank policies have pretty much distorted global markets. And that the BRIC countries have so far not lived upto expectations. However, it is too early to take a call whether the term BRIC is more of a fad. The way things stand right now, we believe that India has the best chance to come out on top in the coming years provided the Modi government gets things right.

As economic sanctions and falling oil prices weigh heavy on Russia, and China struggles to shake of the excesses in its economy, India still stands to benefit immensely if reforms are effectively implemented and infrastructure growth is given a massive push. This will reflect positively on corporate earnings, fuel domestic demand and set the stage for the next decade of growth in the Indian economy.

Do you think that the BRICS story should be entirely written off? Let us know your comments or share your views in the Equitymaster Club.

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As we write about how India has a better edge over its BRIC peers when it comes to future growth, the Indian stock markets seem to be looking at things differently. Indeed, the Sensex was down by more than 700 points at the time of writing. This is keeping in mind that it had gained around 30% in 2014. And this time, weak global cues are spoiling the party.

Not surprisingly, the continuous slide in oil prices is one major reason for this. But the other is possibility of the crisis deepening in the Eurozone. Indeed, there are concerns that the Greek crisis could be back to haunt the Euro region. This hardly spells good news for a region that is already reeling under the impact of bloated debt, rising unemployment and weak growth.

So will resurgence of a crisis in Greece pose fresh problems for the Eurozone? Two arguments have been presented. The first is that the impact may not be that grave since the European bloc now has safeguards.

The other camp, and this is the camp we are siding with, believe that it is not prudent to be complacent and the issues could be serious than originally envisaged. It goes without saying that the threat of Greece exiting the Euro will weaken the single currency and send shock waves through the global markets.

Interestingly, those who believe that the Eurozone now has safeguards built are essentially relying on the European Central Bank to bail the region out of the crisis should it escalate. Like it did the first time around. We have never believed that easy money policies have ever solved the economic problems of the West and we do not think that this time it will be any different.

Whatever be the scenario abroad, investors in India should not be alarmed at today's fall in Indian indices. Given the pace of surge last year, a correction was always due. After all, a falling market always throws up the best opportunities to pick up good quality stocks at attractive prices.

  Chart of the day
In yesterday's edition of the 5 Minute WrapUp, we cautioned investors about the upcoming IPO boom. IPOs are always the talk of the town in any bull market. It is no different this time around. Undoubtedly, the government will want to cash in on the party. With the fiscal deficit at record levels, capital receipts from stake sales could be used aggressively by the government. While successful share offers can certainly help to boost the government's coffers, it is by no means the best way to raise funds.

As is evident from today's chart, the government tends to overestimate the disinvestment target and ends up falling short! As per an article in the Business Standard, the government benefits more from the regular dividends paid out by cash rich PSUs. Many of them are sitting on huge cash hoards and are quite profitable. Thus, setting up a clear dividend policy would be in favour of minority shareholders too we believe.

How useful are disinvestments?

While investors are turning cautious about many global markets, Indian corporates are not too concerned. The latest study conducted by trade body ASSOCHAM, says that both debt and equity markets in India will be stable in 2015. As per ASSOCHAM, if global factors remain conducive, markets will provide good opportunities for investors and corporates who want to raise capital this year. The study has also praised market regulator SEBI, for being proactive and for cracking down on instances of fraud.

We do agree with many of the study's findings. However, we do not believe that investors should pay much attention to predictions about markets made by trade bodies. There is an inherent conflict of interest here. Many corporates will be raising funds via IPOs this year as opposed to last year. It is in their interest to say that markets will be stable. Investors would be best served if they make their own independent judgments about individual stocks instead of getting swayed by the views of corporates.

In the meanwhile, Indian stock markets languished deep in the red as weak global cues such as the falling oil prices and worsening Eurozone crisis spooked investors. At the time of writing, the BSE-Sensex was trading lower by about 700 points or 2.7%. Stocks across the board were trading weak with those from the oil & gas, banking and IT spaces leading the losses. Mid and smallcap stocks were under pressure as well with their representative indices trading lower by about 2% each. Asian markets were also down with Japan and Hong Kong leading the pack of losers besides India. European indices have not been spared either and were trading weak at the time of writing.

 Today's investing mantra
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."- Peter Lynch

This edition of The 5 Minute WrapUp is authored by Radhika Pandit.

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