Should the 'I' in the BRIC be removed?

Jun 27, 2012

In this issue:
» Is the American dream a 'myth' now?
» Realty stocks are falling despite property price rise
» Is the Fed thinking fundamentally wrong?
» Is this the gold rush for Indian pharma?
» ....and more!

---------------------------------------------------- Equitymaster WebSummit ----------------------------------------------------

Here's what we are discussing at the latest edition of the Equitymaster WebSummit -

Whatever happened to the Sensex 31,000 prediction?

Our guest will be Ajit Dayal, Founder, Equitymaster.

Free Registration is open for a few days only... Sign up now!


What percent of African countries you think have populations of more than 80 m? Most of you will be prompted to take a wild guess, isn't it? Now what if a wheel of fortune is spun such that it lands on the number 10? Research shows that there is a high probability that your answer will revolve around the 10% mark. What if the wheel now lands on number 45? Well, now there is a high possibility that your answer would revolve around the 45% mark. You see, your mind has fallen prey to one of the most popular cognition errors called as the anchoring effect. Anchoring effect is nothing but the tendency of our brain to start drawing conclusions, even if they are wrong, from some sort of an initial value. This initial value acts as an anchor or a footing that you need to stand on.

Just like the people who took the above mentioned test, there are a lot of economic experts out there who are falling prey to the anchoring effect. The topic concerned however is of an entirely different kind and with very huge implications. These people are of the view that since India's GDP growth has fallen to 6.5% in the last financial year, it no longer deserves to be a part of the BRIC group of nations. Let us tell you why we think this is a real life example of follies that arise due to the anchoring effect. You see, these experts are basing their judgement only on the 8.5% average growth that we saw in the preceding few years. The fact that this 6.5% growth is higher than in any other period is being completely ignored.

This is not all. As per a leading daily, Brazil, another member of the group, has grown faster than 6.5% only once in the last 20 years and its average growth since 1996 has been less than 1%. Russia is no great shakes either with GDP growth rate of mere 4% in 2010 and 2011. Thus, if the BRIC has to break up at any cost, it will be far better to call it IC than BRC.

Lastly, even India's investment rate has not done badly for itself. The very ratings agency that has questioned India's position in BRIC has maintained that its investment rate has been a healthy 35% of GDP in FY12. Thus, it is only the policy bottlenecks and the slow pace of reforms that seem to be putting a spanner in India's wheels and once those are removed, we should be back to notching up attractive long term growth rates.

Do you think India should be removed from the BRIC group of nations? Share your views with us or you can also comment on our Facebook page / Google+ page.

 Chart of the day
Today's chart of the day highlights one of the reasons why construction firms have fallen out of favour with investors. As the chart shows, the fundamentals of firms in the construction sector seem to have gone from bad to worse, what with the interest coverage falling from a respectable 3.5 times in FY09 to a uncomfortable level of just 1.8 times in FY12. It is not only the decline in profit that has led to such state of affairs but the rise in debt as well as interest expenses have also played their part. It will be interesting to see how many of these firms survive in the long term.

Source: Livemint

Property markets have been displaying an interesting paradox for quite some time now. A paradox of rising property prices but falling stock prices. Difficult to digest, isn't it? Common sense says that if property prices are increasing realty companies should be effectively making more profits. And thus their stock prices should rise. So, what eludes this logic?

Well, it must be noted that land is the major cost component in any realty project. And typically the builder ropes in a Private Equity (PE) investor to purchase the land. And considering the long gestation period of realty projects, PE investors ask for a high hurdle rate in return for lending the money. Now, since the builder wants to keep his returns intact, he jacks up the prices of the property to incorporate the PE investor's return expectations. Increasing prices result in lower volumes. This impacts the profitability of the realty companies and thus their stock prices decline. Thus, in such an environment, investors should look out for zero debt companies with sizable land bank that is completely paid off. Such companies are better placed to weather the current downturn.

What is the job of a central bank? We can list some of the key deliverables here. To ensure smooth functioning of financial markets. To regulate flow of money in the banking system. To stimulate growth by facilitating credit disbursement. To control inflation. But what about stimulating stock markets? Or inducing market participants to take more risk? Well, these are deliverables that no central bank ever had in its to-do list to our knowledge. At least not until we came across an article in Zero Hedge that claims to unravel the fundamental flaw in the US Fed's policies .

That the US Fed's money printing policy has miserably failed to stimulate growth is well known. But that the Fed did so to ensure rise in prices of risky assets, particularly stock markets, was a hidden truth. The crash of 2008 evolved out of Wall Street's greed for high risk returns. Post that, the Fed's cheap money policy ensured that greed remains in the US and global stock markets. At least so long until there isn't another big ticket bubble bursting. However, how many more bubble bursts will it take for the US Fed to acknowledge its flawed thinking is anybody's guess.

A few decades ago, America was a reckoned as the land of opportunities. It was said that if you were a hard working person, you could quite easily lay your claim on the so-called American Dream. But this maxim doesn't hold true anymore. Nobel laureate economist Joseph Stiglitz points out the harsh truth. He opines that today, an American child's future prospects are more dependent on the income of his or her parents than in Europe. Or for that matter, most other developed countries. The main reason for this is the widening income gap, thanks to reckless government policies.

He argues against the notion that faster growth widens income gaps. On the contrary, the US grew much faster in the decades following the Second World War when inequality was lower. Whereas after 1980, while growth was slower, income gaps widened enormously. In fact, there is growing evidence that growth, equality and stability are quite linked. Whatever be the case of the US, India certainly needs to take home some lessons.

The US generics market had become highly competitive since the past many years. More and more players entered the market to capitalise on the generics opportunity. As a result, competition has intensified and prices have eroded significantly. Thus, for players to have a sustainable business from this market, it has become very important to continuously launch new products. And a wave of innovator drugs losing patents over the next few years will certainly give the required fillip.

Between 2012 and 2015, around US$ 60 bn worth of original drugs are going to see their patents expire. Out of this, US$ 34 bn will be ripe for exploitation this year alone. As a result of this, the US generics market is expected to grow by around 12-13% during this period. Indian pharma companies are leaving no stone unturned in capitalizing on this opportunity. Many of the big ones have a slew of drugs slated for launch over the next few years. Even a 90% price erosion still presents a good opportunity to mop up more revenues and profits. The potential risks could be in the form of delay in regulatory approvals. This is because the US FDA has become stricter in processing filings. Overall, those companies having a healthy product mix of big dollar drugs with some niche products having lesser competition will certainly have the edge over the rest of the pack.

Meanwhile, indices in the equity market in India are trading strong today with the Sensex up by more than 100 points at the time of writing. Stocks from the power and metal space were amongst the top gainers. Most Asian indices also closed strong today. Europe has also opened on a positive note.

 Today's investing mantra
"If our success were to depend upon insights we developed through plant inspections, Berkshire would be in big trouble. Rather, in considering an acquisition, we attempt to evaluate the economic characteristics of the business - its competitive strengths and weaknesses - and the quality of the people we will be joining." - Warren Buffett

  • Test Your Warren Buffett Quotient Now!

  • 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 "Should the 'I' in the BRIC be removed?". Click here!

    4 Responses to "Should the 'I' in the BRIC be removed?"

    Dr M.Chandrashekhar

    Jun 27, 2012

    Kindly send the free Guide to PPF.


    Krishna Kumar

    Jun 27, 2012

    "BRIC" is just a marketing term coined to sell mutual funds and increase asset under management. India's growth is not on account of somebody in west coined the term "BRIC". So even if they remove the word "I", it shouldn't matter. Indian economy actually has a negative corelation with Brazil and Russia which are commodity driven. So BRIC anyway is a meaningless term created by overpaid investment bankers.

    Like (1)


    Jun 27, 2012

    If "I" is taken out of BRICS then the guy's who are bringing down the GDP of "I" nation are themselves fooling, India's GDP is all the last 5 years steady and not like the other BRIC nations, compare that to the population which will make the people speak less and work more. Are the guy's thinking to get "I' out of the BIRCS so that they can show the world down trend of "BRICS" . Keep out those dirty tricker's. Be what one is .

    Like (1)

    C K Vaidya

    Jun 27, 2012

    Your advice to 'investors' in Real estate companies left me confused.
    If a company has land bank which is fully paid for, it does not require investor money. Typically, it keeps selling flats and asks the buyers to keep paying corresponding to the progress of construction. Since all these payments are in proportion to the total cost of the property, even the land cost gets paid over the period of construction.
    Secondly, are there any real estate company which have land bank fully paid for? Are they listed? If so, pl let me know.

    Like (1)
    Equitymaster requests your view! Post a comment on "Should the 'I' in the BRIC be removed?". Click here!