The dark horse of India's long term future

Mar 5, 2011

In this issue:
» Faber is bullish on Japanese stocks
» Spending cuts will kill US recovery
» China is set for another 5 years of fat growth
» Who will gain if oil prices rise?
» ...and more!

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Construction is set to see stupendous growth over the next ten years. And at 5.2% growth on an average every year, it all set to overtake the growth in global GDP in that period. Not surprisingly, emerging markets will account for 55% of global construction by 2020, up from 46% today. According to a PwC report, this will be on account of their fast-growing populations, accelerating urbanisation and robust economic growth. As far as the developed world is concerned, construction there will be constrained by large public deficits, austerity programmes, slow population growth and limited economic expansion.

Not just that, if you take India into consideration, spending on construction will overtake Japan by 2018. And this is when India will become the world's third-largest construction market. There is no doubt that construction in emerging markets including India will see robust growth in the future. Especially considering the scope for growth in Indian infrastructure. What is more, the government has been stressing on the need to ramp up infrastructure investments. And the initiatives on this front are bound to have positive connotations for the construction industry.

But construction companies in India have a lot of challenges to overcome. Although their order books may be flowing, execution has always remained an issue. Particularly given the complexity of projects, problems with land acquisition and red tape. Plus, most companies in the sector are saddled with load of debt on their books. This eats into their profits in a rising interest rate scenario. Exceptionally high prices (especially in the case of real estate) also act as a huge demand dampener. And the nexus with politicians plus poor disclosure norms only compounds the problems.

Indeed, in India, the construction sector is the second largest employer in the country, next only to agriculture. Hence, addressing its challenges and ensuring a healthy growth for this sector could be benign for the economy. For investors it would advisable to go in for a bottom up approach for the sector. Companies with healthy balance sheets at discounted valuations could prove to be long term winners.

Do you think that investors can make money in India's construction sector in the long term? Share with us or post your comments on our Facebook page.

 Chart of the day
India and China have been towering their peers when it comes to growth in GDP. However, if one looks at the December industrial production numbers, China lives up to this perception, but India does not. Today's chart of the day shows that India's industrial production growth in December 2010 was the lowest among its BRIC peers and even the US. Of course, data for a month cannot form the basis for a trend and one will have to wait for a few more quarters before coming to any meaningful conclusion. But the industry faces the challenge of higher prices and borrowing costs dampening demand in the future.

Data Source: The Economist

The equity markets in the US and Europe are offering little hope for extraordinary returns. Hence, investors are increasingly looking at more unusual bets. Especially at times when the emerging market story seems reasonably priced in. One such prognosis comes from a seasoned emerging market investor. Given his reputation in predicting market crashes, his opinions are particularly of interest to us. We are referring to Marc Faber, publisher of the Gloom, Boom & Doom report. As per Moneynews, Faber seems to have his eyes on Japanese stocks these days. The Japanese stock markets endured two decades - popularly referred to as 'the lost decades' - of bear markets. However, the economy seems to be enticing several investors now. A rise in interest rates to monetize the country's public debt, weakening of the Yen and better earnings for Japanese exporters seem inevitable. And the buoyancy in Japanese stock markets will be the obvious outcome of better corporate earnings. Thus emerging economies, especially the BRICs need to remain on their toes. Else the chances of smart money finding its way to more lucrative destinations remain high.

There are many economists and investors who are raising their voices against the US Fed's easy money policy. We recently heard the likes of Marc Faber and Warren Buffett voice their concerns. Standing aside these experts is the Nobel prize winning Paul Krugman.

Krugman has told a leading international business daily that any spending cuts from the US government will 'kill the recovery'.

Krugman is reported to have said that if spending cuts happen, "...hundreds of thousands of jobs would be lost, something Republicans believe will be offset by improved business confidence. They believe that the Confidence Fairy will make everything all right."

The Chinese economy clocked an average 11.2% growth in the last five years. Can it repeat a similar feat in the coming five years? We do not know. But the country's Premier Wen Jiabao sounds upbeat about the growth prospects. According to him, China is set for another five years of fat growth. Between 2011 and 2015, the dragon economy would aim to grow at 7% annually. But this target is more of a worst-case scenario than a true forecast.

Of course, there is no denying that China has all the right ingredients for a perfect growth recipe. There is a growing domestic consumption demand. Supply of funds is abundant. The demographics, the infrastructure, the scientific and educational level are all a great plus for the economy.

But inflation continues to be a real threat. Prices of food, housing, healthcare and other goods remain unabated. And this could turn out to be more than an economic problem for the government. We have already witnessed the political upheaval in the Middle East and North African (MENA) region for the very same reasons. If any of those tremors reach the Asian giant, the ruling Communist Party is going to have many a sleepless night.

Who will gain if oil prices rise? There is little chance that high oil prices will benefit OPEC in the long run as the rising graph for crude oil prices will only kill its demand. However, one party that is going to profit will be option sellers, feeding on the fear that oil prices will rise and sustain at high levels. No wonder then that despite murmurs of a Libyan truce, there is no dearth of speculation that oil prices will keep rising.

However, we believe otherwise. Unless there is a real shortage of oil reserves, even if oil prices rise for a while, it will not sustain for long. And this doesn't seem to be the case as OPEC sits on huge spare capacities. Among the numerous scenarios, the only one where we will hit the panic button is when crisis spreads to Saudi Arabia.

The world markets depicted mixed performance during the week. While the emerging markets closed the week on a strong footing developed markets displayed a weak performance with the exception of Japan and US. Amongst the developed markets the biggest loser was France (down 1.2%) followed by UK and Germany. However, the US and Japan registered marginal gains of 0.3% and 1.6% respectively during the week. The developed markets were more or less steady for the week ahead of the eagerly anticipated key employment report by the US. However, emanating tensions from the Middle East continue to somber investor's mood in the markets.

Amongst emerging markets, India was the biggest gainer (up 4.4%) closely followed by Hong Kong and Brazil. Singapore and China too registered modest gains of 1.2% and 0.8% respectively. The fiscal road map laid down by the FM during the course of the budget announcement lead to a sharp rally in the Indian markets.

Data Source: Kitco, Yahoo Finance

 Weekend investing mantra
"Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied." - Benjamin Graham

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8 Responses to "The dark horse of India's long term future"


Aug 9, 2011

good article but cant help in investment


v sarvani

Apr 4, 2011

andhra bank



Mar 14, 2011

article is good


sana khan

Mar 12, 2011

japan now in danger what next....?



Mar 12, 2011

hfcl is the darkhorse this


viny gupta

Mar 7, 2011

If India's construction sector wants to get FDI in real terms it would need to follow international accounting practices and it would need to be transparent. All payments would need to be in cheques.


Manoj Kumar

Mar 6, 2011

In the long run any sector can make money for the investors but in the short to medium term, this sector is headed for disaster given the opacity and greed of the companies in this sector. We first will have a few bubbles, a few more scams and then reforms will come and then only this sector will become healthy for retail investors.


Anupam garg

Mar 5, 2011

pretty lengthy edition....wonder who can finish it in 5 min...the articles were quite informative as well

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