Biggest investment story for the next 20 years

Jun 5, 2009

In this issue:
» Emerging markets lead the way
» Dollar staring at a hard landing
» Credit growth at its five-year low
» Ketan Parekh is at it again
» ...and more!

If you want to become a proud owner of a Lamborghini or a Ferrari, please do not join the finance industry and instead become a farmer. No, this isn't a figment of our imagination but is a candid assessment of the world that we would live in 10 to 20 years from now and it has been made by one of the world's most successful and outspoken investors. The man in question is Jim Rogers. Speaking to India's leading business daily, the bow-tie sporting maverick opined that the world is shifting away from the financial types to producers of real goods and the transition could last for several years. Hence, ten years from now, it could be the farmers who will drive fancy cars while stock brokers will move around in tractors and taxis. Rogers also said that if the Indian government really gets serious about reforms this time around, then India would be the one of the biggest investment stories for the next twenty years or so. He was also worried about the fact that few of the developed countries like the US and UK are in real mess and could also have a run on their currencies. As for his investment ideas, Rogers continued to remain bullish on commodities as he felt it was the safest thing to do what with countries around the world resorting to printing of money.

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Nothing describes the word 'optimism' better than run up we have seen in the past three months. This has been the sentiment prevailing in emerging markets such as China, Brazil and India. As the IHT puts it 'Stock markets in developing countries are riding a wave of optimism.' In hopes that the global economy is recovering and that the developing nations worldwide are leading this recovery, markets have surged tremendously over the past few months.

However, the gains recorded in India have been greater to those witnessed in Brazil and China. There have been various reasons for the same - UPA coming back to power, improving auto sales and growth in production levels of core sectors, amongst others. But things have not been so different in the other two countries as well. China has witnessed its industrial production levels rebound, while retail sales in Brazil have seen an increase in recent times.

If we look at the chart below it gives a sense of how things have changed and how they differ between those of developed markets.

Rs 100 invested is now worth...
Source:Yahoo Finance

However, on comparing the indices valuations, the situation is a bit different. While India's BSE-Sensex and Brazil's Bovespa indices are trading at a price to earnings ratio of around 21 times each, China's CSI-300 Index is trading at a much higher multiple of 29 times. It may be noted that during the first week of March, the Sensex was trading at a P/E ratio of around 11 times. Has the scenario changed so much that the index is commanding such high valuations? We do not think so.

It is well known that following the 2000-2001 stock market scam, Ketan Parekh was duly punished with the SEBI barring him from the capital markets. Now a similar punishment is being meted out to 26 entities as they were believed to be acting as conduits for Ketan Parekh and executing synchronised deals in five scrips over a period of 26 months from January 2007 to February 2009. Besides looking to investigate the matter further, the SEBI has given these banned entities 15 days to respond. However, given that many investors have burnt their fingers due to the fraud perpetuated by Ketan Parekh, his audacity to trade in the markets despite being banned is truly shocking. Obviously, he has not learnt a hard lesson and if indeed it is proven that he has been blatantly flouting the law, a more severe punishment might be in order.

As per a Business Standard report, bank credit growth, which is basically the growth in the amount of loans disbursed by banks in India, has fallen to a five-year low of almost 15.9% YoY for the fortnight ended May 22. This 15.9% growth seems all the more bad when compared to the corresponding period last year when bank credit had grown 25.5% YoY. What more, this is the lowest growth since March 24, 2004. It is estimated that apart from the lower demand for funds due to fewer new projects, last year's high base may also be behind the sharp moderation in growth rates. However, credit growth is expected to pick up in the short to medium term, in line with the revival in demand and investment as also banks lowering their prime lending rates further.

We all are aware that Mr. Bill Gates, the founder of software behemoth Microsoft, is one of the most generous philanthropists in the world having donated billions of dollars for several causes. At a recent meet in Oslo, Mr. Gates passed on a message to the other billionaires of the world, suggesting that they give away a large chunk of their wealth to charities. To quote Mr. Gates - "I think all billionaires should give away the vast majority of their fortunes -- though I don't say they shouldn't leave anything to their kids. I think they would enjoy it, their kids would be better off, and the world would be better off." We can't help but give a double thumbs-up to his recommendation.

The US is clearly having a fear of a run on the dollar. Or what would justify Geithner's comments in China recently where he tried to soothe sentiment by saying that China's holdings of US debt are safe? Chinese officials have outlined their worries in recent months (three times to be precise) that large US spending could impact the treasuries. And they've received immediate guarantees from the US. Now Geithner has pledged again that the US will reduce its budget deficit over the next few years.

China is by far the largest purchaser of US government bonds. About 82% of its US$ 2 trillion of foreign reserves are in dollars. And at a time of big budget deficits and future rising costs of medical services and retiring baby boomers, the US cannot afford to tell China to stop buying these bonds. But if the Chinese really stop buying the US bills, the result would certainly be a hard landing for the dollar.

India's very own version of the electric car is likely to hit the roads in a few months. Ratan Tata, chairman of the Tata Group recently stated that Tata Motors will be ready with one by September this year. In addition to this, there has been news floating around the world's smallest car, the Tata Nano being launched in the United States within the next two years. Apart from this, it is also planning to launch the vehicle in Thailand and other markets in South East Asia. This will be a strategic move by the company as it plans to use Thailand as its manufacturing base to export its products to other countries. In India, the car is expected to hit the roads by July this year.

The Indian markets ended the day on a firm note with the BSE-Sensex ending higher by around 95 points while the NSE-Nifty index ended higher by 15 points. Stocks from other Asian markets closed on a firm note as well. Stocks in Europe were trading in the green at the time of writing.

 Today's investing mantra
"Graham wasn't about brilliant investments and he wasn't about fads or fashion. He was about sound investing, and I think sound investing can make you very wealthy if you're not in too big of a hurry. And it never makes you poor, which is better" - Warren Buffett

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1 Responses to "Biggest investment story for the next 20 years"

Alok Misra

Jun 6, 2009

What would you call as investment of this nature?Rs 4000 invested in a barren hillock sold for clean Rs 22 Lacs after 30 years. This again sold by the new buyer for a sum of Rs 68 Lacs!
Rs 300 invested in a plot in 1960 worth Rs 2.5 Crores today!
Rs 3lacs invested in 1989 and again invested Rs 4 Lacs in 1994 worth today Rs 45 Lacs!Could as well be worth Rs 1 Crores from all indications!
Is there any thing better!

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