The asset class to benefit most from the global crisis

Feb 4, 2012

In this issue:
» BSE-Sensex and rupee-dollar rate show interesting correlation
» IT companies to also bear brunt of 2G license cancellations
» Shall we call this the Bernanke bug?
» Britain gearing towards worst depression ever!
» ...and more!

2011 was year that global investors would want to erase out of their memory. On one hand, the developed economies seemed to be succumbing to the consequences of their past excesses, on the other the Eurozone sovereign debt crisis was just surfacing.

If you would recall, the emerging markets had displayed great resilience post the 2008 global financial crisis. However, the side-effects of monetary and fiscal stimuli doled out in the preceding years showed its full manifestation in 2011. Especially in the form of persistently high inflation. This forced central banks of emerging markets, particularly the Reserve Bank of India (RBI), to tighten liquidity by hiking interest rates. And this in turn slowed down economic growth and investments in these economies.

How did global investors react to this? Needless to say, they dumped emerging market stocks in their desire of flight to safety. They bought US stocks and bonds even though the problems of the American economy were far from over. The Indian stock markets were one of the worst performers in 2011 among global equity markets. All in all, all the optimism related to emerging market economies dipped to very low levels.

Cut to 2012. The picture seems to have changed quite a bit. For instance, Vanguard's MSCI Emerging Markets which is the largest emerging market stock index ETF, was up nearly 11.6% during the first four weeks of January 2012. Even the BSE-Sensex was up by about 14% since the beginning of the year. Above all, there is a strong likelihood that emerging market stocks will be among the most sought after asset classes through the rest of 2012.

The reasons are simple. Despite whatever domestic concerns that the emerging economies may be facing, their economic growth will still continue to outpace that of the developed nations by a wide margin. That's the fundamental strength of these economies that cannot be altered. It goes without saying that wherever there is potential for growth, capital and, consequently, wealth creation will follow. Moreover, the problems that emerging markets are facing can be gradually resolved with government will. Control on inflation and fiscal deficit and necessary reforms are bound to follow. In the meanwhile, the structural problems in the US and Europe are far from being sorted out.

As such, we believe that emerging markets, especially India, remain a great investment destination for investors. All you have to do is buy companies with strong fundamentals at a fair price.

Do you think emerging markets are still lucrative for investors? Share your comments with us or post your views on Facebook page / Google+ page.---------------------------------------- Have an enriching Saturday! ----------------------------------------

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 Chart of the day
Today's chart of the day shows that barring certain periods, the benchmark index of the Indian stock markets, the BSE-Sensex, has more or less moved in tandem with the depreciation of the rupee against the US dollar. Why is that so when India is not a heavily export-oriented economy? The answer to this question is foreign Institutional Investors (FIIs). FIIs have a significant binding on the movement of not only our stock markets but also our exchange rates. This is indeed a worrying sign. Until we wean ourselves of our dependency on FIIs, our markets and exchange rates remain vulnerable to their whims.

Data source: BSE,

Good things always come with some pain. At least, this is what seems to be happening in the recent landmark judgement of license cancellation pronounced by the Supreme Court of India. No doubt, it may go a long way in terms of cleaning up the whole system. However, not only several companies in telecom space but also from other sectors such as Information Technology (IT) are going to face the brunt. That too, without being at fault in the entire process.

Why so? Actually, many IT companies such as Wipro, Tech Mahindra and IBM had bagged large deals from the affected telecom companies during 2009-10. An obvious fallout of license cancellation would mean delay in some of the projects. And in some cases, it may even end up in deal cancellation altogether. The possibilities of deal cancellations are higher in case of newer players such as Uninor and Etisalat DB.

How much all this would affect the IT companies depends on the nature of contracts and the investments made by these companies towards the execution of the deals. There is also a possibility of renegotiation of the contracts. How things would pan out? Only time can answer, especially after the re-auctioning of the licenses.

There seems to be a new superbug in town. And it is moving with great speed all across the globe. At first, it bit the members of the British central bank and now it is showing its deleterious effect on Mario Draghi, the newly anointed president of the European Central Bank. Want to guess what this new bug is? Well, allow us to break the suspense. Due to the lack of a better word, we will call it the Bernanke bug. What this bug does is that it kind of compels central bank chiefs to dole out trillions of extremely low cost money. All in order to keep the banking system alive. And this is not all? It also keeps the central bankers under the illusion that everything is fine. But is it in reality? Certainly not. The underlying problems have still not gone away. Besides, rather than solving the problem, the central bankers are only exacerbating the same. Little do they know that once the genie of hyperinflation is out of the bottle, there will not be enough tools in the central banks' kitties to bring it back inside. It will fade away only after destroying wealth well worth trillions of dollars. For now though, the dangers are being happily ignored.

During the Academy Awards 2011, director Charles Ferguson of the documentary film Inside Job, complained about the criminals of 2008 financial crisis not being brought to book. It seems that his anxiety about the criminals going scot-free is not unfounded. They are doing more harm to the financial world now than ever before. Banks used poor quality securities, such as repackaged subprime loans, to secure trillions of dollars worth of cheap funding before the burst of 2008 housing bubble. It was only when their trading partners refused to accept such securities as collateral that the short term borrowing (repo) market rapidly contracted. However, it seems that the bankers are back to selling toxic assets. This in an attempt to raise cheap money despite the near zero interest rates. As per an article in Financial Times, the use of poor rate securities has gone back to the pre-crisis levels. We are afraid that this time around, even the US government may not be in a position to fund bailouts. The players in the US debt market should, therefore, be prepared for a much harder landing this time.

It was once said that the sun never sets on the British Empire. But if current projections hold true, the sun may be about to go down on Britain. The country's GDP has flattened. If things continue to move at the current pace, the current depression may not just be the worst depression in Britain since the Great Depression. It may probably be the worst depression in Britain ever! Prime Minister, David Cameron's expansion-through-austerity policy doesn't seem to be working. As we can see, government spending is a big part of the GDP equation.

GDP (Gross Domestic Product) = Private consumption + Gross investment + Government spending + (Exports-Imports)

In light of a slowing consumption and investment, if governments also make deep cuts it increases the chances that the economy will slip into a recession. According to J Bradford DeLong, an economist at University of California, policymakers across the world need to pay heed that starving oneself is not the road to health. And pushing unemployment higher is not a recipe for market confidence.

The world stock markets closed the week on a strong note. The US stock markets were up 1.6% during the week due to strong employment data. The unemployment rate fell to 8.3% in January as the economy created 243,000 jobs against an expectation of 150,000. The UK markets too showed some sparks of optimism as business confidence returned easing worries of double dip recession.

The Indian stock markets were up by 2.2% during the week. Rising foreign flows (foreign investors bought shares worth US$2 bn last month) and expectation of rate cuts buoyed markets. It may be noted that after a 25% decline in 2011; BSE Sensex is already up 14% year to date. Considering this was the fifth consecutive weekly gain for the Sensex it would be interesting to see whether the current rally has legs to sustain its momentum in the coming weeks.

Amongst the other world markets, France was up 4.6% during the week followed by Germany (3.9%). Even Brazil registered healthy gains of 3.7% during the week. However, markets from Singapore and Japan were relatively flat.

Data Source: Yahoo Finance

 Weekend Investing Mantra
"I've seen more people fail because of liquor and leverage - leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing." - Warren Buffett

Click here to read our series on 'Lessons from Warren Buffett'

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5 Responses to "The asset class to benefit most from the global crisis"

sunilkumar tejwani

Feb 5, 2012

an Italian at the helm of European central bank, alas! God save the European Union. He is an ex-Goldman Sachs employee. And every one knows what Goldman had done to Greece & other countries. I am not surprised why Goldman has survived all sorts of onslaughts: sub prime mess, and other serious allegations of knowingly selling toxic assets to it;s clients & simultaneously going short on the same. This animal is a friend of U.S senators & members of US Fed.

Like (2)


Feb 4, 2012

1 I sincerely feel that advertising which creates desires for more and more is one of the basic causes of todays weaknesses. Factories have high labour saving and production machines which need to be kept busy. With higher unemployment how can these machines be kept busy ???
2 Defence costs are shooting up the world over and the payroll of the defence forces and suppliers is keeping up demand for goods. So this cannot be reduced. But in the meanwhile, there is unprodutive activity and no real wealth creation for long term stability
3 Religion and religious bigots are playing a major part in promoting discord and even hatred. Advani's most cherished dream is a magnificent Ram temple. How much will this alleviate the abysmal poverty in all parts of the country??
4 There is a fundamental shortage of VALUES all over the world. This needs a recast -- till then Lincoln, Gandhi, Martin Luther King, Jr will continue to be assasinated and the distress will continue till an aestoroid destroys mankind and the Lord of the Universe accepts His mistake in creating humankind the way we are.....

Like (1)

sarat palat

Feb 4, 2012

It is shame to all Indians that we still depend on FII's to guide the course of our stock market. Our Corporates are sittinig on bundles of cash and are relectant to invest in India. a clean and known example is Piramal Healthcare. If this is the case, instead of going after seasonal birds why can't we change the course ourselves by doing the necessary at the right places?

Like (2)


Feb 4, 2012

Commenting upon the equitymaster in India, we are too lag behind the other countries. As regards still in India employment problem still going on as well as poverty. There is substitute for hard work. Japan after second world war how fast improving in all fields. We are not born with silver spon.

Like (2)

shome suvra

Feb 4, 2012

The CRR cut will decrease lending rate unless the product of sensitivity of real money demand to income and real income does not exceed money supply by a large amount as the real demand of money is highly negatively sensitive to interest rate. This is pro investment. Privatization is important to earn more profit and better corporate governance provided creeping acquisition should be restricted for first few years. Once inflation comes down policy reforms will lead to more investment. Disinvestment through the open market will increase free float and attract FIIs.

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