Goldman saga, a boon for Indian investors?

Apr 19, 2010

In this issue:
» India's position in world services
» Landmark event of 2005 likely to be repeated
» India's official poverty rate is raised
» US Fed wants to keep money cheap
» ...and more!

Just when you thought that we have seen the worst of the crisis, more skeletons keep tumbling out from the closet. Goldman Sachs may not have been dealt the same fate as its less fortunate peers notably Bear Stearns and Lehman Brothers. But the investment bank's arrogance post the crisis indeed had not won it any favours. What is more, the recent scandal that is marring its dubious reputation certainly highlights the fact the company is no better than many US investment banks.

Not surprisingly, this latest development has not gone down well with stockmarkets around the world, especially the US. More so for the latter, which is already grappling with recession and high unemployment. But the question is how will this impact the Indian stockmarkets?

Taking cues from its global peers, Indian stockmarkets today have been at the receiving end. But we believe that these are just knee jerk reactions and that any such dips should be looked upon by investors as opportunities to buy some good quality stocks. The global financial crisis is a perfect example. At the height of the crisis, even when India's prospects were not as bleak as the rich world, stocks plunged considerably.

To such an extent that very good quality companies were available at bargain prices. Therefore, we believe that the eruption of the Goldman scandal could be detrimental in the sense that it might bring stock prices down. But you, as the long term investor, should grab this opportunity and latch on to stocks of good companies with good managements, available at cheap valuations, and having the ability to deliver higher returns in the future. At the end of the day, despite various challenges that the Indian economy faces, its growth prospects still look good from a long term perspective with a lot going on for it at present.

 Chart of the day
India's services industry may have grown at a scorching pace over the past many years. But when it comes to its contribution to the world's services market, it is pretty miniscule at 2.6%. As today's chart of the day shows, the US was way ahead of its peers in the services sector as it accounted for 14.2% of the world share in 2009. China, despite being the world's leading merchandise exporter, still has a long way to go before it becomes a force to reckon with in the services arena.

Data Source: The Economist

India has been very slow in creating proper infrastructure to support a fast economic growth. One reason behind this has been that the government has handled a large part of the projects. And given that the government has been extremely slow in execution, the country has suffered. This is set to change now, as more private players enter the fray.

Even the government would like to see private companies' share to rise in India's infrastructure spending. It even expects private firms to fund half of the US$ 1 trillion investment in infrastructure planned for the five years between 2012 and 2017. Now, the intentions are right here. But what we fear is that even private companies might falter on delivering projects within the given time and cost. This is due to the slow bureaucratic process that will continue to make it difficult for such projects to get all necessary approvals. Not to forget the problems in accessing long term funding!

The financial world is about to see a repeat of a landmark event of 2005. Of course, it is not a certainty yet but the event is widely expected. We are talking about the Yuan revaluation. Last time it was done, it turned out to be quite a game changing event. The WSJ is running a story on whether the event would be as dramatic this time around as well. Well, everything depends on the magnitude of the change. It should be noted that a small change has already been baked into the asset prices by now. Most Asian currencies have already run up in anticipation of the same. And oil prices have also gone up in response to a strong possibility of a weaker dollar.

But what if the size of revaluation turns out to be far more than expected? In that case, all bets would be off. We are living in such an intertwined financial world that it would be difficult to gauge the exact after effects of a strong revaluation. However, the Chinese leadership may not be willing to risk the same. Most probably, the revaluation of the Yuan is likely to be a gradual one. And it is not likely to have dramatic an impact on assets across the world. In the long run though, it would put a lot of purchasing power in the hands of Chinese consumers. And this is good news for investors in a wide variety of commodities.

India's planning commission raised its estimate of the country's official poverty rate recently. This, it has raised from about 27% of the population to 37%. Reports peg the number of Indians in below the poverty line at around 410 m. But many activists in the country are of the opinion that the real number of poor may be much higher. What makes this vital is the fact that it is this number that will decide how many people will be eligible for the state's food subsidies. Only households deemed officially below the poverty line will receive the same. 'Inclusive' development is surely easier said than done.

If there is one thing that the US Fed is committed towards, it is keeping money cheap. Much to the disapproval of economists, the US central bank does not seem to be finding any concern in offering liquidity for free. The problems of high leverage that brought the economy to its knees hardly figure on the Fed's correction list. Instead all that they are concerned about is getting growth at any cost. Probably its time that the RBI and other sane central banks worry about how this cheap liquidity will fuel asset bubbles. For one thing is sure. The longer interest rates remain near zero in the US, the more will be the risk appetite of investors there. And many of them may be willing to pay unreasonable prices for assets and returns in emerging markets.

To the common retail investor, investing in companies means buying listed stocks and the occasional IPOs. The universe is larger for big institutional investors. One key area is that of private transactions. Here, investors can take large stakes or even completely buy out companies without using a stock exchange at all. Such 'private equity' investors are always on the lookout of young, promising companies. Turns out, private equity investors are now keen on emerging markets. More than ever. That shouldn't come as a surprise. After all, the growth profiles of companies in the emerging economies look fare better than their peers in the developed markets. As per Financial Times, emerging markets will attract nearly 15% of all private equity commitments in two years. That's twice the current levels. In our view this trend is likely to continue. The scope for superior returns and relatively low base will ensure that.

The Goldman scandal took a toll on Indian stockmarkets as the indices languished in the red throughout the day. At the time of writing, the BSE-Sensex was trading lower by about 168 points (1%). While most Asian indices were trading in the red, the European indices had also opened in the negative. Losses were largely seen in metals, oil & gas and IT stocks.

 Today's investing mantra
"Diversification may preserve wealth, but concentration builds wealth." - Warren Buffett

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4 Responses to "Goldman saga, a boon for Indian investors?"


Apr 19, 2010

dear sirs one side you say 40 %indians are living below poverty line and on the other side you indians saving rate is 30% or something.It is very hard to digest



Apr 19, 2010

Some of the top students from IIMs are taken by Goldman Sachs. The company has a major presence in India. What will be its imapct on people's confidence in the financial system? If the IPL investigations bring out the involvement of Indian Banks in financial irregularities will it not erode further confidence? Are these indicators of further downslide in the sensex? I am looking to sensex reaching 27000 forecast by you sometime ago.



Apr 19, 2010

Goldman scandal and the resultant dip in the stock market prices have definitely provided a golden opportunity for long term investors to invest in truly good scrips. It should be grabbed by all shrewd investors.


Prem Singh Dhankar

Apr 19, 2010

Good number of possibilities.
Chances are that this time around MFs and other in house indian FII will play a bigger role in keeping the market charged.
Good reading

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