Why MNCs should be part of your long term portfolio?

Apr 28, 2011

In this issue:
» China doing its best to end the dollar's reign
» Hunt for talented leaders in BRICs
» Is US$ 200 barrel oil a near term possibility?
» India looking for ways to get oil supplies in order
» ...and more!

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 Chart of the day
The concept of multinational companies (MNCs) has undergone a dramatic change for the Indian investor over the years. A couple of decades back this term was invariably associated with an American, Japanese or European company with operations across the globe. These were entities that hired the brightest Indian minds for overseas posts. They sold products that were far superior in terms of quality. And they looked to serve the needs of only the financially well off in developing markets.

Today, the cases are quite the reverse. The MNC may be an Indian company having operations in the US, Europe or Japan. Some may even have subsidiaries in those countries. Instead of sending talent abroad, the Indian MNC may be offering jobs to Americans and Europeans. And most importantly the Indian MNC may be exporting superior quality products at cheaper rates. Thus it may seem that Indian investors would be better off focusing on home grown stories for long term investments.

No denying the fact that some Indian companies could turn out to be bigger wealth creators than those in the West. But does that mean that the MNCs from US or Europe can be completely ignored? We do not think so. There continue to remain some entities from the West that have retained competitive advantage over centuries. Professional managements in these entities have nurtured leaders for decades. Further they have capital, technology and brands at their disposal like no one else. Fortunately for us some of these entities are listed in India.

If one goes by today's chart of the day, a higher share of profits from offshore markets may lure the MNCs to invest more resources in India. The need to grow at a rapid pace may also lure them to Indian capital markets more often. We believe Indian investors should not ignore this long term opportunity if it comes at a reasonable price. Better regulation on rights of minority shareholders of MNCs listed in India makes the case for investing in them even stronger.

Data source: Gloom Boom and Doom report

Do you think some MNC stocks could be value accretive to your long term portfolio? Let us know your views or post them on our facebook page.

The US dollar has long been the currency of the world. It has reigned supreme since the gold standard came off. But China appears to be going all out to end this reign. A column carried by a leading daily has discussed this issue time and time again. About 2 years ago, China has proposed the replacing of US dollar with SDRs (Special Depository Receipts). The rate for the SDR would be a weighted average of a basket of global currencies and not just determined by the US dollar. However, this proposal was not accepted at the time. But China has not lost hope and is still trying alternative means to end the US dollar's reign. China has now gone ahead and established mutual lines of credit with countries in local currencies with the BRICS (Brazil, Russia, India, China and South Africa) countries with which it has huge amounts of trade. Through this these countries are able to minimize their foreign exchange risks. However, it also minimizes their dependence on US dollar for trade with China. For now it looks like China is successfully paving the path to end the dominion of US dollar in the years to come.
We all know that the center of economic growth and power is shifting away from the developed economies. In the coming years and decades, countries such as China, India, Brazil and other emerging economies are going to dominate the global economic stage.

Quite naturally, global MNCs have displayed their keenness about making the best of this changing scenario. But there is one major challenge that these biggies are facing. The challenge is about finding the right talent.

If a certain poll is to be believed, India, China and Latin America are going to witness the greatest shortage of executive talent this year. And this is not happening for the first time. China and India have consistently made it this list in the last three years.

Global businesses are looking for talented leaders with international operational experience who can move smoothly between different cultures and also have deep local roots. Now that's quite a scarce combination. So finding the right business leaders will surely remain a big challenge.

Yesterday, we talked about how Jeremy Grantham, a noted investor and financial writer, made a compelling case for higher commodity prices in the future. However, he is not alone. Marc Faber, another famous investor of our times made a similar argument, especially for oil. Writing in his monthly market commentary report, Faber opined that he finds it difficult to make a case for a sharp drop in oil prices. The likelihood of an escalation of unrest in Middle East countries and the central banks' strong penchant for money printing are two of the biggest reasons why oil prices should hold high as per Faber. However, he was slightly concerned about the fact that so many analysts were calling for US$ 200 per barrel oil in the near term. This, as per him, looked like a remote possibility. Thus, while there is a chance that oil prices could correct, the uptrend should remain intact in the long term, he concluded.

As per leading news daily, India is now exploring using Turkey based banks to pay for crude oil imports from Iran. To give you a background, Iran makes up for 13% of crude oil imports. The problem goes back to late December when RBI (Reserve Bank of India) scrapped the usual mechanism to pay for crude oil imports of Iran. This was in response to U.S disapproval as it felt that funds were used for Tehran's nuclear program. Post this, payments were routed through Germany. This did not go down well with U.S and hence the option was closed. India is now eyeing Turkish banks to clear long standing dues to Iran.

So will this be the ultimate solution? We have our doubts. U.S knows it pays well to bully India and will do so again if India opts for Turkish banks. The oil supplies from Iran have not been hit yet as Iran is relying on India's goodwill. However, we don't think it will be wise to stretch it too far. If supplies are disrupted, it will be costly to enter the spot energy market or strike fresh deals as oil prices are boiling already.

We believe it is high time that India puts its foot down and signals U.S to back off. Our relationship with Iran is too crucial to be governed by U.S. As gas supplies continue to dwindle and energy demand rises like never before, oil policies are the last area where we can afford to slip.

India's high food prices continue to remain a headache for the common India and for the RBI, but the government seems to have displayed a complete apathy for the same. Otherwise what would explain the fact that even after production picking up, lack of storage continues to pose problems. Take the case of wheat for instance. In Punjab, wheat procurement has already picked up but its 'mandis' are ill equipped to store the same. What is more, with daily arrival of the grain to mandis touching eight lakh metric tonnes, the procurement agencies are failing to match up with timely lifting of the grain. As a result, most of these food grains are exposed to the vagaries of nature and get wasted. Indeed, the RBI has been trying to rein inflation by hiking rates to restrict the supply of money. But that is not the problem. The issue is that despite food production picking up, inadequate storage facilities are damaging foodgrains thereby leading to supply constraints. Thus, the government needs to urgently address these structural issues if inflation has to remain under control going forward.

Lagging most of their peers in Asia, the benchmark indices in the Indian stock market made further inroads into the negative territory led by profit booking in realty and IT heavyweights. At the time of writing, the BSE Sensex was trading lower by 99 points (0.5%). While the Japanese indices are leading the gainers, the Indian and Chinese markets are the biggest losers. Europe has opened on a positive note.

 Today's investing mantra
"Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation." - Warren Buffett

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6 Responses to "Why MNCs should be part of your long term portfolio?"

ramamohanrao g

May 1, 2011

It is indeed wise and undisputed to have MNC Stocks inany one's portfolio.On issues like corporate governance,investor interests they are streets ahead.We have various examples of hoe some indian companies cheated the investors,thru the loop hole in the existing corporate laws and our exasparatingly slow legal system.Rao


Sonny A Jacob

Apr 28, 2011

I think China's SDR proposal will remain a dream only, at least in near term. In order to do this, they have to pull back at least $2tn ADR reserve and convince Japan to follow suit. But US may not allow that to happen. Remember even in 80s, Iran wanted to get back few Billions for which they had to hold the entire Embassy crew as hostages.


Mohan singh

Apr 28, 2011

Grains are rotting, but people are going hungry and inflation is high. Such grave situation can happen only because of corrupt and callous politician and IAS babus. Short term solution is to 50% of the MNREGP wages as food grain. Remove all IAS babus from this job and hand over the responsibility of logistics to some honest professional and ban export of food materials by subsidising it with tax payers money. Export of subsidised food materials is a henious crime committed on the people of India by corrrupt politician and IAS babus



Apr 28, 2011



shome suvra

Apr 28, 2011

India needs more capacity of supply to fight inflation where FDIs can take a strategic role. Investing in MNCs during inflation is a good strategy as these cos provide the translational business advantage reducing the systemic risk.



Apr 28, 2011

Totally agree... there is no doubt the the MNC companies have continues to outperform due to robust processes & controls, global expertise and excellent parentage.

A shining example of this is the Performance of the Birla Sun Life MNC fund which invests in MNC companies and has given 20% returns in the last 3 years, as against BSE Sensex Annualised returns of just 4.3%.

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