India now wants less of you, Dear Mr.FII

Apr 13, 2010

In this issue:
» India does well in manufacturing in Feb
» Banks are parking funds with MFs
» Excessive fear to lead to a better recovery?
» Oil prices to rise 10% on lower supply
» ...and more!

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Could there be the formation of another asset bubble in Asia? Yes, if central banks in that region do not do much to tighten their monetary policy. It is widely apparent that Asian economies have weathered the global crisis much better than the US and Europe. Countries such as China and India for instance have already started reporting healthy growth in GDP. However, the developed world is still struggling to shake off the ills of recession. Infact, as reported on Bloomberg, the Asian Development Bank (ADB) has stated that the Asian region is likely to expand by 7.5% in 2010. This is after recording a lukewarm growth of 5.2% in 2009. The latter incidentally was the slowest pace of growth in 8 years.

But a stronger recovery poses its set of challenges too. The risk of higher inflation and formation of asset bubbles. Central banks have so far refrained from adopting a stricter stance with respect to their monetary policies. They feared that the same could thwart growth. But that would only tantamount to risks of high inflation in the future. Further, one should note that the origins of the current global crisis lay in the loose monetary policies of the US Fed. And so, ADB contends that Asia needs to start raising interest rates. This is to prevent inflation from accelerating and avert the formation of asset bubbles. ADB has also stated that additional stimulus measures are not likely to be introduced this year. But at the same time the central banks will have to take a call on the withdrawal of the current measures. More importantly, if there are strong indications of the economy overheating, then interest rates will have to be raised.

In this regard, China and India have already raised reserve requirements with banks to rein in inflation. However, in India's case this may not be enough since high inflation stubbornly has refused to ebb. Therefore, it is only a matter of time before the RBI chooses to raise interest rates. Indications are that this may happen as soon as the central bank sits for its policy review in April. It is strange that FIIs, the very set of investors that the Indian stock markets so greatly rely on are now being seen as fueling asset bubbles.

 Chart of the day
Emerging markets have recorded strong growth in the past few quarter. What is more, this healthy trend has been replicated in manufacturing as well. As today's chart of the day shows, Brazil and India led the pack in terms of highest manufacturing growth reported in February 2010. The developed world (notably the US), however, does not have much to boast about.

Data Source: The Economist

Who can deny the lure of better returns? Certainly not the ones who are in the businesses of putting money to 'better' use. You may have guessed that we are referring to banks. The poor credit demand scenario has left the lenders with little option to optimally use their funds. They park most of the excess funds with the RBI at the base lending rate (repo rate). As per a business daily, the surplus funds parked by banks with RBI are on an average Rs 750 bn a day.

However, the option to earn higher tax-free returns from mutual funds seems more alluring now. And banks have been resorting to the same despite the RBI's disapproval. The RBI sees the movement of bank money in and out of mutual funds as the former's means to window dress its books. And hence the disapproval. Nonetheless, unless the central bank offers banks better option to utilize funds, (credit disbursals) this problem may persist.

A recent article in Financial Times caught our attention. A stock market bull was behind it perhaps, as it painted a pretty rosy picture of the future of the stock markets. And some of the views therein did impress us. The author talked about how extreme fear gripped the global economy during the worst slowdown since The Great Depression. This in turn led to asset prices across the board taking a huge beating. The article further adds that the response to the crisis has also been nothing short of extraordinary. Whatever needed to be done has been done and more. The governments have gone all out to reflate the economy. They have tried very hard to make the old magic work again.

So far, so good. However, this is where, we believe, the article starts to go wrong. The writer believes that the excessive fear made the recovery worse than expected. And now it may help produce a much better than anticipated recovery. We beg to differ. We don't believe that you can use the same trick twice to fool people. Most of the growth that has happened in the past decade has been based on steroids.

Liquidity and cheap credit fueled asset price bubbles and poor consumers thought these to be a real source of wealth. But now the bluff of the people behind these bubbles has been called. And the US consumer has turned a lot wiser. Thus, there is a strong chance that all the efforts towards bidding asset prices up again could fail. And the recovery that has happened so far could actually turn out to be phony. Currently, the stock markets seem to be factoring in a strong recovery. There is a possibility that the recovery may not happen at all and the bull behind the article is forced to go into a shell again.

Indian pharma companies may have spread their wings far and wide across the globe. In many overseas markets they have managed to establish a formidable presence. But not so in China. The Chinese pharma market is beset with a slew of challenges which Indian companies are finding difficult to overcome. These include strong barriers for market access, longer time to build commercial infrastructure and difficulty in competing with Chinese players on cost. Not just that, language is a barrier which means that the only way to gain a foothold would be through a JV with a local partner. But even that is not easy. The challenge again being finding a trustworthy partner and establishing distribution set up in the highly government regulated Chinese market. But some Indian companies are still upbeat that healthcare reforms introduced by the government would enable Indian companies to penetrate this market. One will, however, have to wait and watch.

At the height of the crude oil price spike, everyone was keen on knowing if oil prices will reach US$ 200 a barrel. Although oil has bounced back from its lows, it doesn't quite grab headlines the way it used to. Yet, there are oil industry veterans who continue to be bullish on crude oil prices. Take oil billionaire T. Boone Pickens for example. He believes oil prices will rise another 10%, as supply isn't keeping up with demand. He says, "All the world can produce is 85 million barrels a day. But projections are now that you'll need 86 to 86.5 million barrels a day. This is going to move up." In our view, short to medium term predictions are tricky. After all, much of the marginal demand is dependent on economic growth in the western world. There is very little consensus on how that is going to shape up. In the long term though, we do believe price will march upwards as there are no new sources of supply on the horizon.

Any news of recovery in the US is good for the Indian IT sector. After all, Indian IT majors like TCS, Infosys and Wipro derive over 50% of their revenues from the US. They had shivers running down their spines during the peak of the recession when their rich clients in the US got stingy and cancelled or deferred most of the investment in IT then. Nevertheless, it appears that their worst days are over. IT research firm Forrester Research predicts that the US$ 85 bn US IT services market which is the life-blood for many Indian IT companies will return to pre-recession growth levels of 5% in 2010. Moreover, in 2010, the US businesses are expected to outsource 4% more business (around US$ 79 bn) to remote locations like India. In short, the American pie of IT outsourcing is again expanding. Surely, the Indian IT sector will have a lot to gain from this.

Indian stockmarkets had a weak trading session as the indices languished in the red throughout the day. At the time of writing, the BSE-Sensex was trading lower by about 34 points (0.2%). While most Asian indices were trading mixed, the European indices had opened in the red. Losses were largely seen in auto and banking stocks.

 Today's investing mantra
"If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes" - Warren Buffett

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4 Responses to "India now wants less of you, Dear Mr.FII"

Ajit kumar singh

Apr 27, 2010

Dear mr.fll All good news sent this my email id and coprete me my Award money your fathi fully Ajit kumar singh



Apr 13, 2010

As on now, Mr. FII is playing more than 35% of the market, and they are the cause for the ups and downs. i donot agree with this statement
-India now wants less of you, Dear Mr.FI


Suresh Aithals

Apr 13, 2010

Previously we do keep the Stock for more than years and marry with the Stock years together .Now how changed the scenario.yes it is right to sell wen we feel it is not good.


Anupam Garg

Apr 13, 2010

The rise in interest rates should have been done a long time back. It is a little late now but not late enough
Biggest problem of g: choice of wrong base
RBI always acts like a daddy bank. stop preaching and start acting daddy.
MFG always has been india's bane, now in pharma also, tch tch
US: the last source of oil...i wonder 4 wht day is it preserving its resources when the world is going green anyway

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