Will US stocks give better returns than those in India?

Jan 20, 2011

In this issue:
» What if China dumps US bonds?
» FM banking on long-term infra debt funds
» Will Indian stocks outperform Chinese stocks?
» Global real estate investments to rise in 2011
» ...and more!!

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In the last couple of years, the writing on the wall was very clear - invest in stocks from the emerging markets and stay away from those from the developed markets. This was not without reason. Although the global financial crisis impacted both developed and emerging economies alike, the latter showed far better resilience. Growth quickly rebounded in those economies and investors rushed to emerging market shores to take advantage of low stock prices and the prospect of stronger returns.

Has this scenario changed now? Noted investor Marc Faber seems to think so. He opines that the US and Europe present better investment opportunities in 2011 than in India and China. Especially since inflation is raging in both India and China and tightening of interest rates could stifle growth a tad bit. Moreover, stock valuations especially in India have run ahead of fundamentals.

We agree that India and China have many near term concerns to deal with, inflation being on the top of the pile. But from a long term perspective, the growth that these economies are likely to display will be hard to beat by the developed world. Moreover, the problems of the developed world notably excess debt, bloated deficits and high unemployment are not likely to go anytime soon. Further, the ineffective policy of the governments in the West of only throwing more and money at their problems is only expected to worsen the situation further. Which means that even if stock valuations in the US and Europe are cheap, they are not likely to move up much unless the scenario there considerably improves. That leaves us with emerging economies. But only after stock valuations once again retreat to reasonable levels.

Do you think US and Europe will provide better investment opportunities than India? Let us know or post comments on our Facebook page.

 Chart of the day
Today's chart of the day shows that the world's top 5 fastest growing economies will be the emerging countries. Not surprisingly, the top two slots have been bagged by China and India respectively. Interestingly, the African continent, which is otherwise very poor, is set to show a marked improvement going forward as many countries from this region report stellar GDP growth.

Data Source: The Economist

What is your biggest fear when you borrow a lot of money from someone? Repaying that money, right? And what is the first question when you fear this? "What happens if my lender sells off the asset that I have mortgaged to him in lieu of the loan taken?"

A similar fear seems to have struck the US government that has borrowed a trillion dollars from its biggest lender - China. China (including Hong Kong) holds around US$ 1 trillion in US government bonds. And the US government now fears what if China dumps these bonds in the open market. Well, if that really happens, it would cause a plunge in the value of the already feeble dollar.

So the course of action for the US is to work on a Plan-B if this eventuality arrives. One way that economists are suggesting is that US would persuade its citizens to buy those bonds. This is what they did to fund the expenses of World War-II. But now, when the US government has run up such huge debts and there are voices to junk its creditworthiness, we are not sure whether there will be many takers for such bonds.

The core question again is - can China really do this dumping stuff? Despite the fears, it looks less likely. This is because a depreciating dollar will hurt China's own cause. One, it will lead to a huge rally in commodity prices. And two, China's own holdings of US dollar debt will face depreciation. Seems like a catch-22 situation for both the countries!

The world thinks that India will outshine China in terms of GDP growth in 2012. Maybe they are right, maybe they are wrong. But would this mean that Indian stock markets would also outperform the Chinese markets? Probably not! With huge FII inflows being pumped into the Indian markets, prices have already run up quite a bit. Moreover, the domestic issues of infrastructure, logistics, inflation, interest rates, corruption, are just some of the concerns that investors have with respect to Indian equities. On the other hand, Chinese stocks appear quite attractive in terms of valuation. Though China's exports as well as its manufacturing have shown signs of a slowdown, experts believe this is largely due to a base effect. With huge growth in earnings expected from the Chinese companies, the China stock markets would most likely outperform the Indian stocks.

Poor infrastructure development has been the Achilles' heel of our economic growth. It is also partly responsible for the high food inflation. To revamp the country's infrastructure problems, the government plans to spend US $1.5 trillion by 2017. Towards this end, several funding sources are being considered to create a long-term infrastructure debt fund. In June, the Planning Commission had proposed to set up a US $11 bn infrastructure debt fund that could tap sovereign and insurance funds to finance building roads and utilities.

A major source could be overseas funds. The finance minister has opened the gates for overseas funds raised by NBFCs. Of course, they would be subject to full hedging of currency risk and other prescribed norms. Given the paltry interest rate levels in developed economies, investing in India would be a luring prospect for them as well. It could well turn out to be a marriage of needs and a win-win situation for both.

Rising inflation continues to make our lives miserable. The RBI is at its wits end in trying to control her evil ways. Especially since the Government is not being of much help. The central bank can do little to increase food supply or address the shortfalls. So it has to do what it knows best. Increase key interest rates in response to higher inflation. It is expected to hike rates for the 7th time next week after headline inflation increased to 8.4% in December 2010 (7.5% in November).

Food prices have been spiraling upwards everyday on climate concerns and poor yields. But, India's poor transportation system and long chain of commission grabbing middlemen are also at fault. Around 30% of farm produce is spoilt before it reaches the ultimate consumer. Increased demand is another factor. Demand for all raw materials has been rising massively in a country growing at 9% per year. Rising rural disposable income on account of the National Rural Employment Guarantee Scheme (NREGS) is also contributing to boost consumption. With low supply and high demand, prices only have one direction to go. And that is up, up, and away. And the rest of us, including the RBI can just watch the show, in tears.

The dust raised by property bubble bust finally seems to be settling down. Jones Lang Lasalle, the renowned property consultancy, estimates global real estate investments to rise by 20% to 25% in 2011. It expects the strong growth on the back of sharp rebound in the US. However, there is a caveat of no further debt crisis or shocks which we believe is something no one wants to bet on. It expects US to witness 40% growth. The same for the EMEA and Asia Pacific is estimated to be 10% and 15% respectively.

The estimate is still about half way to the market peak in 2007. However, the 50% jump in commercial real estate investments in 2010 from an eight year low in 2009 does not make the record look daunting in the short term. While we may reach there soon, the question is, will it stay there for long? Because if it crumbles down the way it did in the past, we may have the makings of another global crisis.

After languishing in the red throughput the morning session, strong buying activity pushed the indices into the positive. At the time of writing, India's benchmark index, the BSE-Sensex was trading higher by about 45 points. Leading the pack of gainers were stocks from the IT and banking spaces. Other Asian markets today were trading in the red with China and Japan trading lower by 3% and 1% respectively.

 Todays' investing mantra
"The investor of today does not profit from yesterday's growth." - Warren Buffett

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5 Responses to "Will US stocks give better returns than those in India?"

V. D . Prasad

Feb 12, 2011

US Economy is improving but slowly. But it is surely a win situation. In India,,Inflation,higher interest charges,Scams and corruption,bad food distribution policy,lack of interst,delayed decision,lethagic infra growth are all negative factors which may impede growth.


Krishan chander Anand

Jan 21, 2011

It is high time to create storage facilities for the perishable goods close to the local markets rather than the centralised APMC markets. There is a need for the decentralised distribution markets of perishable goods which can cut down on transportation of the perishable goods with little transportation from one market to other market.


John Martis

Jan 20, 2011

As long as US salaries for employees there remain more than 10 times the salaries prevailing in emerging countries, US economy will lag behind and totter. This is because the whole world has become a global village and water would take its own level.


Vivek Mahajan

Jan 20, 2011

Financial markets are infamous for disregarding consensus amongst the market players. As the voices about the potential for appreciation of US & European stocks grow louder and louder, more and more analysts seem to be joining the chorus. Unfortunately, some of these well-known analysts who till September/October 2010 were persistently talking of a "double dip" have suddenly taken a U-turn towards the "recovery" theory. In my humble view investors should remain cautious for three reasons:
1)US has hardly taken any steps in the direction of structural changes needed in that econmy. Except for infusing huge doses of liquidity in the world economic system nothing else has been done. The core fundamentals of US & European economies remain bad and the continued "gush" of cheap money will ultimately result into a much bigger disaster not only for US & Europe but the whole world.
2)The connivance of some Politicians, the Fed and big market players (some of them are known financial criminals)in trying to build a false sense of euphoria about the markets and economy cannot be ruled out.
3)As a part of their "Grand Plan" it is quite possible that in the next couple of quarters these criminals after having pumped up the stocks, would be waiting to dump them on euphoric "suckers" (buyers).
As far as the Grand ole man Marc Faber is concerned, I have always revered him as a shrewd economist. But the gentleman of-late seems to be going berserk. After having remained doomy and gloomy about the US econmy since 2008, he too has taken a U-turn...and at a time when the US stocks have already had a big run. Perhaps he is finding it too painful to have been on the wrong side for too long and having missed the early action or ......perhaps he is getting ready for "suckers play".....or may be he has started running a hedge fund. Anyway, I pray he proves right this time. His comments on the China & India are quite approriate and well taken.


Vinod Furtado

Jan 20, 2011

obviously you are missing a very important point. US companies are global companies and hence it makes sense to invest in US companies that earn majority of their income outside the US. Take for example Apple which reported excellent results for the previous quarter. Only 38% of the income was from the US, the remaining nearly 60% came outside. It will be more profitable to invest in such companies than in India.

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