Cheap money may not find its way into Indian stocks

In this issue:
» Deregulation of diesel prices
» What is the gold to silver ratio saying?
» Rural India devoid of digital access
» Higher chances of US dollar collapse now than ever before
» ...and more!

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00:00

There is more to this than meets the eye. The developed markets have lost their halo ever since the 'Too Big To Fail' showed their true colours. Since then the lure of emerging markets has attracted capital from across the globe. Even the risk adjusted returns in emerging economies were far higher than those in developed ones. This led foreign investors to multiply their investments in the BRICs. But the most important reason why they chose to do so was because the cost of such capital to them was 'near zero'. The interest rates in the developed markets prevailed near zero for an extended period. And with that, the risk appetite of investors there also increased. With no hopes of making money in the home countries, even the most risky assets in emerging markets seemed irresistible. And therein came the bubbles in emerging market stocks and real estate.

It is not that we are the pioneers of this theory. The central bankers in most emerging economies have been crying hoarse over the futility of cheap forex inflows over a long time. Some have been very proactive in taxing unnecessary inflows from the start. But it seems that our very own RBI is seeing red with the problem only now. The central bank has denied the need for capital controls at more than one occasion in the past. However, the RBI governor has recently advocated such a measure to avert currency risks. What it means is that if the Fed decides to follow up QEII with QEIII, QEIV and so on, it is unlikely that a lot of it will find its way into Indian stocks. Chances are that stocks that were finding favour purely due to excess liquidity will revert back to their fair valuations. Thus liquidity driven bull markets are certainly not here for long. Investors would therefore do well to ensure that their portfolios are based on fundamentally driven stories and not near term speculations.

What do you think should the RBI do to stop inflow of cheap money into Indian markets? Let us know your views on post them on our facebook page.

01:20		Chart of the day

India's auto companies have been in the news for the record growth rates in sales over the recent months. In fact the economy is expected to be one of the fastest growing auto markets in the coming decade. However, if one puts the absolute numbers into perspective, the Indian growth story gets dwarfed by China. While the growth in overall auto sector may be high the sales of passenger cars in India will continue to remain less than a fifth of that in China and US by 2012. Hence it is unlikely that India will support China in making up for the fall in car sales in the developed markets.

Data source: Automotive News, Reuters

01:55

We know how gold proved its doubters wrong and went on to become the asset of the last decade. In fact, gold bugs believe that the yellow metal still has a lot of steam left and they won't be surprised if the feat is repeated. The evidence so far though presents a different picture. It is not gold that is setting price charts on fire but its close cousin silver. Yes, that's correct. Leading daily points out how domestic silver prices are up an impressive 30% in the past couple of months alone. Compare this with the puny 4% that gold has returned and it becomes clear why silver is more in news than gold.

Of course, a decade long track record cannot be judged on the basis of a couple of months alone. But fundamentals too point towards a rosy picture for silver than gold. Historically, gold to silver price ratio has averaged around 30. Currently though the ratio is 38. Thus, silver will have to rise lot more than gold to bring the ratio more in line with the historical trend. This is not all. While silver like gold can be used as a hedge against inflation, the white metal also has many more industrial applications than the yellow metal. Hence, if economy improves further, silver prices can receive even more impetus. All in all, it does look as if silver investors will continue to have an edge over gold investors in the near to medium term. Longer term though, we prefer gold over silver as we believe the former to be a better insurance policy against any unforeseen economic risk.

02:25

Rising crude oil prices continue to pose a serious threat to our economic growth and the government's deficit targets. State-owned oil marketing firms such as IOC, HPCL and BPCL are making mindboggling losses by selling fuels at government controlled rates. IOC alone is losing about Rs 2.4 bn every single day.

If you recall, the Indian government had deregulated petrol prices in June last year. But it had desisted from doing the same with diesel prices. The government has now indicated that diesel prices too could be partially deregulated in the coming fiscal if inflation dropped down to 6%. The government is planning to limit diesel subsidy at a pre-fixed level. It would then allow oil retailers to raise diesel prices if the subsidy does not suffice.

This will definitely be a move in the right direction. However, the total subsidy bill for fuel could still rise above the budget estimate if high oil prices prevail.

03:05

India's services industry has already made its mark in the international arena. Then, the same would not be said of its manufacturing industry. But that is gradually changing. In fact, according to the United Nations Industrial Development Organisation, India is now one of the top 10 industrial nations of the world. It has also withstood the financial recession with a growing trend of productivity in its manufacturing industries. Indeed, with the global recession hitting the developed world hard, China, India and Brazil have seen their share increasing as compared to the US, UK, Japan and Germany. That said, if one were to compare India and China on the manufacturing front, the former considerably lags the latter. Not just that, on the digital access front, India trails behind Brazil, China and Russia. Level of digital access includes mobile and broadband subscriptions, fixed telephone lines and households with a computer and television. While there has been explosive growth in this area in India in recent times, most of it has come from the wealthier segment of the urban areas. The rural areas have yet to see a significant change in digital access. So, far the main barriers have been cost, poor education and lack of connectivity. But if efforts are made to address these issues, the market that it opens up is huge.

03:30

Picture this. A bumper crop for a particular commodity. And the price of this commodity shoots up to nearly double during the year of the bumper crop. Reason - the government decides to export most of the commodity and leaves the domestic manufacturers starving for it. As a result demand for the commodity shoots up and prices touch the sky. The commodity we are referring to is cotton.

The year 2010 saw a bumper harvest of cotton. Yet the cotton prices remained very high as India decided to export 5.5 m bales of cotton to China, which was suffering from a shortage due to the floods in the country. And the reason the government decided to do so was because they 'miscalculated' the cotton production. And 'assumed' that the area under cultivation would increase the next year due to the higher prices.

Unfortunately, the government was wrong on both counts. The domestic demand for cotton was high. As a result the cotton production was not enough to take care of both the domestic needs as well as the export needs. And more so, the area under cultivation cannot be increased as there is a shortage in terms of the seeds. Thanks to the government's mistake the domestic textile industry would continue to see higher cotton prices and just pray that this year is good for cotton harvest. Otherwise they would continue to face the heat of higher prices for some time to come.

04:10

What comes after a disaster? You are right if you say, "Misery!" But there's one more aspect of disaster that people often forget amidst this misery. We are talking about 'rebuilding'. The fallen houses and factories have are rebuilt. People's lives are rebuilt. There's a cost of such rebuilding, and sometimes it is huge depending on the disaster.

Take the case of Japan, where the damage done is being estimated at around US$ 300 bn. This is almost four times the damage that Hurricane Katrina did in the US a few years back. And this number is only going to rise with the length of the ongoing nuclear crisis in that country.

Economists are now wondering if the cost of rebuilding Japan will mean a disaster for the US dollar. One of the ways Japan can fund its rebuilding is by selling a chunk of the US bonds it holds. And Japan holds around 20% of these bonds. So if Japan were to sell large amounts of US bonds to fund its reconstruction, there is a risk of selloff (or even a collapse) in the value of the US dollar as well. Whether it happens or not is still doubtful. But it is a real risk for the dollar.

04:30

The benchmark indices in Indian stock market managed to hold on to the momentum led by buying interest in banks, auto and commodity stocks. Positive cues from markets across Asia also helped sentiments. The BSE Sensex was trading 130 points (0.7%) higher at the time of writing this. The European markets have also opened on a positive note.

04:45

Today's investing mantra

"Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business." - Peter Lynch