The best bet as markets fall

May 22, 2010

In this issue:
» India among the best bet as markets fall
» Rupee posts biggest weekly decline in 14 years
» From poor monsoons to excessive rains
» Financial system needs urgent overhaul: Bimal Jalan
» ...and more!

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When you invest in a company, among other things, you look at its balance sheet. How much debt does it have? How does that stack up against its net worth? Does it have enough liquid cash to manage day-to-day operations smoothly? These are some of the questions you would ask.

It is not that different when you are looking at entire countries. Countries with lower debt to gross domestic product ratios, higher foreign currency reserves and better managed banks make for safer investments. As per Mark Mobius, who oversees US$ 34 bn in emerging market funds at Templeton Asset Management, emerging markets are much safer than the developed ones. He says, "The numbers show that these countries are safer to put your money in terms of debt. People are now beginning to differentiate. Many of these countries have been denigrated undeservedly because they've been doing actually a good job."

He believes there is less risk and better return in emerging markets. Especially when the Greece crisis has cast a shadow on stock markets around the world. We couldn't agree more. Only recently, when the world economy was reeling under the global financial meltdown, India was among the first to rebound. Given India's domestic demand led economy, any correction in asset prices stemming from the developed world would only provide investors to buy good companies at reasonable prices. In fact, such external shocks can just be the right time to implement a. value investing strategy like Warren Buffett

 Chart of the day

Source: Economic survey FY10, Reuters

With the monsoon season fast approaching, everyone is hoping there is no repeat of last year's drought. India's agriculture minister sure is betting on better rains this year. Recently he predicted that India's sugar output is likely to exceed its annual demand of about 23 m tonnes for the first time in three years. It may be noted that sugar production in India is cyclical in nature. As the chart of the day shows, high levels of production in FY07 and FY08 are followed by lean years in FY09 and FY10. With production in FY11 expected to exceed domestic demand, India is likely to export sugar. That will be quite a turnaround from last year when we had to actually import the commodity.

Speaking of monsoons, poor rains last year led to rising food prices, which quickly became the biggest headache for the Indian government. In fact, the annual food price inflation, based on the wholesale price index, still hovers around 16.5% currently. The government is expecting food inflation to decline substantially by the end of the year on predictions of a normal monsoon season this year. Ironically, it seems that we might actually end up with excess monsoons instead. According to scientists, there is a risk of floods from downpours linked to La Nina weather pattern this year. If this were to happen, crops such as sugar cane, corn and rice would get damaged. It seems the headaches for India's agriculture ministry just won't disappear.

After 2008's credit crisis, another major crisis is upon us again. Over this period, there has been a lot of talk about an urgent need for financial and regulatory reforms. However, nothing much has happened. This is what Dr. Bimal Jalan, the former RBI chief believes. In an article he has written in Business Standard, Dr. Jalan suggests that the global financial system needs a major and urgent overhaul.

Also, as per him, the core objective of such a reform should be to develop transparent rules for financial transactions. Not just for transactions between two companies but also two countries. Among his major suggestions, Dr. Jalan has talked about dealing strictly with the 'too big to fail' type banks.

He also suggests fixing an upper limit for both fiscal and current account deficits as percentage of GDP. If a country exceeds that level, it should come under scrutiny of an international financial agency like IMF. Dr. Jalan also suggests taxing profits from foreign capital flows of less than one year.

We agree these suggestions will definitely help in overhauling the global financial system. But all this requires political will and support. And what we have seen since the crisis started in 2008 leaves a lot to be desired on this account!

An interesting article in The Economic Times has been critical of the current form of the savings bank deposits in India. It talks about how the interest rate on such deposits is still not left to market forces and is regulated.It also suggests that once these rates are freed, it is possible that some new products tailored to particular sections of society will emerge. But until they are fixed there is no incentive for banks to make these accounts more attractive!

In the era of globalisation, no country remains insulated from the financial indiscipline at any other part of the globe. The Euro-zone debt crisis is a prime example of that. Apart from creating havoc in stock markets around the world, it has also caused excessive volatility in the currency markets And the Indian Rupee is no exception. The Rupee has posted its biggest weekly decline in nearly 14 years as concerns over the Euro-zone debt crisis has resulted in an outflow of foreign funds to supposedly safer places.

India follows a managed float exchange rate mechanism to control excessive volatility in the currency markets. And it appears that the central bank may step in soon in to arrest the rapid fall in the Rupee. Interesting to note that India plans to gradually move to full capital account convertibility. In our view, given the scope of damage that volatility in currency markets can cause, the RBI will have to be really watchful and see that checks and balances are in place.


Source: Source: Yahoo finance, Kitco, CNNfn

Similar to last week, Indian stock market around the world continued to nosedive on the worries over the Greek debt crisis this week. In addition, the unexpected rise in US jobless claims added to the concerns. Pressure was seen in stocks across geographies with the top losers being Japan (down 7%) and Singapore (down 5%). These were followed by Brazil, China and the US, which saw declines in the range of 4-5%. Amongst the key world markets, Hong Kong was amongst the best performers, falling by 'just' 3%.

Down by 3.2%, India's benchmark Index BSE-Sensex was amongst the lowest losers this week. Pressure on Indian stocks was largely due to an approximate Rs 40 bn selloff (net) by the foreign investors. However, on the back of strong results posted by some of the index heavyweights, the pressure on the stocks was curbed to a certain extent.

 Weekend investing mantra
"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage" - Warren Buffett

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8 Responses to "The best bet as markets fall"

Shibshankar Saha

May 27, 2010

Stay away when Greece is burning.
Some more Greece can comeout from the blues.
So wait & watch upto few more months for better time to invest.



May 25, 2010

"emerging markets are much safer than the developed ones" = Coundn't agree more on this.It is a fact. Hope, funds flow towards India, the safest destination.
(2)"India’s sugar output is likely to exceed its annual demand of about 23 m tonnes for the first time in three years."=Will Indian sugar companies make money or not?What will be world out put?
(3)"we might actually end up with excess monsoons instead."= It is cyclical.It just might happen. Is no rains better than heavy rains?
Good News and bad News = Thanks for all that.



May 25, 2010

yr ideas are educative .make more specific and actionable pl


Rajkumar hallan

May 24, 2010

Your format of presentation is very nice and very well arranged. This gives important financial news in nutshell but with added value. Kudos!!! to you all guys.



May 23, 2010

Equitymaster predicted sensex will touch 21000 by June this year... and not 27000.

June is not yet started.. and who knows it will touch 21000 in next 30 days (approx 20 trading sessions).

Nevertheless, I am optimistic that Sensex will touch 21000 if not in June then at least by December'2010.



May 23, 2010

Hadn't u predicted that sensex will touch 27000 by June this year? The logic given then has not withstood the test of time. Most of the economists are out of touch with reality. They come up with theories that ignore human behaviour and therefore are wrong in their predictions.


Vikram Chandalia

May 22, 2010

Your format of presentation is very nice and very well arranged. This gives important financial news in nutshell but with added value. Kudos!!! to you all guys.


VB - Dubai

May 22, 2010

I think we are staring at a probability of 25-30% correction given the eminent slowdown in China. The stock market correction in Brazil, Russia and China are indicators pointing in that direction.Things can get worse if there is another shock from Eurozone.Challenging times ahead for Stocks this year, find it amusing that certain FIIs are projecting 19000-20000 levels by DEC 2010.

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