This 'money' historian favors India over China...

Jan 25, 2010

In this issue:
» US economy headed for doom, warns Marc Faber
» See who's increasing allocations to India
» What will help India Inc. sustain a good profit growth
» Large engg companies vindicate our skepticism
» ...and more!!

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Who else can vouch for the fact that 'history repeats itself' than one of its most ardent students? And when it comes to the history of 'money', there is none better than Niall Ferguson, the noted author of 'The Ascent of Money', an international bestseller and one that tells the story of how the money game has evolved over the centuries.

In a recent interview with The Economic Times, Ferguson said why he is more positive on India's future prospects than China's. As he says, "One reason I'm long on India than China is that India has a better institutional basis of development than China does. I think that representative government, rule of law, meaningful private property - these are keys to success. They were keys to western success."

Ferguson also adds that all's that is really needed for an economy's well-being is improving in India - like primary and secondary education for a majority of people and improving infrastructure. He also says, "Indians are very entrepreneurial. Everywhere you go, people are selling stuff, even if it is only a pile of spices. I think unlocking the entrepreneurial energy of India will lift a large number of people out of poverty."

While we agree to most of what Ferguson believes, we see poor governance and corruption as key issues that can delay India's rise as an economic superpower. While we have all that it takes to reach there, the time taken can be longer than what most expect.

Now, while historians are talking positive about India's future, there are others predicting doom for the western world! Though the frequency of such doom-saying has reduced considerably since last year, such predictions still rule newspaper and business media headlines. Amongst the prominent faces associated with such doom and gloom is Marc Faber. The noted author of the 'Gloom, Boom & Doom' report in fact believes that the US (and with that the world) economy is headed for big trouble!

"When you look at the's a total disaster, we're all doomed, we're doomed!" Faber, told CNBC late last week. He added that the worst investment managers worldwide have been the state pension funds in the US. They bought everything right at the peak and got out right at the bottom!

Anyways, Faber is not alone in his dire predictions. Even Stephen Roach, the Chairman of Morgan Stanley Asia and a noted economist, expects things to get worse for the global economy before they get any better. Roach in fact sees a high probability of a double dip recession for the US economy. As he said, "I think global growth is going to be anemic and I'd put a 40 percent chance on a double dip at some point in the next couple of years."

 Chart of the day
Today's chart of the day shows the movement of commodity prices over the past few years. After rising to their all-time highs in 2008, these crashed to their multi-year lows by the start of 2009. As we stand now, while energy prices (led by crude oil) have moved up by 63% of their lows, metal prices are up 37%. These are facts that Indian companies relying on these hard commodities as raw materials might not be happy about!

Source: IMF's World Economic Outlook 2009

Indian stockmarkets may be looking a tad bit overvalued now. But large foreign business families are increasing their allocations to private equity funds focused on India. These families are varied and come from the US, Europe and West Asia. The reason: They want to capitalise on India's growth story. Some of the foreign families that have expressed interest in investing in India are the Oppenheimer's of the US, the Swarovski's of Austria, Germany's Grillo Group and some business families in West Asia.

Traditional investors have been wary in recent times of putting money in private equity. These include pension funds, large institutions and university endowment funds. This is because of the huge plunge that was witnessed in the global stockmarkets once the crisis began. But foreign business families are not to be deterred. They are still keen to invest in Indian companies. The fact that there are limited investment avenues also seems to have prompted this move. After all, despite various hiccups, India will still be one of the fastest growing economies in the world. And these business families do not want to miss the bus.

While the US economy might be heading towards danger, we maintain our long-term view on the strength of the Indian economy and companies. While the profit growth numbers, as we have seen this quarter, are not sustainable in their current form as a large part of this is due to cost cutting by companies, not growing topline sales, we believe the latter (higher sales) driving profits for India Inc. long time into the future.

* Performance of results announced until last week; Source: Equitymaster Research

With the semi-urban and rural markets still untapped for so many fast growing sectors like retail, healthcare, and financial services, we see a tremendous scope for Indian companies to sustain a robust growth in sales over the next 10 to 15 years. This is however notwithstanding the temporary hiccups that will come their way in terms of the usual business cycles.

Anyways, in what might have been one of the best recoveries in a day's trade, Indian markets gained strongly during the latter half of today after opening deep in the red. The BSE-Sensex was trading down by just around 5 points at the time of writing this (from being down by around 150 points earlier in the day). Buying activity in engineering and FMCG stocks saved the day for the markets. Most other key Asian markets, led by China (down 1.1%) and Japan (down 0.7%) closed deeper in the red today.

The 3QFY10 quarterly performance of engineering companies has been a mixed bag so far. The two behemoths of the industry, L&T and BHEL, reflect that trend. While BHEL has turned in a much more stable and solid performance, its private sector peer has found itself at the receiving end of the aftermath of the credit crisis induced slowdown.

It has seen many of its projects face delays from various fronts. This includes all the major hiccups that any engineering company is bound to face from time to time. These include delays in financial closures, execution issues, funding problems from the client's side amidst ongoing execution of a project etc. In effect, it has been a vindication of the skepticism we have shown at the valuations of such frontline engineering stocks off late!

India has long held 'distributive justice' to be important. In simple terms that means how wealth is distributed is as important, if not more, as how much wealth is created. But much of that intent does not get translated. A corrupt distribution chain leaks much of the government subsidy meant for the poor before it reaches them. Given that government subsidy in all amounts to US$ 28 bn, it is a sizeable amount.

But there's hope in sight!

One of the most important benefits of the Unique Identification project that Nandan Nilekani is heading will be transparent distribution of subsidies to the needy. The first 16-digit Unique Identification number will be issued in February 2011 and cover 600 m people in five years. The cost and technology involved is still not clear. However, we fully support the initiative. For two reasons. A unique identity number attacks the root of the problem by acknowledging the existence of a citizen. Secondly, it heralds a welcome trend of the best and the brightest getting into public service.

 Today's investing mantra
"Bull markets go to people's heads. If you're a duck on a pond, and it's rising due to a downpour, you start going up in the world. But you think it's you, not the pond." - Charlie Munger

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10 Responses to "This 'money' historian favors India over China..."


Mar 11, 2010

good friend is the best


Sachin Wagal

Jan 27, 2010

Unique Identification Project:
How many more such projects Indian politician's are going to undertake.
To begin with we have a Birth Certificate, Ration Card (recently again Ration Card was updated), Voter I Card, PAN Card and now one more UIN.
Each and every time the government made huge sums of money while awarding contracts for implementation of such projects without any success criteria.
This time to sound more realistic they have invited Nandan Nilekani, only to make people believe that this time they mean business. Infact before going ahead with this project government should spell out in clear black & white the objective of this project and then the steps that are going to be taken. Post which there should be open public debate on it before going ahead with this one as this project again will involve huge sums of money and again the time of each and every individual.
Imagine the work hours each and every individual will have to put in by doing the intended documentation prescribed by the government and also visiting these camps/booths in order to make this project a success.
PS: I do remember the day when i had to visit the site where photos were being taken for the Voter I Card and the amount time that had to be taken out from regular work by each and everyone. It even meant a half day or holiday at work without pay for most of them.



Jan 25, 2010

Well said Mr Pardhanani. I am much younger to you in experience and age, but I feel pretty much the same. One Dimensional Middle Class (read salaried class including executives) is finding excuses all around except self. Corruption exists more among corporate executives than politicians. One good example where the Board of a US listed IT Company (another one, not Satyam) decided to turn a blind eye to the corruption by executives (not promoters not politicians) in the range of 1000-2000 crores of capital expenses spent during the boom years. The individuals were phased out without any legal action as it was felt the organization's image would be impacted. There are many such stories. Sad but truth.
Btw, considering your experience, what do you think the few socially conscious citizens can do in their lifetime, that will make a difference?


Ajay Z

Jan 25, 2010

I loved the love for birthplace by Mr. Pardhanani. I second his opinion.
The Corruption is part & parcel of everyday life for any Indian. Its accepted at all the level, from Birth certifiation to Death certificate of an Indian. Sometime the mindset has to change.
Also, when we talk about subsidies, one has to analyse the difference between the WPI & retail price of the commodities/goods. There we will come to know, who is being benifited!



Jan 25, 2010

Good, articles are good for the people with limited time to spare.


Abhay Datar

Jan 25, 2010

This refers to the observation by Mr. Ferguson and your comments on the same. It deeply hurts me to seem very very greedy politicians and even the "Babus". Corruption has its roots even at the lowest level, like the lower middle class. We need to change the attidute.



Jan 25, 2010

"This 'money' historian favors India over China" made for interesting reading, not simply because we happen to be Indians but because there is abundant sense and substance in what Niall Ferguson has observed. Everything points to the fact that his words will come true. Let not anyone try to be complacent on that account.



Jan 25, 2010

Before we paint a gloomy picture about the US economy, and it is indeed a gloomy picture, spare a thought for the IT engineers and BPO employees, for whom the Great Recession is a reality here!



Jan 25, 2010

I must begin with a note of explanation. I am a British citizen(72) of Indian origin, who has been living in India now for 4 years, having lived abroad for 45 years of my life. Whatever criticisms I make below will be because of love for my birthplace whose disappointing social profile leaves me speechless and ashamed.
You say India's handicaps lie in the area of poor governance and corruption. I think you should have spelt corruption with a capital C. I cannot see any aspect of Indian life that has not been severely infected with this bug. Add to this poor governance and you get the most vulnerable sections of society suffering the most.
I would add other factors to this unholy cocktail of India's shortcomings. The middleclass Indian tends to be totally one dimensional interested in nothing else but the pursuit of money, very often acting as an ammoral parasitic host upon the labours of his less fortunate brothers, whom he exploits relentlessly.
We are creating a two nation state where the middleclasses live in a totally different world to that in which the majority of Indians try just to survive, creating a potential for serious destabilisation. Add to this cocktail the centrifugal tendencies of several of our Indian regions and you begin to wonder if India's prospects are all that rosy.

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Jan 25, 2010

Instead of worrying about the US economy time and agian, it is better to clean up our own backyard of subsidies, deficits and other ills that plague our financial system. While your optimistic projection is for 10-15 years which is a no-brainer anyways, you quote only the last 2-3 years figures for topline and bottom-line growth. Seems to me a very narrow analysis!

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