Yet another 'hot investment theme' waiting to pop!

Mar 14, 2011

In this issue:
» Japan staring at yet another recession?
» Should we re-adopt the Gold Standard?
» China on the brink of 'Jasmine Revolution'
» India's ambitious road projects on paper
» and more!

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Indian investors are not new to mis-selling of hot investment themes. Time and again their brokers advocate investment in big ticket IPOs irrespective of the pricing and fundamental soundness. Until recently mutual fund distributors made hay recommending new fund offers. And every time the investors join in the mad rush to capitalize on the new theme, they end of losing tons of their hard earned money. But unfortunately, the lure of hot investment themes seems everlasting. After all in most cases it promises extraordinary gains in a short time. The latest one claims to do this and more!

Concern over rise in commodity prices has hurt investor sentiments over the past few months. Hence, the latest investment theme claims to offer a solution to beat inflation. It goes by the name of 'commodity funds'. These mutual fund schemes will essentially invest in commodity stocks internationally. It promises to help investors see the potential rise in international commodity prices filter into their portfolio returns. What is amusing is that the funds claim to be less risky than commodity futures. We agree that the latter may be more volatile than the commodity funds in terms of performance. However, at least commodity futures offer you a direct exposure to the inflationary trend as against the commodity stocks. More importantly, international movement of commodity prices are not always reflected on the inflation levels in India. Hence there may be a huge mismatch in your risk return profile.

Hedging an investment portfolio against inflation is certainly a must do. But if you are a long term investor, all you need to ensure is that your portfolio returns beat the average long term inflation rate. Near term price rises can have only a marginal impact on portfolio returns, if any. Hence in our opinion Indian businesses that have profitably tided over inflation for years continue to remain the safest bet against inflation. They win hands down against commodity funds. Especially when it comes to capturing a typical Indian investor's risk return profile. And what you must not forget is that commodity price levels is not the only risk to your portfolio. There are several others like low growth, high debt and expensive valuations that cannot be overlooked.

Do you think the commodity funds are for you? Let us know your views or post them on our facebook page.

 Chart of the day
Developing nations are now spending billions on building their commercial infrastructure. But what may be going unnoticed is their defence spending. As per a recent study, India has become the largest importer of arms globally. This is despite the fact that India's defence budget of US$ 33 bn gets dwarfed by the US' budget of US$ 693 bn. But as per a report from the International Institute for Strategic Studies, published by the Economist, the BRIC economies are soon catching up on this. Each of these economies may soon catch up with the developed nations in terms of defence outlay as a percentage of GDP.

Data source: The Economist

For Japan, the earthquake and tsunami could not have come at a worse time. Already, the Japanese economy is battling to overcome recession. The yen has been stronger which has hampered exports. And it is burdened with debt that is twice the size of the US$ 5 trillion economy. To make matters worse, the earthquake and tsunami has spawned fears of a nuclear disaster at its nuclear reactors. Plus, power has been disrupted and could take some time before it is fully restored. Factories and oil refineries in the North East region have also been shut down. What this essentially means is that Japan is in the danger of slipping into recession once again. In response Japan's central bank poured a record 12 trillion yen (US$ 146 bn) into the financial system. The Bank of Japan governor has indicated that it is ready to unleash massive liquidity to prevent another prolonged recession in the economy. Japanese interest rates are also at an all time low. Whether an expansionary monetary policy will help revive the fortunes of the world's third largest economy is questionable. So far such policies have certainly not done much for the US and Europe which are also mired in recession.

Gold Standard. That's what your father must have grown up to and you must have read or heard about. That's what critics of the global central banking policies are advising the central bankers to go back to. And that's what we might see in reality in the future as well.

Under the Gold Standard, countries fixed their exchange rates relative to the US dollar. The US, in turn, promised to fix the price of gold at US$ 35 per ounce. This system however collapsed during US' war with Vietnam when the then US President Nixon called for ending the dollar's connect with gold. This gave a free hand to the US government and its central bank to print dollars at will, as gold ceased to act as the backing for such freshly minted dollars.

Now, in a world flushed with irresponsibly printed dollars, voices are being raised to re-adopting the Gold Standard. No one can predict exactly how this will all pan out. But here are good chances for a return to Gold Standard, or its modern equivalent. Unlike paper currencies that are consistently losing value, gold remains the only man standing. And that is because, as gold expert Doug Casey says, it is durable, divisible, consistent, convenient, and has intrinsic value.

Have you invested in gold as yet?

Jasmine may be an innocuous little fragrant flower. But recently, it has come to mean something very big. So big that a revolution that goes by the name of Jasmine Revolution, has been held responsible for sparking unrest against the authoritarian regimes in the Arab world. And now, the revolution seems to have reached the Chinese shores. Mysterious internet calls for protest rallies had started doing the rounds in China. But these seemed to have faded in the background as the Chinese administration has warned of stern action. Still, comparison of China with the Middle East is making Chinese policymakers nervous. Wen Jiabao, the dragon nation's premier rejected any comparison. But he also admitted of huge risks emanating from issues like inflation and growing rich poor divide. Indeed, in economic terms, no other country has burst onto the scene as forcefully as China in recent years. But the growth has brought its own set of problems. The Chinese leadership is grappling with a range of problems such as inflation, rampant corruption, environmental degradation and land grabs. We believe it will have to do something rather quickly to deal with these problems. Otherwise, the growing discontent among its citizens could well lead to another Jasmine Revolution. And this could perhaps be unlike anything the world has ever seen before.

An interesting book was written by bestselling author Dan McNichol, on the US Interstate System. This is probably one of the most incredible road systems in the world. The book was titled 'The Roads That Built America'. It has been over 50 years since this project was started. And even today, these roadways are the arteries that pump blood through the American economy. Well, in India, it works in the opposite direction. India was built, despite its roads.

Either way, the National Highways Authority of India (NHAI) has now been asked to work on awarding contracts for around 100 projects. This is expected to cover 11,151 km over the next fiscal. This works out to 8 projects being awarded every month. Former, Highway Minster Kamal Nath had an ambitious target to build roads at 20 km per day. However, this plan remained on paper. The liquidity crunch and rising interest rates also did not help matters much. New minister, CP Joshi however feels that awarding 100 projects should not be too much trouble. We hope that this is not another case of over ambitiousness. Anyway, the bidding process has been made less complex. The annuity mode of building projects has also now shifted to the engineering-procurement-construction (EPC) model. Reason being, concerns on the government's increasing annuity payment liability. This reached a whopping Rs 850 bn. Well, we hope that these new initiatives give us a less bumpy ride.

The dragon nation is undoubtedly one of the largest consumers of any form of metal in the world. Hence, metal prices typically depend upon the demand-supply dynamics prevailing in the Chinese economy. And this is certainly evident from the recent fall in the Indian iron-ore export prices. It may be noted that Indian iron-ore export prices have fallen by upto 50% in the past one month due to lower demand from China. Apart from this, an increase in export levy and hike in freight rates has also impacted the volume momentum. This has resulted in an oversupply situation which has further aggravated the fall in prices. Meanwhile, it is interesting to note that the sea borne freight rates for bulk goods as measured by Baltic Dry Index (BDI) have been on a rise in the recent past. BDI virtually acts as a lead indicator for predicting the future economic activity. And since BDI freight rates have been on a rise one gets a sense that the declining demand (of iron ore) is a more of temporary phenomenon. Hence, a revival in demand and thus prices is just around the corner.

The Indian stock market indices managed to buck the trend seen across Asian markets today. While most Asian indices were flat to negative, the Indian markets had a strong outing today. The BSE Sensex was trading 196 points (1.1%) higher at the time of writing this. The Japanese markets (down as much as 6.2%) were the biggest losers in Asia. The European markets have also opened on a negative note.

 Today's investing mantra
"The really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions." - Warren Buffett

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4 Responses to "Yet another 'hot investment theme' waiting to pop!"


Mar 15, 2011

The report that India imports more defence equipment than
China is totally wrong. Firstly, China does not give out
any info on its arms purchases and even the internet is
controlled in China. All public info before it is released
has to be scrutinised by the govt. So please treat this
lopsided piece of info with a pinch of salt.



Mar 14, 2011

Roads and Infrastructure development is in jeopardy for one more reason that no one wants to highlight - the failure of state and central governments to honour contracts related BOT (build operate and transfer).
Private companies such as ILFS promoted Noida Toll Bridge Co Ltd. have not been allowed to raise toll rates at 10% every year as in the contract signed by the Noida Authority (UP government). It also has to get arrears which if not paid ny the UP government will result in the toll collection term to be extended from 30 years to 75 years or more. The children of Delhi-ites will have to pay toll that their parents are not willing to pay.
At this rate no investment will come into this sector.


k.s.jayanth kumar

Mar 14, 2011

I do not understand the commodity fund, its economics and behaviour.Hence I don't invest in what I don't understand.


Shome suvra chakraborty

Mar 14, 2011

Commodity fund is not a hedge against inflation. Commodity futures' hedging should be effective and optimal.Investment in multinationals, risky stocks to get higher return,long hedges to protect the losses from depreciating currencies owing to inflation should be some of the strategies to invest during inflation.

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