"I am more confident of India than China" - The 5 Minute WrapUp by Equitymaster
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"I am more confident of India than China"

Jun 13, 2009

In this issue:
» India causes flutters in the Chinese camp
» BlackRock makes one more acquisition
» The worst could be over, says Infosys
» George Soros demands a ban on credit default swaps
» ...and more!

India seems to have pipped China in the near term at least. Both these fastest growing economies had seen their growth getting derailed due to the global financial crisis. However, until recently, China's massive government stimulus spending worth 6% of GDP was the biggest draw in Asia for investors chasing growth. But that changed once the general elections in India concluded.

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The strong victory of the UPA government and hopes that a stable government at the centre will push ahead with reforms faster has now swung the limelight on India. Investors are now more positive on India and believe that valuations of Indian stocks are more attractive than their Chinese counterparts offering the prospects of stronger returns. In fact, Stephen Roach, chairman of Morgan Stanley Asia had this to say, "For the first time in 12 years, I am more confident of India than China because India has made good macro improvements."

He further added, "It has well managed companies, entrepreneurial talent, English-speaking population, well developed capital markets and now the political will to reform." Having said that, India does have its share of challenges the chief one being infrastructure; a department where China scores many times over. Hence, India may have the advantage in the medium term but unless it bucks up on the reforms front, the enthusiasm now could peter out in the long term.

And while we are on the topic of India and China, India's announcement that it would dispatch 60,000 troops to the border with China has caused flutters in the Chinese camp. In fact, an online poll conducted by a leading Chinese news daily shows that 90% participants believe India to be a big threat to China.

As you know, India's turbulent history with China goes way back in 1962 when both the countries were locked in a brief war over the 3,500 km Himalayan border area. Since then while both the countries did sign a peace treaty, relations between have hardly been very cordial. In fact, Prime Minister Dr. Manmohan Singh recently reiterated while co-operative relations with China would continue, no concessions would be made when it came to territorial disputes. This tough stance has not gone down too well with the Chinese and many of them believe that China should not maintain relations with India!

For years, India had been sitting pretty as it had what no other country seemed to have namely the 'India Advantage'. This meant availability of skilled labour and services at low cost. However, India can no longer afford to rest on its laurels. In fact, Wipro's chief Azim Premzi has cautioned the industry that competition globally is hotting up and has warned the sector against falling into a mind trap of the 'India Advantage'. What is more, he has cited the example of the Philippines whose exports this year would be pretty much close to that of India, when five years ago they were hardly 20% of what India exported.

It is not just IT but the India advantage in a sense does not hold much weight in the pharma sector as well. For instance, as far as generics are concerned, India always had the upper edge as Indian companies were able to produce generic versions of branded drugs at the cheapest possible cost. But global players rapidly caught on to this fact and started either acquiring plants in the country or forging tie-ups with Indian players. Thus, domestic pharma companies can no longer bank on only the low cost advantage but will have to move up the value chain.

Forget the global financial crisis and the fact that it has led many companies to hive off unviable units, US firm BlackRock seems to be on a growth trajectory of its own. The British bank Barclays has agreed to sell its BGI investment arm to BlackRock for US$ 13.5 bn, making the latter the world's biggest asset manager.

BlackRock had traditionally been firmly entrenched in the mortgage market but began to grow into a powerhouse through various acquisitions including its 2006 deal to buy Merrill Lynch's asset management operations for US$ 8.6 bn. The deal is also beneficial to Barclays as the proceeds from the sale would enable it to bolster its Tier I capital especially in a scenario where many of the global banks including the British ones are struggling to conserve capital after massive write-downs.

There are some good news and some not so good news coming from Infosys. The good news is that Infosys believes the worst to be over as far as the impact of the global financial crisis is concerned. The not so good news is that demand for outsourcing services will take up to a year to recover.

As reported in the Wall Street Journal, Infosys' MD Kris Gopalakrishnan has said, "Our clients are more confident about the current situation because they believe that we are at the bottom, and it's highly unlikely that we see something unforeseen (such as bankruptcies and failures) in the future."

While these words do sound comforting, Infosys nevertheless has chosen to remain cautious. In fact, the company intends to go to college campuses for recruitment next year only after clients finalise their IT budgets in December and January. This is hardly surprising. Given the scale of the global crisis, any recovery is bound to be gradual.

Given the damage they have caused to the financial system, experts are demanding a ban on the issuance of credit default swap instruments (CDS). George Soros, the billionaire investor is one of them. In an interview with a US business channel, Soros has asked for 'outlawing' CDS instruments. He says, "Some derivatives ought not to be allowed to be traded at all. I have in mind credit default swaps. The more I've heard about them, the more I've realized they're truly toxic."

Now, while CDS are used to protect against nonpayment of debt or to speculate on a company's credit quality, as Soros says, "People buy a CDS not because they expect an eventual default but because they expect them to appreciate in response to adverse developments." And that has been the cause of all mayhem that surrounds us currently.

Soros' criticism echoes fellow investor Warren Buffet's description of derivatives in 2003 as 'financial weapons of mass destruction'. On derivatives in general, Soros has said that they should be as strictly regulated as stocks. As a matter of fact, the Indian central bank, RBI is planning to introduce CDS in India starting this year.

While we remain worried about high inflation in the future given the way central bankers are printing money these days, there are experts who believe otherwise. Their belief is that consumers, who are on a saving spree on account of the fear of wealth loss, will demand less of products and services in the future. This will keep a tight lid on the overall demand worldwide, thereby keeping inflation under control. Therefore, these economists believe deflation, not inflation is a greater likelihood.

The Indian markets ended the week ending June 12 2009 on a positive note. The country's benchmark index, the BSE-Sensex ended higher by 1% over the previous week. Other Asian markets put up decent performances as well. While Japan (up 4%), China (up 2%) and Hong Kong (up 1%) recorded weekly gains, Singapore posted a decline of 1%. As for other global markets, US, Brazil (up 0.4% each) and UK (up 0.1%) ended on a positive note, while Germany and France ended marginally lower.

Todays market: Performance of world market Todays market: Performance of asian market
Source: Yahoo Finance Source: Yahoo Finance

 Weekend investing mantra
"We're more comfortable in that kind of business. It means we miss a lot of very big winners. But we wouldn't know how to pick them out anyway. It also means we have very few big losers - and that's quite helpful over time. We're perfectly willing to trade away a big payoff for a certain payoff" - Warren Buffett

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5 Responses to ""I am more confident of India than China""


Jun 15, 2009

A very crisp and comprehensive write up, I have ever read. Thank you and continue writing.



Jun 14, 2009




Abhishek Singh

Jun 14, 2009

This edition was far better and more concrete than the last one. Well done! It really sums up the entire gamut of activities.



Jun 13, 2009

Your news letter is extremly well and covering all relevent information.

This weekly news letter matter width is more then the computer screen width and difficult to scroll left to right and right to left. In this process I am loosing time, intrest, proper meaning. This problem is only in weekly report not in daily reports. Request to correct it or if I am not understood the software please help me how to read.



Jun 13, 2009

Dear sir

It is a good week-end review of the maket and contemporary global politico-business events-please keep it up!

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