India's growth is visible in this...

Jun 18, 2010

In this issue:
» China's wage linked inflation
» Bonus for minority shareholders
» Central banks in 'gold rush'
» Currencies that may be destroyed
» ...and more!

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India's growth story in the past decade has been largely attributed to 'outsourced' jobs. So much so that the US nicknamed it as "hijacking jobs from Buffalo to Bangalore". Well, India has been the back-office of the world for quite some time. But Indian companies have also staked claim to some interesting achievements in the past few years.

Reckon this. India has actually created about 60,000 jobs in the US in the last five years. As per Hindustan Times, the investment by Indian companies in the US totaled US$ 26.6 bn between 2004 and 2009. Of this, US$ 21 bn was towards 372 acquisitions. The rest were towards 127 greenfield projects. As per FICCI, the greenfild projects alone created some 16,000 odd jobs in the US.

Thus, India's growth story is no longer about offering cheap labour to MNCs. Nor is it limited to services. India's growth is now also visible in its manufacturing capabilities in foreign geographies. And Indian companies are now creating jobs overseas rather than importing the same.

In short, Indian businesses are now about adding some real value. And it's not just the big companies that are making a niche. Probably, this is what moving to the next level is all about! Such attempts have the potential to bring Indian companies on a much more solid footing. Particularly, to capture profitable opportunities globally. And this is where we think India has some sort of a headstart over China.

 Chart of the day
Labour dissent in China has been grabbing headlines too often these days. This is despite manufacturers offering wage hikes and better work conditions. Today's chart shows that India's hourly wage rate pales in comparison with its developing and developed peers. So much so that it is still lower than China, which is considered one of the world's cheapest manufacturing destinations. India's attempt to increase the share of manufacturing is indeed noteworthy. However, it may have to do more than just hiring.

Data source: ILO

Talking about wage hikes in China, the same is expected to lead to inflation getting out of hand. This, especially at a time when the property prices in the dragon nation have already reached unjustifiable levels. But the World Bank thinks differently. In its latest quarterly update, the World Bank has stated that Chinese companies can absorb higher wages by increasing productivity. The rationale is that total labour costs per unit of output in China have been flat in recent quarters. And so there is scope for wages to rise, especially for low-income groups. The labour market has also given a boost to Chinese consumption. This, along with real estate investment has contributed to economic growth in the year so far. Having said that, property prices in China have gone through the roof. While the Chinese government has placed some restrictions on the sector, to what extent prices will be cooled going forward remains to be seen.

Do you want to earn outsized returns in this overvalued market? Start looking for companies that have reserves and surplus far in excess of their share capital. Also, these companies should have promoter shareholding in excess of 75%. Strange parameters, isn't it? Especially the second one. However, there is a reason we chose these two parameters. You see, the Government recently came out with a proposal of making it mandatory for listed companies to have public shareholding of a minimum of 25%.

Now, this involves two routes. Either the company raises fresh equity or the promoters sell their stake. But both these routes would have created enormous pressure on liquidity. However there is a third route as per a leading daily. How about coming out with a bonus issue only for minority shareholders? This will do away with the need for currency transactions as the currency here would be the shares themselves. However, what the step will do is make minority shareholders rich at the expense of promoters. And the promoters may not be too willing to do an exchange of something for nothing. But you never know. Such instances have happened before. Think Reliance Power in 2008 and Kwality Dairy in the not so recent past. Thus, we don't rule out such a possibility entirely. The investor will really have to work hard to unearth such gems though.

'Dr. Doom' Marc Faber has been called a 'super bear' for a long time now. And he remains one on the long term future of the global and especially the western economies! But he now seems increasingly confident of a potential rally in US stocks in the near term. But then, he sees this rally short-lived. This is given his belief that the impact of government stimulus will wear off in the second half of this year.

Faber was asked how successful will European governments be in raising money selling long term bonds. And he quipped, "Who will buy a Spanish bond at 4.91% for 10 years? I'll rather be in emerging market equities that give dividend yield of 4-5% than Spanish bonds!"

The proverbial 'gold rush' seems to be intensifying with each passing day. And now even many central banks around the world are finding it hard to keep their hands off the precious metal. A CNN Money report states that last year, foreign central banks were net buyers of gold for the first time since 1997. Further, India, China and Russia have been the biggest buyers. And more recently, even low profile countries like Philippines and Kazakhstan have jumped into the fray. They've all made big purchases of the precious metal recently. Many of these countries have, as a majority of their reserve assets, the US dollar and the euro. But the move towards a higher proportion of gold is conspicuous. And is perhaps fueled by an increasing insecurity about paper currencies. Especially from Europe and the US, for whom devaluing their currencies seems not only necessary from here on, but inevitable.

At a time when the West is in the survival mode, the question here in India is not whether India will grow. The question is, 'by how much?' 9.2% in FY11 as compared to 7.4% in FY10, if the Centre for Indian Monitoring Economy's forecasts are to be believed. The economic think tank expects the three key sectors - industrial, services and manufacturing - to fare well. It is especially bullish on food products such as sugar and edible oil, consumer durables and capital goods output. It may be noted that the RBI however, forecast an 8.2% economic growth in FY 11. Whatever is the actual number, just the fact that there are such high expectations stands out is sharp contrast to the troubles of the developed world. A fact Indian investors would do well to take into account.

Legendary investor Jim Rogers does not mince words to cite his preference for currencies and commodities. The investor is bullish on agricultural commodities. But when it comes to currencies, he believes a major crisis is on the cards. While Rogers has been bearish on the US dollar, he has been buying the currency for quite a while now.

What is interesting is that Rogers is now buying even Euros. The chairman of Rogers Holdings predicts that bailouts for European nations will eventually destroy the single currency. However, he also says that it may take 10 to 15 years for the currency to disappear. Meanwhile he is cashing in on the negative sentiments on the currency.

We leave the analysis of the short term trend of these currencies to the investing legend. However, we cannot agree more with his opinion on the long term fundamentals of the US dollar and the Euro. Both currencies, once claiming a lion's share of global exports are quickly losing sheen. It may be quite some time before the Chinese Yuan gains similar status. Nevertheless, the fate of the US Dollar and the Euro are certainly sealed.

Indications from the RBI about the central bank willing to curb liquidity has led Indian markets to underperform Asian peers today. In fact, Indian markets seem to be in the mood to shed some gains today after seven consecutive sessions of up-move. Indian indices along with peers in Japan, China and Hong Kong are the biggest losers in Asia today. The BSE-Sensex was trading nearly 15 points (0.1%) lower at the time of writing. European markets have, however, opened in the positive.

 Today's investing mantra
"Managers thinking about accounting issues should never forget one of Abraham Lincoln's favorite riddles: 'How many legs does a dog have if you call his tail a leg?' The answer: 'Four, because calling a tail a leg does not make it a leg" - Warren Buffett

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1 Responses to "India's growth is visible in this..."


Jun 18, 2010


With reference to the labour strikes in China, it seems like these strikes are often heard out of mostly MNCs which operate in China. Not many (in fact not heard of any) such cases have been reported in wholly owned Chines companies. Seems like they are trying to make the non chinese companies operating out of China less competitive... Need to wait and watch for more clarity on the same.

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