An asset that could outshine stocks and gold...

Jan 27, 2010

In this issue:
» The biggest risk for Indian markets
» Why Bernanke has become TBTF!
» India Inc. bets big on 'reverse outsourcing'
» Beware of realty IPOs
» ...and more!!

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Is the yellow metal Gold losing its luster? The fear of the US economy once again falling into a recession is doing the rounds of late. And this is in turn could mean lower inflation and higher dollar as flight to safety takes wings. Not good news for gold buffs indeed. But there could be an option. In the form of another precious metal called Platinum. As per reports, an ounce of platinum buys 1.42 ounces of gold, down 42% from the record 2.43 ounces in 2001 and 23% lower than the 10-year average. Thus, even if a 10-year parity is to be achieved, Platinum will have to rise substantially from here. Also, supply side problems have crept up what with South Africa which produces 80% of world's platinum is suffering power cuts that are shutting down mines. Hence, looks like Platinum may outshine stocks and gold in the times to come.

 Chart of the day
Whether the country is facing economic meltdown or not facing it, infrastructure spending is important. Not surprisingly, it has appeared as an antidote to global meltdown. It has proven to be the solution for creating jobs, improving competitiveness and fuelling internal consumption. In 2009, the World Bank indicated that about US$ 25-30 trillion is likely to be invested in the infrastructure sector in the next two decades.

Data for public private partnership projects
Data source: India Infrastructure Report 2009

India, Asia's third-largest economy, planned an outlay of US$ 500 bn between FY08-FY12, or 9% of her GDP to strengthen its stretched public works capacities. Of this, as today's chart shows, the exposure of public private partnership (PPP) projects has been skewed towards energy, transport and telecom sectors. These together comprise more than 70% of the total outlay so far.

Companies selling all kinds of products, stretching from soaps and toothpastes to mobile phones and vehicles, believe that rural India is the place to be. So far reaching has been the optimism surrounding India's rural opportunity, that the innocent villager has now been burdened with the task of taking the BSE Sensex to its next level. Through his consumption of more soaps, toothpastes, mobile phones and tractor loans that is.

Unfortunately, what is being ignored is that the rural consumer is spending a lot more than he can afford to sustain consumption. The rise in his monthly expense budget has been nearly double that of his urban neighbour. And if that continues, he may soon stop consuming beyond basic necessities. A business daily reports that price rise for rural consumers has been to the extent of 17% over last year. In contrast, that for urban consumers has been around 10%. Notwithstanding that for rural consumers the price rise is from much lower base, most of this gap can be attributed to food costs that occupy the biggest chunk of a villager's consumption.

Thus, lower than expected EPS numbers, sovereign debt default and asset bubbles are undoubtedly the risks that could hurt Indian stockmarkets. However, we believe that the biggest risk could emerge by way of steep inflation at the consumers' level and resultant rise in interest costs. With both individuals and corporate getting wary of incremental consumption, the BSE Sensex may have few shoulders to rest on.

Let's take a short quiz. How about naming any two people who currently work for the US Fed? Nine out of ten times, Ben Bernanke would come up as the first choice. There are even higher odds that the second name will not be recalled at all. In a nutshell, this is the kind of clout or influence that Bernanke wields over the US Fed currently. And it this very weapon his supporters are using to ensure that he is reinstated once his term ends on January 31 this year. His backers contend that the US economy was badly injured during the crisis and required radical surgery. Hence, it makes no sense to change the surgeon now that the patient is starting to recover.

However, what they fail to realize is the fact that the patient would indeed recover in the short term. But it might suffer some permanent impairment in the form of sub-par economic growth and lower living standards for many years to come. And this would be mainly because of high dosages of monetary stimulus being injected into the patient's body. Thus, while it makes sense for a new order to emerge at the US Fed, Ben Bernanke has gone so far ahead with his policies that coming back would mean endangering the entire economy once again. And this is a chance that the policymakers may not want to take. It does not help matters that Bernanke has support in the form of some really respected voices in investing like Warren Buffett and Bill Gross.

The outsourcing story so far has been one way. That of Indian IT companies eating into jobs in the US and UK. Now a reverse trend also seems to be evolving. The one of Indian non-IT companies outsourcing their non-core tasks to the multinationals. Some call it 'reverse outsourcing'.

Bharti Airtel's outsourcing of its IT and network requirements, is a case in point. While the company can be termed a pioneer of such a trend in the past, it isn't done as yet. The company is now looking to outsource the management of its 12,000 km-plus of inter-city optic fibre cable network. This is apart from its already running contracts with vendors like IBM, Alcatel-Lucent, and Nokia-Siemens, and Ericsson.

While we do not have the total market for such services as yet, the trend seems to be fast catching up with other Indian companies as well.

India Inc. appears to be on a fund raising spree. Take the case of 2009. Indian firms raised US$ 20.2 bn from share sales in 2009, mostly through follow-on offerings. This represented a 181% increase from the year earlier. IPOs accounted for just US$ 4.1 bn of the total. What's more this buoyancy is expected to spill over in 2010 too. JPMorgan expects share sales in India to reach as much as US$ 30 bn in 2010, translating into a 50% YoY increase. This will be prompted by government stake sales and IPOs by power and property firms. No doubt, the revival in economic growth and the rally in the stockmarkets have encouraged Indian companies to make hay while the sun shines and raise funds. But it seems doubtful whether Indian investors will have the capacity to digest such massive fund raising on a consistent basis.

Again, talking about IPOs, you can expect about 10 or so realty companies coming to your door asking for Rs 167 bn sometime soon. Yes, that's the kind of realty IPOs that are in the pipeline. And you need to be very careful who you give your money to. We have, time and again, cautioned you of the valuations of many of the IPOs that have hit the market in the recent past. Mr Deepak Parikh, Chairman of HDFC, has in a recent interview evinced caution at the valuations of the realty IPOs that are in the pipeline. According to him, there is large scale oversupply in the commercial property market. Further, a large amount of commercial property lies vacant in Mumbai, Chennai, Hyderabad, and Gurgaon. In fact, he opines that the current supply is sufficient for two whole years. Not surprising then that builders are now on the lookout for aggressively raising money. Afterall, their capacity to keep rates high despite holding on to huge inventories directly relies on their ability to raise fresh funds.

Meanwhile, Indian markets continued to witness investor apathy and the indices languished in the red throughout the session today. The BSE-Sensex was down nearly 370 points at the time of writing. Weakness in stocks from the metal and realty sectors dragged the benchmark indices lower. Infact the Indian markets were the biggest losers in Asia today followed by the Chinese and Korean markets. Europe has also opened on a negative note.

 Today's investing mantra
"An investment in knowledge always pays the best interest." - Benjamin Franklin

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10 Responses to "An asset that could outshine stocks and gold..."

max monteiro

Jan 28, 2010

Thank you for broadening our avenues for investments. The question is -where and how does one invest ? would appreciate if the same is shared with all of us.




navin nath

Jan 27, 2010

I think that no one shall put the money in realty IPO. This will push the developers to reduce the prices and will help the citizen at large. So please do not put a single rupee in the realty IPO.


Ravindra Nath

Jan 27, 2010

Is there an exchange traded fund for platinum just like the gold ETF?
As far as the realty IPOs are concerned, the existing realty scrips like DLF and UNITEC are being badly hammered in the markets for the past two weeks.
The above are high BETA stocks. The in coming IPOs are going to suffer the same fate. So, investors stay away from the realty space or else your funds are likely to be suckered in to this space with no recovery in sight!!!!



Jan 27, 2010

The point on Platinm is well poised...however how do we meaningfully gin from this??? Is there a fund that invests into it? There is a precious metals fund but there again we are dependent on the fund manager making the choice (may not necessarily choose platinum) also buying physical stock is not a very viable option...any suggestions???

Thanks ands regards

Premal B Thakkar


Dr I Prabhakar

Jan 27, 2010

The article is fine but how to invest in platinum?Please explain.



Jan 27, 2010

It is a tempting offer. How far it works in this trade is my question here.



Jan 27, 2010

Indian companies in the out sourcing business are in the lower end of the work. They get business of labor arbitrage. But when it comes to taking responsibility - that is the tough one. Interesting is that Infosys - the most glamorous one - and with "Nationalist" management - has negligible presence of Indian clients.
I am a true Indian - and can bet my las DOLLAR on that !!!


Ajay gunware

Jan 27, 2010

your article on platinum is good, but how investors in India can benefit through this rise in price.



Jan 27, 2010

Your article on platinum is good.The question is how to go about in investing through a fund.


27th jan '10


Amit Sharma

Jan 27, 2010

You site is really helpful to get decision accordingly market with best future options & opportunities.
Amit Sharma

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