The next big danger to global recovery

Jan 12, 2010

In this issue:
» The lurking danger of the Chinese bubble
» Indian exports up for 2nd straight month
» Infosys results beat market expectations
» Talent crunch at public sector banks
» ...and more!!

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There has been a slow shift of economic might from the developed nations to the emerging ones. The global financial meltdown seems to have only quickened the process. Among the emerging ones, arguably it is China that gets the most attention.

It can't be helped. China just keeps piling up the statistics. The Dragon nation is now the world's largest automobile market by units, ahead of the US. It is now the world's largest exporter of manufactured goods, ahead of Germany. Soon it will be the world's second largest economy, ahead of Japan.

But the question to ask is, "Is this sustainable?" As per the New York Times, the Chinese government has pumped too much cash into the economy. As a result, there are signs of a bubble in Chinese housing and credit markets. The country is now facing pressure to hike interest rates and revalue its currency. Especially from the world community. But it is unlikely to comply anytime soon. A low interest rate helps its massive investment juggernaut. An undervalued currency helps the all important export sector.

The reason we should be concerned is because much of China's economy seems to be on steroids. Sooner or later the effect will wear off. The last revival programme, the US$ 585 bn stimulus package has gone into unviable projects. And an economic crisis in China will have a world wide impact. While China has been able to absorb its own excesses earlier, there is no guarantee it will always be able to do so. As of now, the Indian stock markets seem to have completely brushed aside economic worries. It is precisely at such a juncture that, in our view, long term investors in India must keep an eye on the lurking dangers.

 Chart of the day

Source: Businessworld

The global economic crisis took a heavy toll on Indian exports. However, the situation has improved of late. Some of that can be attributed to the stimulus package. Today's chart of the day shows how India's exports have turned around. In fact, they rose for the second straight month with exports worth US$ 15 bn in December, 2009. That's a 9.4% growth over November, 2009. Interestingly, that's not sufficient to wipe up the losses stacked up during the previous 13 months. Little wonder then, the government plans to unveil a package of incentives for exporters in sectors that continue to face pressure. It is also unlikely to withdraw the stimulus package.

Speaking of stimulus packages, Martin Wolf, the Chief economics commentator at Financial Times, one of the most celebrated business dailies in the world, spoke to DNA recently. And he seemed to belong to the Keynesian school of thought. He felt that it was perfectly reasonable to continue with the fiscal policies that most governments have undertaken as long as the government borrowings do not come in the way of private sector borrowings. However, he also cautioned that the deficits cannot be sustained at this level for the indefinite future.

Wolf has also been pretty vocal in recent times about the need for China to rebalance its economy. He told DNA that China should make all possible efforts to increase its consumption as currently it is a very small share of the country's GDP. Another important insight that came out of the discussion was the possibility of enormous losses that the dragon nation could face on its dollar reserves as and when it starts appreciating its currency. Wolf argued that the longer China takes to appreciate its currency, the more the losses will grow.

While we agree with Wolf on his China related musings, we don't believe fiscal deficits should be encouraged as it deteriorates a country's balance sheet and leads to long periods of subpar growth.

The anchor on a leading business new channel couldn't control his happiness as he announced the 'market-beating' numbers from Infosys this morning. After all, the company had outperformed the quarterly estimates of so many brokerages that had filled the channel's talk time during the past few days. Today's happiness thus seemed from the fact that the channel has got its content for the next few days - on how much the analysts will now increase the target price for the Infosys stock for the next week and the next quarter.

But does that make any difference to you, the long term investor who has Infosys as part of your portfolio? A quarter of outperformance or one of underperformance is not something that keeps even Infosys' management worried. What they are instead looking at is building a world-class business model in providing low-cost and high-quality IT services to clients.

Anyway, just a a brief on Infosys' 3QFY10 numbers - the company has performed extremely well during the quarter on both the revenue and profit fronts. Most importantly, it has managed to improve its operating margins despite the impact of an appreciating rupee. The management believes that even though the IT budgets are expected to be flat in 2010, offshore outsourcing is likely to benefit from the ongoing economic recovery. A view not far from what we have!

Nearly two thirds of the top management moving out is not an easy situation to handle in any corporate. It means a lot of things. A wide gap in experience levels for the next tier of management. Hiring from outside the organisation. Higher cost for the new recruits. Major changes in the companies' policies and long term outlook. Each of these has the potential to change the direction of a company's growth. And Indian public sector banks have only a couple of months to reckon these. In a recent banking conference, the CMD of a leading PSU bank announced that around 58% of the top management in Indian PSU banks is set to retire by 2012. While paucity of trained human capital is itself a challenge, high attrition makes it worse. Further, as per Mc Kinsey, nearly 0.4 m people in the banking industry need to be re-skilled and up-skilled. Thus the sector that was known for over staffing is soon set to face severe human resource crunch, unless it taps resources on time. The accompanying higher cost is only an added discomfort.

All those Wall Street banks and investment banks which were hit hard by the subprime crisis had to go with a begging bowl to the US government to bail them out. Despite that many of them chose to dole out big bonuses to their employees sparking considerable outrage. After all, the US economy is struggling to grow and unemployment has surged to 10%. And so, with an aim to tap this public anger, the US President Barack Obama is planning to come up with a plan to slap a fee on banks to ensure they shoulder the full cost of the massive financial bailouts and help tackle record US deficits. This fee is expected to be included in Obama's budget plan due to be sent to Congress next month. And who knows? Obama's plan might end up getting brownie points. Especially since the banking and financial industry is not garnering the same kind of respect that it once did before the crisis erupted.

Meanwhile, the Indian markets made a strong comeback after early morning jitters due to buying interest in the software heavyweights. However, they soon relinquished their gains. At the time of writing, India's benchmark index, BSE-Sensex was trading lower by about 86 points. As for global markets, Asia was trading a mixed bag, while Europe began the day on a weak note.

 Today's investing mantra
"Easy does it. I have not learned how to solve difficult business problems. What we have learned is to avoid them." - Warren Buffett

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13 Responses to "The next big danger to global recovery"

sanjay k singh

Jan 15, 2010

shortage in top management of psu banks is due to the HR policy of the Finance Ministry. while they dont have eligible officers as GMs/EDs for promotion and they have to relax the eligibility criteria, there are officers in SBI Group but they are not considered.though both report to the govt the rules are different, why? can anyone respond.


sanjay k singh

Jan 15, 2010

it seems that when we talk about shortage of top management in psu banks we dont take sbi and its associates into consideration.while there is shortage of eligible gms/eds for promotion in psu banks and eligibility is being reduced there are officers in sbi group who have the necessary expertise but are not considered for promotion.because of some hr policy that the finance mnistry has.will someone give rationale for this.



Jan 14, 2010

Wrapup mails are educating the people on economic scenario of the Nation at large. I would like to renovate my dwelling house and to construct further floor. Whether steel and cement rates still escalate or any chance of getting at lower in near future or still go up.


sanjay kumar

Jan 13, 2010

thanks for information



Jan 13, 2010

I enjoy reading your 5mte wrap up. you are giving valuable info on economics and finance. please keep up the good work. My sincere appreciation and thanks to the team that is collating the info.



Jan 13, 2010

I request to through some light on
volatile commodity markets that we saw on 11/1,12/1, and 13/1
especially on gold/silver
will it be a bubble in the making for 2010 in commodiites?


Prem Singh Dhankar

Jan 12, 2010

The right kind of dangers/ reality of the near future/ something not to forget - keep it up.



Jan 12, 2010

as india is part of world economy,it is worrysome due to oil price and chinese co;mpetetion to India. sustainability of Indian economy in lesser pace. the good option is agricultural bumber productivity. will the govt take inetiative to sur pass agri growth of 3to 4 percent. thank you.



Jan 12, 2010

It is very Useful Article to all of Us to know the stock market analysis



Jan 12, 2010

I would like to give my opinion on your daily article that it puts more emphasis on indo-china and rarely on other emerging countries`s economy and opportunity of investment at these market`s bottom of pyramid.

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