Can BRICS no longer deliver strong returns?

Mar 26, 2013

In this issue:
» 5 European countries bailed out so far
» How much power must central banks wield?
» Foreign investors stay away from Indian aviation
» Should India Post get a banking license?
» ...and more!

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Once upon a time, BRICS (Brazil, Russia, India and China) were the apple of the investors' eye as they recorded healthy growth rates in the pre-crisis years. Even when the global financial crisis struck and its impact was felt by these countries, they nevertheless managed to bounce back strongly.

But the last couple of years have seen growth slow down considerably on the back of mounting challenges. The International Monetary Fund forecasts gross domestic product growth of 5.5% in the emerging markets in 2013, barely higher than 2012's estimated 5.1%. As a result, investors seem to be losing interest in the region and are looking elsewhere to invest; in south east Asia and some parts of Africa.

No doubt the ongoing debt crisis in the Euro area has made matters worse. And it will be a while before any significant recovery takes place in the developed world. But a lot of the problems that BRIC countries are facing are homegrown.

Take China and India for instance. For three decades, the dragon nation grew at an average annual growth rate of 10%, which drastically improved the standard of living of its citizens and made it a force to reckon with in the international arena. But its growth engine has slowed down due to many reasons; its sheer size and a business model relying too much on exports being part of them.

India's issues are too well known. Difficulty in doing business in the country due to redundant land and labour laws, corruption and red tape continue to pose problems. Not to mention a high fiscal and current account deficit, which have not left much headroom for the government to spend on productive areas.

But, we believe it would be too soon to write off the BRIC countries entirely. The fact remains that they are still growing faster than the developed world of US, Europe and Japan and are expected to do so in the years ahead even as growth in the rich world remains sluggish. Further, investing in other south east Asian and African countries are not without their share of risks either.

India atleast can boast of some very strong companies with good business models and sound managements. And while the country may not be catching the interest of foreign investors at the moment, it is the right time for long term investors to pick up some good stocks at attractive prices.

Do you think that the BRIC region has lost its sheen and no longer hold the potential for attractive returns for investors? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
Since 2010, the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) have agreed on packages to bail out five countries in the Eurozone. As today's chart of the day shows, Greece tops the list in this regard, as bailout funds came to its rescue first in 2010 and then in 2012. By contrast, the bailout funds required for the latest victim Cyprus pales in comparison. Having said that, this only highlights the fact that troubles in the Euro zone are far from over. Despite these bailout packages, growth in the region has remained lackluster. But this clearly hasn't stopped the central bank from pumping money into the region, when it is quite clear that it is simply not working. Besides poor growth, unemployment and dim job prospects continue to burden the population. All of which has also been leading to a gradual deterioration in the standard of living of its people.

Data Source: The Economist

Given the kind of damage their policies have created, one wonders whether central banks are even necessary. However, nothing even remotely close to this kind of thought has entered into anybody's mind. In fact, debates are underway over the increasing powers that central banks have come to wield. Their original mandate has of course been maintaining price stability. But the aftermath of the crisis has seen their roles extend to include banking supervision and also stand-back financial oversight. This territorial expansion has not gone unnoticed though. Mr Olivier Blanchard, the chief economist of the IMF has sent out a warning that central banks could become too powerful if they are further given new powers.

Even if correct, the warning seems to be a case of too little, too late. It is indeed the low interest policy of central banks like the US Fed that has led us into this situation. And increasing their powers is only going to make matters worse. What the world needs are central banks that keep inflation under strict check. Not the ones that keep creating bubbles with every subsequent one being greater and more destructive than its predecessor.

Every time we speak of infrastructure and industrial growth in India, comparison creeps in. Across the border, China has come to be the global benchmark for infrastructure development. Indian authorities, on the other hand, have miserably failed to deliver on the promises. Successive five year plans have projected ambitious investment targets in sectors like power, roadways and industrial zones. But each one of them has left a lot to be desired. Only a fraction of the budgeted investments have been completed within the given tenure. Moreover, many projects have been abandoned due to policy bottlenecks or want of funds from private partners. Land acquisition, in particular, has been one of the key hurdles. A tangible solution to the same, which can satisfy both industry and farmers / land owners, is yet to be arrived at.

Here, one wonders how China got through with it. It seems China's autocratic leadership managed to do what the democratic setup in India cannot. As reported by Economic Times, Chinese authorities have earned almost US$ 5 trillion in profit by selling land obtained from farmers to developers. Although the land confiscations have led to numerous protests, very little of it has come to the notice of global media. The Chinese government, however, is not too sure how long the matter will remain under wraps. We believe that though it may be time consuming, Indian policy makers should not do away with the principles of democracy for the sake of development.

What if we asked you to invest in a stock that is currently reporting financial losses? For further information, we tell you that this stock will probably continue to operate in a loss. This is because it uses one of the most expensive inputs in the form of oil. And the government shows it very little sympathy and continues to bleed it through higher fuel taxes. It cannot raise prices because competition is stiff. The balance sheet of the company is stretched too. Most of its competitors are going out of business because they are bankrupt. Chances are that this stock too may face the same end. Would you invest in such a stock?

Your answer would be a firm no. But the government of India thinks otherwise. It recently invited FDI in such stocks. The stocks are that of the aviation sector where the government has allowed foreign players to buy up to 49% stake in domestic carriers. Needless to say, foreign investors have not really jumped at this opportunity. Air Asia has shown some interest through a joint venture with the Tata Group. But it is a rare exception. Other foreign carriers have stayed away from the Indian aviation sector. They would need a lot more coaxing to enter into the market. One of them would be revision of the tax structure to make operations profitable. Because unless they see returns, doing business in India would make very little sense.

Capital is one of the most important factors of production in any economic activity. Banks facilitate the flow of this capital. In other words, banks play a very crucial in an economy. This is the reason why any disturbance in the banking industry has direct repercussions for the larger economy. So it is important that banks be run by the right people.

There is already so much debate about the new banking licenses that are likely to be issued to eligible corporates. Now, there's a new debate. How about Post Bank of India? Consider the facts. India Post has about 155,000 offices. And mind you, a majority of them are in rural and semi-urban areas. Moreover, it has 300 million deposit accounts and has plentiful real estate in financially excluded areas. Doesn't it sound like the perfect potential banking entity that could achieve the goal of financial inclusion? At the face of it, it may.

An article in Firstpost raises some important concerns about allowing India Post to form a bank. First of all, the PSU is running losses in the region of Rs 68 bn. So, here is a business that is already in trouble. Would you want to hand over your money to such a firm? We don't think so.

In the meanwhile, the Indian equity markets traded in a volatile manner today. At the time of writing, BSE Sensex was up by 67 points (0.4%). There was mixed performance from sectoral indices with FMCG stocks being the key gainers. Barring China and Japan, Asian stock markets traded positively and Europe opened on an optimistic note.

 Today's investing mantra
"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Philip Fisher

Editor's note: There will be no issue of The 5 Minute Wrapup on Wednesday, 27th March 2013. We wish all our readers a very happy and colourful Holi!

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4 Responses to "Can BRICS no longer deliver strong returns?"

Selvamani K

Mar 29, 2013

I hope India can do well and post positive records despite rampant corruption and red tape tendency.


Gunesh Apte

Mar 26, 2013

Even though Indian growth story is not over, the growth rate going forward may be much lower than what economists have predicted earlier. Indian society as a whole and the politicians are taking short term view of the problems and issues which are ahead of us, and that is not helping the growth story.

While western countries are spending more money on etics and education along with human welface, India seems to be moving in opposite direction, by not focussing on ethics in day to day life. This will have harsh impact on the country as a whole more sooner than what most of the people think.

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Mar 26, 2013


Like (1)

Nandan Shah

Mar 26, 2013

I use to be positive on India. The pace at which criminalization of Indian society & corruption is growing, I have changed my views for past 2 years. I have personally seen the red tape and extreme lethargy - I can not imagine India has a chance, even within in BRICS.

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