Are the days of the 'India story' numbered?

May 11, 2011

In this issue:
» Will China determine global gold prices?
» Why most of the recent IPOs have proven duds?
» Loss making PSUs continue to suck taxpayer money
» The cost of global disasters
» ...and more!

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'Emerging markets' has been the most fancied investing theme amongst global investors. Ever since Goldman Sachs published the famed report on 'BRICs' in 2001, investors do not seem to be getting enough of them. What is more, each of these economies offer some unique characteristics. China has superb execution skills and excellent infrastructure. This makes it an ideal manufacturing hub for MNCs looking to cut costs. India's large base of young and English speaking population offers it an edge in services. Brazil and Russia have it all when it comes to basic resources like food grains and minerals. Hence there was little reason for investors to look beyond these four over the past two decades.

But a legendary investor who has the reputation of being the 'guru' on emerging market opportunities is now looking elsewhere. After 40 years of managing emerging market funds, Dr Mark Mobius is now being enticed by what he calls 'frontier markets'. Going by Mobius' own definition, they are but a subset of emerging markets. They have lower market capitalization and liquidity than the relatively developed emerging markets. More importantly they are markets that have not yet been 'discovered' by majority of investors. And what makes their case really unique is that they have a long trend of high growth rates ahead of them with very low debt to GDP ratio. Thus in a scenario where both high growth and low debt are hard to come by, these certainly make interesting options. To add icing to the cake, some 'frontier markets' are also well endowed with resources like oil, gas and precious metals. Hence they are well positioned to benefit from the high global demand for these resources. Especially, from their emerging market peers.

Nigeria, Saudi Arabia, Egypt, Vietnam, Kazakhstan, Qatar, Ukraine and Argentina are some of the names that appear in Dr Mobius' watch list. Needless to say that despite a lot going in their favour, social and political unrest assumes a huge proportion of risk in these economies. Not that these are going to stay forever. There may come a time when some of these economies will have investment potential much larger than the BRICs. But we believe that as long as they are deprived of good governance and social stability, no amount of growth rates can be sustainable. Also when it comes to undiscovered long term opportunities, there are plenty in India itself. Hence for the time being, we would avoid this theme even if Dr Mobius or Goldman Sachs don't.

Do you think that the India story is here to stay? Let us know your views or post them on our facebook page.

 Chart of the day
If there is any argument that justifies the RBI's belief that Indian markets are suffering due to the Fed's faulty policies it is this. Over the last one and half years, FIIs (Foreign Institutional Investors) have by far dominated the derivative trades in Indian stock markets. As seen in today's chart FII trades were on an average 88% of total derivative trade on Indian bourses in recent months. What this confirms is that most of the speculative activity here is being funded by cheap money from overseas. And hence there are that much more chances of sharp correction once the FII trades start unwinding.

Data source: RBI

The deadline is drawing closer by the day. In fact, quite a few experts are of the view that it is only a question of 'when' and not 'if' anymore. We are referring to the time when China will overtake the US as the world's largest economy. With this debate more or less settled, let us veer our attention towards another important argument. Will this landmark event have any impact on the future demand for gold and its price? Quite certainly, believes a long time gold specialist. Rising demand from both the official as well as the retail sector in China is going to be extremely bullish for gold prices. No doubt China is one of the world's largest gold producers. But as per the specialist, almost all of that production will go towards satisfying the official demand. This means that the enormous retail demand that will spring up courtesy the rise of the Chinese middle class will have to be largely met from outside. Thus, it is believed that Chinese demand together with Indian demand will completely dominate global retail gold demand by 2020 and as a consequence, also set the price and the trend of the gold markets of the world. An argument with a strong merit indeed.

Legendary investor Warren Buffett couldn't have been more accurate about initial public offerings (IPOs) when he said: "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."

Haven't we always admitted when it comes to IPOs we prefer to be careful than sorry? Just look at the most recent IPOs that hit the secondary markets in the last two months and you will know why. According to yesterday's closing prices, PTC Financial Services, Shilpi Cable Technologies, Paramount Print Packaging and Future Ventures, were all trading 32%, 66%, 26% and 17%, respectively, below their issue prices. Only Muthoot Finance managed to remain a meager 0.8% above its issue price. So effectively, retail investors have suffered heavy losses on these recent issues.

But the story is not way too different if you take all the IPOs that listed during 2010-11. About 52 IPOs came in during the year. You would be surprised to know that 41 of them are trading below their issue price. Even more shockingly, about 23 of them are down over 40%. Most of the times, the pricing is so aggressive that there's hardly anything on the table for retail investors. As a result, they fall prey to the greed of promoters and merchant bankers.

These are two undertakings which have been losing both money as well as market share. State run BSNL and MTNL have seen their business operations deteriorating consistently. And the government wants to gift these two a whopping Rs 30 bn as aid. The Department of Telecommunications (DoT) is expected to soon finalize a subsidy of Rs 25-30 bn to support these ailing PSUs. So essentially these companies would get tax payer money with which they can continue to run their loss making units. Why? Because they are public sector undertakings.

BSNL and MTNL have seen an erosion of market share. The reason is their focus on the fixed line services, which is losing share thanks to the growing mobile telephony in the country. And the two companies have been consistently losing market share in mobile telephony as well. This is due to the aggressive marketing of the private operators which is helping them in garnering a larger share of subscribers. Result being that the two PSUs are not expected to go back in the green anytime soon. Then why give them more money to burn? Would it not be better to restructure them and make them more competitive instead? Apparently the government feels giving subsidies is a much better idea than to improve efficiencies.

When nature strikes, nothing is spared. Bridges collapse, cars are washed away like toys, and huge buildings crumble. According to the United Nations (UN), damage to schools, hospitals, roads, etc. are rising in many lower income countries. And this is despite improvements in early warning systems for evacuation. Rich countries are also exposed, with disaster striking all geographies. Floods in Australia. Earthquakes in New Zealand and Japan. Even hurricanes in the United States all caused significant damage to life and property.

Disasters have already caused more than US$ 300 bn in losses so far in 2011. In barely 5 months, there was more damage than all of 2010. This shows us that catastrophic risks need to be anticipated, since they cannot be eradicated. Use of land needs to be improved and infrastructure needs a boost. It's funny, but, a major hindrance to progress is 'probability'.

Most governments are not willing to spend current money on once in a life time or black swan events, which may or may not happen in the future. Or during the elected party's term. Either way governments need to realize that prevention is better than cure. Insurance companies' portfolios are mainly in the developed world, i.e. North America, Japan and Europe. Developing countries like India need to re-evaluate their infra, especially new projects, as well as insure themselves against natural disasters.

The benchmark indices in the Indian stock market managed to break into the positive territory after some weakness in early hours. At the time of writing, the BSE Sensex was trading higher by 30 points (0.1%). While the Korean and Indonesian indices are leading the gainers in Asia, the Indian markets lag the pack of gainers. Europe has opened on a mixed note.

 Today's investing mantra
"According to our view, the high prices paid for 'the best common stocks' make these purchases essentially speculative, because they require future growth to justify them." - Benjamin Graham & David Dodd

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9 Responses to "Are the days of the 'India story' numbered?"


May 12, 2011

India story will stay for two to three decades. The main reasons for this is our demographic dividend, tremendous infrastructure needs, scope for reforms, high savings rate and the other usual advantages like legal system, democracy, reasonable law and order, and English spaeaking and skilled labour. The only worrying issues are corruption through dicretionary allocation of resources, no political unanimity except on distribution of goodies before election, lack of reforms, land and environmental issues, stability of policies, and increasing inequality beyond a point. However, have we not been growing at 8 percent plus despite all this. Imagine if half of these issues are resolved, we might become the fastest growing economy.


D. Sai Srinivasa Raju

May 12, 2011

Recently I have reviewed my portfolio by comparing the CMP with those in April,2006. In April 2006, the index was 11750 and now it is 18500 and odd. Out of the 9 scrips that I have reviewed 3 are PSB's of which 2 stocks were quoting at +10% of what they were in April,2006 one stock has given 200% return. Surprisingly in the mid cap space, Out of the 6 stocks 4 stocks were quoting at less than 50% at which they were quoting in April,2006, inspite of the fact that their turnovers, net profit, EPS and BV have considerably improved ( more than doubled). Further they are all consistent dividend paying companies. I think that all this hype of FII buying, India growth story et al are are for the consumption of gullible investors. I think that the retail investor has not benefitted anything from the noise being made by the media and the brokers. Infact a set of new generation investors have lost heavily in the 2008 market crash and my guess is that most of them will never look back at equity as an investment opportunity.The high inflation, quality of governance, Government inaction on various financial reforms are impeding the growth of equity markets and it may be quite a while for the market to give good above normal returns. In the meanwhile if all these so called investment gurus, who play with free float money available in the western countries by moving from one country to another and one geography to another move away from India, we may go back to the 1994 era.


Zephyrine Goveas

May 12, 2011

It is ironic that Equitymaster should paint a dismal picture on the one side and on the other seek subscription for several services in their portfolio. I feel making money is pure luck in Indian market for retail investors at least. Now the markets in both the fastest developing economies, i.e. India and China are not going anywhere. If there is no predictability as far as the FII activities are concerned, how can retail investors ever trust the markets. Further, with the abolition of entry loads, the Mutual Fund industry is also unable to offer incentives to agents to get the retail investors invest in mutual funds In India, the regulatory authorities like to overregulate industries which abide by the law. There were no retail investors complaint against mutual fund houses unlike insurance companies, yet, SEBI abolished entry load! Therefore as long as Indian money from PFs, Pension funds and retail investors does not come in the market, the markets will not be in a position to move upwards.



May 11, 2011

BSNL is missing out its inherent advantage.
The service personnel may be in league with private competitiors to kill BSNL.


Ganesh K

May 11, 2011

What?Days of India story are numbered? In fact story never started !! Reasons - (1) Corruption. It has killed the story for india- but china too is equally corrupt but they have advantage that 98% population is single ethnic group (Han)so they love their country.Plus single party(Communists)dictatorship keeps better control. BJP loves country but multi ethnic structure of Indai denise them single party rule (2) Population explosion.(3) fertile land and forest land aquired by force by government has lead to mass insurgencies like naxalite bandits.(4) cultivable land is being sold by farmers to builders and non food crops like flowers for export are grown leading to food shortage furter incresing unrest.(5) environment degradation making monsoon delayed and unpredictable.(6) reservations in education & jobs are
killing the merit. 80 % state revenues are spent in salaries of babus. (7)Religious fanatism is on rise since past two decades spending too much on internal security.(8) India's too much dependence on services sector. It is painful but, Days of tottering Republic of india are numbered.


mm gupta

May 11, 2011

Bsnl and mtnl are losing market share in mobile telephony because of their bad services not for their focus on landline service


Narasimha Rao

May 11, 2011

Very Good analysis.
Thanks & Appreciation.


anupam garg

May 11, 2011

the choice of countries by Mr. Mobius is quite interesting coz they do possess quite strong investment capabilities. the days for india as an attractive destination r numbered especially coz of the rising scams which is painting the country in a very poor picture. Hardly any corrective measures r being taken, & i dont find any unexplored avenues left...the upcoming frontier choices will attract the daddies of FIIs & b4 u know it, som other country will get the title of most eligible country for investment which india truly deserved



May 11, 2011

Eq.Master Team,
At the very outset let me admit that I am not at all en economist !
As an oridnary Aam Aadmi of a great democracy let me
put forth in writing (after havingbread your article) some simple thoughts that flashed through my simple mind in the context of the subject matter dealt with therein !!

I am prompted to cite the instances of contingent assets
and contingent liabilities of Frontier Markets but have elucidatorily illustrated that their elo(contingent libilities like the proverbial Sword of Damocles hanging above one's head by a slender thread)are those that are hovering above, about to crystallise into reality depending upon the happening or not happening of a FUTURE UNCERTAIN EVENT ""

On the sated about the Assetsme analogy you have eminently illustra

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