We won't see Sensex at 8,000 again if...

Jan 19, 2010

In this issue:
» Performance appraisal for Ministries
» China's credit bubble to implode
» The crisis that will sweep the globe
» Outlook for gold prices in 2010
» ...and more!!

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US$176 bn California Public Employees' Retirement System, popularly known as CALPERS is one of the largest pension funds in the world. When the global equity markets cracked in 2008, the fund lost 27% of its value. However, with the long term outlook that it has, CALPERS continued to focus on long term returns in the US and emerging markets. It is this kind of long term money -save some innovative streaks - that has differentiated developed financial markets from the emerging ones.

Investors like Mark Mobius believe that emerging markets is the place to be in the next decade. And India needs to lure long term funds. With one of the highest domestic savings and investment rate, the country places itself very comfortably in terms of economic resilience. However, data from the RBI show that most investments had been going to short term instruments like FDs in the past decade. Mutual funds have only recently found favour. FIIs have been the fair-weather friends and have been quite caustic at times.

It is thus imperative for Indian government to realise that conducive investment policies are key to drawing such funds. More importantly, good disclosures and corporate governance will set the stage for Indian stocks to find an allocation in pension funds. Given their nature and volume, a successful entry of pension funds into India markets may ensure that the Sensex never touches 8,000 levels again.

Data source: RBI

 Chart of the day
At a time when stimulus packages and bailout funds have been enjoying most of the federal fund allocations, spending on public healthcare has been on the back burner. Meanwhile drug makers in economies like the US and Europe have been cashing in on their patents. Data from Economist shows that patients in US and Europe pay the highest differential rate between branded and generic drugs. Infact even in South Africa which has low per capita income, the differential is as much as US$ 24. However, generic pharma companies in India competing for the poor man's wallet charge just US$ 2.5 more for a branded drug.

Data source: Economist
*Difference in price of branded and generic Ciprofloxacin

There are still a good two years to go before the 11th 5-year plan ends in India. But some ministries have been in real hurry. In real hurry of spending the total money allocated to them for the plan. Take the case of railways and urban development. As per a business daily, these two ministries have virtually exhausted their expenditure for the 11th plan. The agriculture ministry is not far behind, having already spent 70% of the 11th plan allocation already. The reason for highlighting all this is that these are important ministries and hence, could be made additional allocation in the forthcoming budget. However, not this time. The Planning Commission intends to rate the ministries based on the utilization of funds. Thereafter additional fund allocation will depend on their ratings. The ministries, which have already exhausted their 11th Plan allocation, may infact be barred from an increase in the budgetary allocation.

For the Finance Minister, who is already grappling with record high deficits and a potentially inflationary environment, higher budgetary allocation would mean additional items to take care of. More so at a time when the country's finances are not in the best of health. Just another indication that the forthcoming budget may be one of the most difficult for the Finance Minister in recent times.

In a recent issue of the 5 Min., we had quoted Jim Chanos, a short selling guru, being bearish on China. He in fact calls China as 'Dubai times 1,000 or worse' for the credit bubble that he sees as building up in that country. We now have none other than Dr. Doom Marc Faber voicing a similar concern.

Faber believes that China could see an end to its credit bubble, though he has not put a timeline to this prediction. "It is very difficult to pinpoint a day when China will implode, I don't think it will happen right way," he told an international publication. Faber remains positive on India, Japan, and gold.

In a recent interview, the senior management of the World Gold Council (WGC) gave its views on the yellow metal. Investors have been keenly watching gold prices in recent times. In what could come as a note of assurance to many, the WGC does not see a drop in gold prices anytime soon. At least not in 2010. However, in 2011 that may be a possibility. Further, the Council's managing director Ajay Mitra opined that since most countries have given stimulus packages which is nothing more than printing more money, leading to inflation as it happened in the past, consumers will happily cling to gold as a hedge. That's the primary reason why he sees no reason for gold's prices coming down.

The man who famously foresaw the global financial meltdown has sounded another warning bell. Nouriel Roubini feels that a sovereign debt crisis will sweep the globe. In fact, in an article in Forbes, he says, "If countries remain biased toward continuing with loose fiscal and monetary policies to support growth, rather than focusing on fiscal consolidation, investors will become increasingly concerned about fiscal sustainability and gradually move out of debt markets they have long considered safe havens". We agree with his basic point that countries must consider withdrawing their stimulus packages sooner rather than later. They were meant to be medicines which would revive ailing economies. Now it is time to pay attention to the side effects of the medicines.

The term BRIC coined by Goldman Sachs has now become a phenomenon. Especially when the crux of the report was that the Brazil, Russia, India and China will overtake the developed economies of the US and Europe by 2050. However, interestingly, the four countries have next to nothing in common. Apart from the fact that none is a high-income country. Take the case of population. China and India are the most populated countries in the world with more than 1 bn inhabitants. But Brazil and Russia fall far behind. China has the competitive edge in manufacturing. In contrast, India's strength lies in its skill intensive services. Brazil and Russia in comparison are far more closed economies.

There is a stark contrast in share of the world output as well. For instance, as reported in FT, China's share in world output at purchasing power parity rose from 8% in 1980 to 17% in 2006. During that time, India's share increased from 4% to a mere 6%. Brazil and Russia did not achieve any significant rise. Even during the financial crisis, while both China and India's GDP grew, albeit at a lower rate, Brazil's growth was stagnant, while Russia's shrank. Therefore, what really binds these four economies together is that they have the potential to grow at a much faster pace and consequently, shift the focus from the developed world to the emerging economies. And therefore, these economies will be expected to play a more proactive role in generating a more balanced growth in demand across the global economy.

Meanwhile, Indian markets witnessed a volatile trading day and the indices languished in the red for most of the session. The BSE-Sensex was down nearly 73 points at the time of writing. Weakness in stocks from the cement and software sectors dragged the benchmark indices lower. Amongst global indices, while the Japanese and Australian markets were the biggest losers in Asia, Europe has also opened on a negative note.

 Today's investing mantra
"It is absurd to think that the general public can ever make money out of market forecasts." - Benjamin Graham

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9 Responses to "We won't see Sensex at 8,000 again if..."


Jan 23, 2010

Sensex may not come to 8000 levels again if....
Sensex may, yes may come to 8000 levels again if....

Entry of CALPERS... OR other pension funds into India alone'll NOT ensure that sensex never touches 8000 levels again....

Lot other if's are there.


Jitendra Naik

Jan 20, 2010

Weekly wrap provides useful information briefly. Thanks


N.M.R Shreedhar

Jan 19, 2010

Hi, reg: Price differential bet Generic and Branded drugs.
can we generalise across the pharma industry based on data of only 1 drug ? would,ve been more representative if few common drugs had been considered. Anyway,at least it is an indicator--. Hospitals and healthcare seems to be the next sunrise industry in India, I think. Perhaps u can enlighten us on this.



Jan 19, 2010

As per my opinion before 11300 to 13300 point will come It must be crossed at least 1 (One) point plus last year 2008 High point



Jan 19, 2010

Benjamin graham comment on making money from market forecasts is very apt for Chanos forecast on China.



Jan 19, 2010

It is true. We cannot see again sensex at 8000 because, Foreign Investors will again try to get maximum gain after the budget news. I am sure sesex may go upto 21000 as predicted before August 2010.



Jan 19, 2010

sensex at 8,000 again if.....



Jan 19, 2010




Jan 19, 2010

There is nothing that stops foreign pension funds from investing in India, but they don't want to commit long term funds to India because of poor governance of our govt. and abysmal infrastructure. They are fully aware that India practices "vote bank" politics and it is not a truly market economy. So the key to brining in foreign pension funds is not making favourable rules, but good governance and reduced corruption. Otherwise no sane fund manager can ignore an economy that is growing at 6% plus for past several years and which is expected to continue growing at even faster rate in the coming years.
The most potent risk to Indian markets in 2010 remains the flight of foreign short term capital which in turn will depend on US interest rates and economic revival there.

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