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The Impact of 'Disappearing' Middle Class Jobs on Your Stocks

Jun 11, 2016

In this issue:
» Official versus real unemployment
» George Soros makes a comeback to profit from global turmoil
» Banks in India need Rs 1.2 trillion capital
» ....and more!

00:00 Chart of the day

Tanushree Banerjee, Co-Head of Research

'It's not a Bengaluru problem!'

I almost raised my voice while talking to a cousin. The 23- year old is waiting to finish his masters at a premier management institute and land a dream job. The discussion on campus placements had veered towards IT firms. And my warning about lower job creation in the sector had irked him. He called it a 'Bengaluru problem'!

According to my cousin, automation is going to eat into only low-end tech jobs. He does not see it impacting any other industry. Bagging a cushy management role in any other sector is a given to him.

You can't blame him. Almost two generations of Indians have seen job creation only in the IT sector. And therefore the risk of job loss, if any, seems to be associated with the tech sector alone.

But unfortunately, that is not the case. Robotics and automation are as much a threat to manufacturing as to the services sector. And the biggest job creators so far, public sector units and IT firms, no longer want bloated employee costs.

RBI governor, Dr Rajan, hit the nail on its head when he recently said...

  • Flexible manufacturing, big data, connectivity, and robotics are changing the entire landscape, wherein only professionals in the hi-tech sector or those lower down like security guards are feeling secure, while leaving the middle class anxious.

The RBI governor has good reason to worry about disappearing middle-class jobs in India.

India produces about five million graduates every year. About 1.5 million of them are engineers. But as per the Labour Ministry, one in three graduates stay unemployed up to the age of 29. The official unemployment rate in the country is close to 12%. But the disguised unemployment is far higher.

For a country that calls its young population its biggest demographic strength, loss of jobs is a serious threat. The economy that thrives on savings rather than debt needs to have the working population gainfully employed. In the absence of job security, not just savings and investments but consumption patterns and household debt levels could go for a toss.

The problems of middle-class unemployment have far reaching implications for businesses too. Just look at China. China's official unemployment rate is lower than India's, but the country now has seven times the number of graduates entering the workforces than it did 15 years ago. With fewer graduates willing to take up blue-collar jobs, the real unemployment number is estimated to be closer to 30%. China's policymakers are therefore bracing for a steep rise in wages and labour unrest in its factories.

The Official Unemployment is different from the Real

Businesses that depend on consumption can take a huge hit with the disappearance of middle-class jobs. Unless they have been careful to align their product profile to stay ahead of the curve.

The conversation with my cousin was to help him shed the rose-tinted vision of the job scenario in India.

Investors too cannot afford to ignore the possibility of mass joblessness.

If robots give a company a strong competitive edge and better returns on capital, then that's indeed a big positive for investors. It seems clear to me that several large companies in India will shed their workforce in this pursuit.

That's why I am personally wary of robots.

My colleague Richa, however, isn't...

She recently recommended a small cap in Hidden Treasure that takes full advantage of robotics. The stock is up 26% in three months and has huge upside.


The turmoil in the global markets has got George Soros worried. So much so that he has made a comeback to trading after a long hiatus. George Soros became famous in 1992 when he bet against the British pound and amassed profits of US$1 billion from the trade.

Soros is not optimistic about the world economy and he opines that the two main pain points are China and the European Union.

According to him, China does not have a transparent political system that can tide over a crisis and more importantly undertake a complete economic overhaul. The European Union (EU), in the meanwhile, is grappling with various issues - the burden of immigration, continued weakness in Greece, and a possible negative fallout should the UK choose to exit the EU.

Based on these factors, Soros has sold stocks and is lapping up gold and shares of gold miners.

Is Soros right? Is there a reason to get bearish on the global markets? What do other experts and economists think?

This is something my colleague Ankit Shah has also been mulling over. Here's what he says:

  • I am not an expert on what's happening in the world economy. But I do understand basic economics... I understand a bit about human behaviour. What I see happening in the world of man and money is say the least. As I see it, the global financial system is inexorably compromised, corrupted, and full of lies. The ordinary individual is being played by an unholy nexus of big governments, central bankers, and big corporations. What's even more startling is that the mainstream media simply do not want to talk about it.If history does repeat itself, then I see every sign that says that we are approaching the tipping point of a worldwide political-economic crisis. I don't mean to say the world is about to end. But we are up for a massive shake-up.

So Ankit is keen to pursue a project that he is very excited about. Vivek, who often writes about such economic issues in his Diary, has introduced Ankit to an elite global think-tank of independent thinkers, economists, and analysts. These are independent experts from practically every major financial capital in the world. Ankit is very keen on getting to know their perspective of what's happening in the world of man and money. And then bring those views to you.

It's really exciting and not something you would want to miss. So do watch this space!


Banking, one of the key pillars for any economy, is on a shaky ground in India. The public sector ones, in particular, have turned good money into bad debts and are in dire need of capital now.

As per Moody's Investor Services, the government will have to infuse Rs 1.2 trillion in public sector banks (PSBs) by 2020. This is to improve balance sheet and compensate for the losses incurred. The government, however, has planned an infusion of Rs 450 billion...just 40% of what is required. It seems to be underestimating the issue once again. Or perhaps it is convenient to ignore the elephant in the room. Since it can barely afford to put in that much capital in banks.

Thanks to the RBI's strict vigilance, the PSBs now are acknowledging the grave bad debt issue instead of kicking the can down the road. But the road to recovery is likely to be a long one. The worst is not over yet. Asset quality of a lot of PSBs is likely to remain under pressure. At depressed valuations, raising capital from the markets will be difficult. The worst part is that the trillion rupees of taxpayer money will be wasted unless lending policies and managements are overhauled.


Barring the US and few markets in Asia Pacific region, major global indices closed on a weak note. Concerns over hike in the interest rate by US Fed kept the global markets on the edge. Investors are looking ahead to next week's Fed meeting.

European stock markets also closed on a weak note. The outcome of Brexit seems to be weighing on the indices. The Brexit referendum will be held June 23, where voters will be asked whether Britain should remain part of the European Union.

Barring Singapore (up 0.5%) and Hong Kong (up 0.3%), the major Asian indices closed in the red. Uncertainty around global events in coming weeks have kept investors on the sidelines. Meanwhile, crude oil prices fell below US$ 50 per barrel, witnessing marginal rise during the week.

The Indian markets too closed the week in negative territory. The Reserve Bank of India, in its second bimonthly monetary policy review, kept the key policy rates unchanged. The rising inflation since last two months has been the concern for the policymakers.

Performance during the Week Ended 10th June, 2016

04:50 Weekend Investing mantra

The really dreadful losses of the past few years (and on many similar occasions before) were realized in those common-stock issues where the buyer forgot to ask "How much?" - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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vkreddy vaddula

Jun 14, 2016

for research

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