Europe's pain could be your chance to buy

Jun 4, 2010

In this issue:
» Europe's troubles, your opportunity
» Fuel price hike imminent
» Alarming decline in mutual fund accounts in April
» Is greed good?
» ...and more!!

--------------------- Don't Miss! FREE Webinar with Ajit Dayal - Register Now! ---------------------
If you are worried about the global crisis reaching India and impacting your investments, then tune in to the Equitymaster FREE Webinar, titled, 'Global Fears, India Cheers?' Listen to Ajit speak on the opportunity he can foresee for India...and for a long-term investor like yourself. Scheduled for Monday, 7th June, 5.30 pm (IST).
Hurry! Register now!

The sovereign debt crisis in Europe is the biggest worry on the macro landscape currently. The PIGS countries got used to low borrowing costs. They splurged the cheap money on housing in excess of their needs and welfare without backing it with hard work. Unfortunately, there cannot be any quick fix solution to the issue. Bailouts, write offs and interest rate hikes will all have side effects of their own. The problem is structural. Hence, we expect the problem to linger on a bit.

How does that affect India? Foreign institution investors will move their money out of the Indian stock markets as soon as panic sets in. We wouldn't be surprised. They have done that many times in the past. But the India story remains intact. If anything, it stands out amidst all the surrounding gloom and doom. As the advanced economies start saving more, they would look at investment destinations to park their money. India will be a leading choice. Our policymakers must grab the opportunity with both hands and direct this finance towards building India's infrastructure.

As for Indian investors, there is a lot to look forward to from the Indian economy in the years ahead. And the growth will percolate to corporate India. We strongly advice making use of any externally driven weakness in the stock markets to buy into well-managed companies with excellent underlying economics.

 Chart of the day

Source: PTI

The last several years have brought the Indian economy to the forefront like never before. And that reflects in the numbers. Take the index of India's industrial production. As the chart of the day shows, it has steadily risen from FY02 to FY07. There after, the global economic crisis hit home and the index slid for two years. India was among the first few countries to bounce back from the downturn. And that again shows in the index, which has gained considerable ground in FY10. In our view, given the relatively low levels of industrialisation in India and the enormous potential ahead, the index is likely to keep scaling greater heights in the future.

Gold is number one on most investors' minds these days. But commodities guru Jim Rogers is more bullish on sugar. According to him, sugar is bound to make an all-time high sometime in the next decade. In fact, he is very bullish on agricultural commodities in general. Then there's the other popular commodity - crude oil. Rogers believes that the extent of the rise in crude oil prices and the length of its stay is something that will take everyone by surprise. Rogers' opinions arise from his belief that these commodities are currently at an 'unbelievably low' price. Especially on a historical basis. Further, currencies like the US dollar are being debased enormously. In such a scenario, real assets that have real consumption may very well turn out to be the perfect hedges. For whether inflation averages 2% or 20% over the next decade, it is unlikely that people will stop consuming some of the commodities he has mentioned.

Speaking of crude oil. The hike in petrol and diesel prices seems to be imminent. An empowered group of ministers is set to meet on June 7 to make a decision. Earlier there were doubts whether they will be able to raise prices to the extent required. For example, petrol and diesel prices needed to be hiked by around Rs 6 per liter each to bring them at par with international rates. But with the softening of oil price due to the European debt crisis, the government needs to increase the price by a more palatable figure of Rs 3.5.

Good economics says that they should go ahead with the hike. Moreover, they should follow through by not interfering again if international crude oil prices were to start rising upwards in the future. In our view, that will be the hard part. It is one thing to introduce reforms when conditions are conducive, it is quite another to stick with them when it extracts a political price. We certainly have our doubts.

Here's an alarming statistic. Indian investors are exiting mutual funds and exiting fast. A leading daily reports that the number of mutual fund accounts have fallen by a whopping 400,000 during the month of April. It should be noted that this number is 10 times greater than that witnessed between September 2009 and March 2010. Important to add that the figure quoted is the number of accounts and not the number of investors. Given the fact that a person can have multiple accounts, it is quite possible that in terms of numbers of investors exiting, the total count could be a lot less than 400,000. However, the fall is worrisome indeed.

The decline is attributed to two factors. Market uncertainty on account of the recent events in Europe and the reluctance of distributors to push MF products due to scrapping of entry loads and commissions. While better awareness of the long-term benefits of mutual fund investing could indeed set the first of the two factors correct, it is unfortunate that distributors are putting the long-term interest of investors at stake for the sake of few extra bucks.

Is greed good? Maybe in a society where the measure of your value is the amount of money you bring to the table and not the social impact you make. This greed was especially evident in the US banking and finance sector. The measure of social impact is as follows. If you make money, your firm makes money. If your firm makes money, your shareholders make money. If your shareholders make money, then guess what, society has made money, thus a positive social impact.

Due to this sort of short-term incentivisation, markets played on irrational exuberance and rewarded quick profits from mortgage backed securities and not prudent traditional lending. Since bankers were bringing in profits, they were understandably rewarded with big bonuses. However, when the cards came crashing down, the poor bankers got all the flak. But, the whole system was based on irrational short-term gains. The fed was waiting in the wings offering liquidity if the system ever got into trouble. All you need is a carte blanche from the government and you can play on the market's greed all you want.

We feel that all stakeholders (including stock markets, governments, and especially the company payroll departments) now need to factor in positive, sustainable social impact while making decisions on whom to reward and by how much.

With the G20 meeting scheduled for this weekend, can we expect some concrete steps for the economic recovery? Well, the World Bank has a suggestion for the G20 nations. Involving the non G20 nations in the forum would help the world economy recover faster. Although the G20 nations represent 80% of the world economic activity, a growth of 6% in the remaining 170 countries, twice that of developed nations cannot be ignored. While the demand in developed economies has gone down, there is still growth in the poor countries with opportunities in education, human resources, infrastructure and private investment. We believe that it would be shortsightedness on the hand of the G20 nations if they ignore this opportunity.

Meanwhile, after starting the day on a weak note, the Indian markets rose above the dotted line post noon. At the time of writing, the BSE-Sensex was trading 70 points higher. Stocks from the FMCG and realty pack were amongst the top gainers. Gains were also seen in Asian markets led by Singapore (0.8%), Hong Kong (0.2%) and China (marginally up). However, Japan was trading lower by 0.1%.

 Today's investing mantra
"We have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Europe's pain could be your chance to buy". Click here!

6 Responses to "Europe's pain could be your chance to buy"

sunil bhagat

Jun 6, 2010

the fall in no of mf accounts is a result of the experience of the 2008 mkt. fall where the sensex shed nearly 63%. The fear of Europe also falling could be one of the reasons triggering this.
The contention of mutual fund advisors not promoting the funds is not entirely true.The left over IFAs consciencously are educating the investors about the long term mf investing. It is wrong to state that distributors are not promoting mutual funds due to the entry load scrapping and that also just for a 'few bucks'. sorry to say it is not 'a few bucks' but the very bread and butter of the IFA which has been done away with. Stop blaming the IFAs for the predicament. And if it was ' a few bucks' then why did SEBI scrap the same.



Jun 4, 2010

Re:Mutual funds accts falling

A third and plausible reason is also the savviness of small investors who have made decent reasons and are smart enough not to push their luck was also recently brought out in your column



Jun 4, 2010

I am fail to understand why we folloe US/Europe, when we say there is no problem in Indian Econmey. We the whole India follows US market. When US/Europe follows us?



Jun 4, 2010


More debt whether from Swiss or other sources will not solve the structural problems of Eurozone. Hardwork, more savings, less expdr will be the key



Jun 4, 2010

Europe's pain can be sloved with the Money in Swiss bankers , they can offer them at negligible rates with mortgauges from the respective govt.Is it not possible for pressing to Swiss through G20?


Mool Raj Vyas

Jun 4, 2010

Essence is the commensuration of work - with the desires- in the long run.We cannot expect ultimately in a situation better than what is warranted by our performance- something that could happen in colonial times.India Society, in general should expect to get the returns commensurate with its own effort- and the word effort is an inclusive one- to include even the wealth (as the wealth reflects saved 'performance' as against 'consumed' performance-results.
This analysis leads us to worry- at least on account of performance of a large section- known as Government /administration where one can see lot of "over /excessive" payments by the Govt. to its own staff - which rarely puts up a performance worth the money paid/spent on them.
Secondly, increase in agricultural output-prices,(coming of course from the scarcity caused by substantially lower quantitative production)- has put in money in the hands of rural masses- quite disproportionately- at the cost of unorganized sector of urban middle class.
These two are major areas- capable widely tilting the balance.

Balance of convenience, makes the administrators ignore these two areas.

Then the payment to / cost of, governance that sometimes comes to the light- like money spent by ex-diplomat central minister or like money collected by a Raja Minister.Instances may not be very much but impact is far-reaching and ultimately probably devastating- when consequences of situations like this in terms of emulations that percolate sideways- get measured.

Equitymaster requests your view! Post a comment on "Europe's pain could be your chance to buy". Click here!