When crash will mean more cash for these companies

Jul 1, 2010

In this issue:
» The biggest problem facing Indian infrastructure
» PIMCO's Gross remains bearish on global economy
» The solution for a slum free India
» China beats India hands down yet again
» ...and more!!

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It does not look like a very good time to be an equity investor or for that matter, investor in risk assets like commodities. There is far too much pessimism around these days, most of it coming from some pretty respectable macro observers. But what we heard today really takes the cake. Strategists at RBS, one of the world's largest banks too have joined in the pessimism. However, they are not just pessimists but ultra pessimists. They believe that the current downturn has the potential to destroy the equity cult. In other words, equities could fall so much that they will lose much of their relevance. Hmm, very strong words indeed.

However let us not talk equities here. Sure, the Indian equities will also feel the heat. But the correction we believe will have to do more with sentiments than pure fundamentals. For the latter remain as strong in India as ever. If anything, the near term weakness will present a very good opportunity for investors to profit from the long term story. Furthermore, one section of the Indian economy could benefit immensely from developed market meltdown. One where commodities form a key part of input costs and where revenues come predominantly from the domestic markets.

It is quite likely that a deflationary environment prevails in the developed world for quite some time. In other words, their economies could continue to remain weak. And this in turn could mean lower prices of a lot of key commodities. Thus, operating margins of companies in India which use a lot of these commodities may not fall as sharply as a lot of market analysts seem to be predicting. And this in turn could give a big boost to their earnings as well as stock prices. So, while the rest of the world around us goes into a deep correction mode, these companies could well end up flourishing more than ever.

 Chart of the day
There are various ways to gauge a country's technological prowess. How about the ability to develop fast, powerful supercomputers? We are living in an information age after all. Thus, what better show of technological strength than this. Today's chart of the day makes an attempt to do just that. It demonstrates what percentage of the world's most powerful top 50 supercomputers has been developed by what nation. And the US seems to be losing its edge here as well. Just at the turn of the century, more than half of the world's most powerful computing beasts came from the world's most powerful nation. But cut to the present and US dominance has been diluted to a great extent. Same goes with Japan. On the other hand, France and China are shining brighter on the supercomp firmament than ever. Infact, the dragon nation had nothing to boast of in the year 2000. It now sits pretty, enjoying a good share in the game of terabytes. Nations labeled as 'Others' seemed to have done not very badly either. Another US bastion comes crashing down we guess.

Source: The Economist

It is no secret that India has huge infrastructure problems. In fact, the notoriety of India's creaky infrastructure is now world famous. With the significant opportunity costs that India has to bear by having inadequate infrastructure, it is not surprising that it is a much talked about problem too. Thus you may very well ask that if the problem is getting so much attention, why is progress on this front so slow? A. M. Naik, chairman of L&T, one of India's largest engineering and construction company in a recent interview elaborated on the core of the problem. India is a very densely populated country. Each time any kind of infra project is executed, a lot of people along the way need to be displaced.

These people, mostly poor villagers, are never too happy about moving. They resort to filing court cases and bring stay orders on the project, causing project timelines to go for a toss. Mr. Naik suggests that the government should adopt legislation guaranteeing people living in the path of infrastructure projects to get alternative housing or receive a fair-market price for their homes. However, the new law should prevent homeowners from blocking land acquisitions by going to court. He is of the opinion that they should instead be permitted to quarrel only about the sale price, pointing out that a similar law exists in the US. These insights, which come from someone who is in the thick of action, surely deserve serious consideration by the authorities.

World largest bond fund manager Pimco's Bill Gross has touted his 'new normal' view for more than a year now. But he complains that while more and more financial experts are using this phrase nowadays, very few understand the idea behind it. These experts use this phrase to predict that the global markets will soon return to the way they were before the financial crisis, a new version of the good old (normal) days! But as per Gross himself, the 'new normal' is a period of extremely reduced economic growth. And this he expects to be led by 'deleveraging, reregulation, and deglobalization'.

In short, Gross's outlook on the global economy remains bearish. He in fact believes that the global bond markets are priced for near depression! Getting over the crisis by issuing more free cash (that caused the crisis in the first place) is not what he thinks is the right way to go for governments! We second that thought.

India's ambitious plans to provide shelter to urban and rural poor needs a reality check. Who better to offer an expert view on this than an economist specializing in property rights for poor? Comes in Peruvian economist Hernando De Soto. He is currently advising the Indian government on urban housing. This is part of the latter's agenda of slum-free India. Mr Soto believes that the key to empowering power is offering them property rights. This will help them legalise their ownership. Besides preventing exploitation of land owners, the rights will enable the poor to borrow against the title. Mr Soto also believes that migration to cities cannot be prevented. What instead can be done is making the cities more livable.

India and China have a lot in common. Besides being the fastest growing economies and a population of over a billion each. Both are keen on acquiring energy assets around the world. Precisely because of the energy needs of a large and rapidly growing economy. Unfortunately, the dragon nation is doing a better job than India in this regard. As per a leading business daily, India lost out to China in energy contracts to the tune of US$ 12.5 bn last year alone. It is not surprising. China has foreign currency reserves to the tune of US$ 2.4 trillion. Compare that to India's US$ 250 bn.

Public sector exploration companies in China spent a record US$ 32 bn last year on overseas assets. India's single acquisition was made by ONGC for US$ 2.1 bn. Moreover, China doesn't have moral dilemmas about shaking hands with tin pot despots and autocratic regimes. India, with its democratic and foreign policy burdens, has its limitations. Nevertheless, India's oil minister has travelled to many such countries - Nigeria, Angola, Uganda, Sudan, Saudi Arabia and Venezuela - this year. Clearly, the Indian government has its task cut out.

The US Government recently passed the landmark financial reform bill. The bill's most important aim is to avoid a repeat of another financial crisis. But will it be able to achieve its objective? A New York Times columnist has argued and rightly so that the financial reform bill may not be able to avoid another financial catastrophe. This is because the next crisis will be completely different from the previous one and hence, the tools that the financial reforms bill is likely to have under its disposal may prove inadequate.

It is in the nature of financial crises that they are a regular feature with the only difference being in their frequency and magnitude. After all, we have been through this before and we will go through it again. Thus, while the bill may help us equip ourselves better for the next one, it won't be able to stop it in its tracks.

Meanwhile, the Indian stock markets appeared in deep correction mode right from the beginning today with the Sensex trading lower by around 210 points at the time of writing. Heavyweights like Reliance and ICICI Bank were causing the maximum damage. Other Asian indices also closed deep in the red today whereas Europe too is experiencing heavy selling pressure currently.

 Today's investing mantra
"I have no idea whether people get friendlier or crazier. That is not my game. My game is simply to buy something worth a dollar for 50 cents. Then if they go crazy in the right direction it helps me and if they go crazy in the other direction I just buy more." - Warren Buffett

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5 Responses to "When crash will mean more cash for these companies"


Jul 1, 2010

I appreciate the comments and articles covered under this, but what I have seen that your comments are always critical, whereas Economy has and will remain progressive. Why not cover some positives instead for a change ?


jasbir singh

Jul 1, 2010

thanks for sending your valuable approaches to me its really giving me boosting to high as i can . all of your information are precious for me.


Yoginder Saxena

Jul 1, 2010

No much crash can efect Indian Growth Story, afer every economic melt down in US or Europe, Indian stock market will again on new high and creat a history in global economy.


Amitabh Mukerji

Jul 1, 2010

Reg. land acquisition for infrastructure projects. Metro Rail construction in Delhi had a special law allowing land for the metro to be taken from anyone at a fair price. This could be a model for all projects.


pavan boddupally

Jul 1, 2010

Regarding your item of infrastructure and land acquisition. I liked to draw your attention that land acquistion act of andhra pradesh already provides for compulsory acquistion of land and the land owners can only demand higher compensation.Before thinking of aping US law we should look into our own law. pavan

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