Are you ignoring this new risk to your stocks?

May 4, 2012

In this issue:
» This tiny Asian economy is a key global economic indicator
» A bubble as big as a continent!
» What's the biggest threat to the world right now?
» Time for reverse brain drain?
» ...and more!

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While evaluating stocks, one of the important parameters that we pay close attention to is how a company prices its products. Companies that have strong brand value, whose products are perceived to be superior to those of others, can easily charge a premium for their products. That is what we call as pricing power. On the other hand, there are companies that manage to prop up prices by creating artificial scarcity of their goods, forming cartels to fix prices and so on. This kind of predatory pricing certainly does not entail pricing power. Moreover, such practices can often get companies in to trouble.

In fact, Indian investors are finding themselves facing exactly this new risk. Over past several months, several companies across various sectors have come under the scanner of the Competition Commission of India (CCI). The issue received tremendous attention last year when the competition panel imposed a hefty Rs 6.3 bn penalty on DLF. The real estate giant was said to have abused its dominant position in the market. More recently, the CCI has penalised agrichemical manufacturers such as United Phosphorus, Excel Crop Care, among others. These companies have been accused of cartelisation while submitting bids for a tender for aluminium phosphide tablets from Food Corporation of India (FCI). A penalty of 9% of the average of their standalone turnover over the last three years has been imposed on them. As per this formula, the quantum of penalty for United Phosphorus would be about Rs 2.5 bn. That's more than its standalone net profits of nearly Rs 2.3 bn for the financial year 2011-12 (FY12). Around the same time last month, about 10 explosives manufacturers were also penalised for similar charges. In addition, several cement and tyre companies are likely to face penalty from the CCI for alleged cartelisation. Verdicts on many such cases are expected to be announced in the coming months.

What are the implications of this? Most of the companies have said that they would challenge the CCI orders before the Competition Appellate Tribunal (CAT). In some cases, the fines are hefty, while in other they are not very significant. Whatever be the case, this will certainly act as a strong deterrence for companies. The pricing discipline that they have managed so far may get affected to some extent. Hence, investors should certainly bear such risks in mind while making investment decisions.

Do you think investors should worry about the CCI penalties? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
How much does an economy lose out because of illiteracy? A recent report by World Literacy Foundation titled Economic and Social Cost of Illiteracy answers to that question. Among the BRIC countries, China and India lead the losses owing to illiteracy with estimated yearly losses of US$ 135.6 bn and US$ 53.56 bn, respectively. The provisional data of the 2011 census suggests that about 74% of India's population aged 7 years and above is literate. As per the same report, illiteracy costs the global economy over US$ 1.19 trillion every year.

Data source: Firstpost

The world is a tangled web. Everything is interconnected. Even stuff that may appear to be insignificant may actually turn out to be the most relevant thing to look at. Look at the South Korean trade data for instance. You may wonder how the trade of a small Asian country affects the world's economics. For such skeptical thinkers, it is time to be shocked. As per Goldman Sachs, it is one of the key indicators of global economic health.

How? Well, South Korea is one of the largest exporters of capital goods to China. And we all know that the capital investment in China is what has been driving the demand for commodities and industrials. So if South Korean trade shows a slowdown, like it has in recent times, then it indicates that capital investment in China has slowed down.

This in turn translates to a lower demand for commodities from the dragon nation. So for all those countries that have been depending on demand from China for their intermediate goods, they are most likely to see a slowdown in coming months. Therefore, the trade data of South Korea is actually a very important indicator of global economic health.

Whenever the word bubble is uttered, the mind is full of pictures of either the US, China or even Europe to some extent. This time around though, we are going to talk of a bubble that is seldom discussed in the mainstream media. Yet, it is so big that some are calling it the biggest bubble in recent history and the one that is heading for the mother of all hard landings.

So, what exactly is that bubble? Australia! Yes, that's correct. The country that has not witnessed a recession since 1991 now seems to be showing some strong signs of a bubble. And what are these signs? Well, for starters, five of the most expensive cities in the world are now in Australia. This gives us an idea of how expensive the real estate down under has become.

Besides, the Australians seem to have piled on too much debt with the expectations that the future will always reflect the past. But this does not seem to be the case. A bulk of the Australian economy is dependent on China. And this is a dangerous dependence to have, especially at a time when China's own future is being questioned. Although there are enough other indicators, the ones presented here should suffice to ask potential investors in Australia to exercise caution.

So what do you think is the biggest threat that the world faces right now? You might think it is the debt crisis that has engulfed Europe and the US and plunged them into recession. But think again. For Nouriel Roubini has a different view. He opines that the new number 1 threat to the world economy is Iran. Iran, its stance on nuclear weapons and mounting tensions with Israel is likely to intensify in the second half of 2012. What is more, the US (read President Obama) is unlikely to intervene before elections in November unless there is increasing pressure. The fallout of this feud will be a possible oil shock. What with uncertainty ruling over the Arab world, fluctuations in oil prices cannot be entirely discounted. And of course, if you also throw in the debt crisis, what one has is a bleak outlook on the world economy.

It will not be wrong to say the all hopes are currently pinned on Asia. True, both China and India have their own set of economic problems. One is trying to make up for the drop in export demand by encouraging domestic consumption. Rise in wages and lack of competency due to currency appreciation is also not doing any favour to Chinese exports. India, on the other hand, has multiple deficits, fuel shortages and policy bottlenecks to tackle. But all said and done, these two economies along with few others in Asia are the only hopes for growth. Little wonder that bodies like International Monetary Fund (IMF) and Asian Development Bank (ADB) have all eyes on the Asian continent. The last that they can afford is to allow Asian economies to make more mistakes. Hence, warning bells are being sounded loud and clear to ensure that there are no further slip ups on economic policies.

Is the time ripe for a reverse brain drain? Can India and China become the next big job destination versus just being low cost centers for goods and services? Indians and Chinese usually want to explore developed markets for jobs. Now, Westerners are looking at attractive growth opportunities in emerging markets.

Facing stagnant growth at home, multinationals (MNCs) are increasingly looking at setting up shop in developing nations. These MNCs are looking at ramping up on a large scale, creating a number of job opportunities for Westerners in countries like India and China. So maybe this reverse brain drain can actually lead to a lot of benefits for India. Especially, in terms of improving our work ethic and rewarding innovation. However a number of issues including salary expectations, work visas, taxes, etc still need to be worked out.

In the meanwhile, the Indian stock markets were trading deep in the red today. At the time of writing, BSE Sensex was down by 271 points (1.6%). Barring healthcare stocks, all other sectoral indices were witnessing selling pressure. Asian stock markets were a mixed bag with Taiwan and Hong Kong being the top gainer and loser respectively. European markets saw a weak opening today.

 Today's Investing mantra
"We both (Charlie Munger and Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'

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3 Responses to "Are you ignoring this new risk to your stocks?"


May 5, 2012

Another source for extra Income,if all tendering and validation is transparent, strict penalties are imposed like black listing the products and cancellation of contract, these things would not arise again. There is a saying in south 'That God(vt) never hears to Poor"



May 4, 2012

How does Indian economy losing because of illiteracy. Has our governments ever succeeded in helping the poor really? Government officials and institutions are merely waging a propaganda stunt that they are helping the poor but in fact, they are giving something so they should not immediately die but at the same time they will never allow the poor to become their competitors at any time. In other words these government organizations in India so far they are squeezing prevailing situations of the poor lot. So I would say these illiterates and poor are not the burden of Indian growth, but our implementation of reforms!



May 4, 2012

The so called "Competion Commission of India" would not give an effective results either for the benefit of the companies nor the interest of the general shareholders. It will be short lived and will be emanicipated after a quite few years time. We have so many commissions introducted and none of them gave an effective results, these commissions are initiated by certain money groups and no intention whatsoever is there for the benefit of general shareholders. So I think investors need not worry about all these commissions, it will not last long!

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