The list of great investments is just about to shrink

Jul 2, 2010

In this issue:
» Manufacturing output loses momentum
» US stocks at a 2010 low
» June rainfall 16% below normal
» Continuing fiscal reforms key to a better sovereign rating
» ...and more!!

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The list of good stocks available for you to invest in may just get smaller over the next couple of years. Recently the government made it mandatory for listed companies to have at least 25% public holding. This rule has many positives for investors. However, it will also have an inadvertent side effect.

As per latest data available, 265 companies listed on the BSE had promoter holdings of greater than 75%. These include companies like 3M India, Berger Paints, Sulzer India, Gillette India and Alfa Laval India. Though not all, many of these are highly profitable, cash flow generating companies. They will also not need to access capital markets anytime soon. Further, many of these have large MNCs as their promoters, a group that has become extremely bullish on the prospects of the Indian economy in the recent past. Cutting down their stake in the companies will be the last thing they would want to do. So what's the next best option? Delist!

Yes, a lot of the MNCs will probably prefer delisting over offloading stake. Delisting will also rid them of the onerous burden of meeting listing requirements. As per reports, the last 15 days have already seen the MNC parents of 3 companies announce plans to delist their Indian units.

For now, we can just hope that this trend does not continue in the months to come. For if it does, your list of potentially great investments is just about to get smaller!

 Chart of the day
India is a densely populated country; there's no denying that. But as today's Chart of the Day shows, that is not its only distinction. As per projections made by the Earth Policy Institure, it is expected that by the year 2015, three out of the top ten most populous cities in the world will be Indian cities. In fact, no other country has more than one city in the top ten. A testament to not only how fast our population is growing, but also to the magnitude of people migrating from other areas into these already over strained urban centers. If the progress of infrastructure development does not keep pace, the result will be nothing short of a nightmare in these metropolises .

Data Source: Earth Policy Institute

The effect of steroids is wearing off. And the patient is beginning to look frail yet again. We are alluding to the global economy. A new stream of data coming out from across the world is not painting a very rosy picture. As per FT, figures show that manufacturing output is losing its momentum in many parts of the world and this could pose a very big challenge in the days to come. More so because countries like the US and Europe have fired most of the monetary and fiscal bullets that they had and will be left with nothing very soon.

The situation in the emerging markets of China and India is not very encouraging either. China's recovery remains solid but is certainly moderating from the pace set few months back. India too is stepping back a bit as factory output in June slows down after a record breaking May. Such developments do not post that much of a threat during ordinary times. But these are certainly not ordinary times. The world has just come out of a deadly financial crisis. And there is every chance that it could slip into recession if further measures are not forthcoming. However, a repeat of the measures taken by the Governments, especially of the developed world, seems highly unlikely. Somehow, they will have to find the middle path. One where not only does the world economy not falter, it should not stretch public finances as well. Quite a tricky situation indeed.

One asset class that has withstood the financial crisis is gold. The yellow metal has in fact risen 11% since the start of this year. However, it has seen some pressure of late, given that investors are looking to dilute their holdings to get cash in hand. Gold prices in the US, for instance, dropped over 3% yesterday. Even silver prices came off by around 5%. These are big one day drops for both the metals in a long time. Nevertheless, investors looking to hedge their portfolio returns should not deter from making a very small allocation to gold.

The fear of slowing growth momentum has taken its toll on stock markets too. As per CNN Money reports, stocks in the US are at new 2010 lows. The reason - poor data from the manufacturing, housing and the labour markets. These are symptoms of a disease, not the disease itself. The root of the problem is structural. The developed economies are operating at a much higher economic base as compared to the rest of the world. In the recent years, large sections of their society has indulged in unsustainable practices. In the broad sweep of economic history, what goes around, comes around. The 18th to 20th century witnessed the rise and dominance of the West. It is perhaps time for a little reversal to the mean.

On the rainfall front, there are some ominous signs making their present felt. The month of June has just passed us by. And the Met department has admitted that the rainfall in that month was 16% below normal. On the brighter side, the rainfall was 60% higher than it was in June last year. But foodgrain production is already beginning to get hampered. This is evident from the delay in soybean planting in the country.

That said, despite a tepid showing, the Met department is sticking to its forecast of a normal monsoon this year. Poor monsoons last year have had an adverse impact on the common man. High inflation for the past one year has stubbornly refused to budge. And government's efforts to curb food inflation have still not yielded the desired results. So, the pressure of a normal monsoon this year will be felt more than ever. Of course, adequate irrigation facilities will go a long way in reducing the dependence on agriculture in the future. But that is easier said than done. For the time being, the rain gods will continue to influence the agricultural production in India.

India's fiscal deficit has been the key reason for the incumbent government not earning any brownie points. But the latest move to deregulate fuel prices seems to be making up for the loss. Rating agencies S&P and Moody's have lately upgraded India's rating on this premise. S&P has suggested that such fiscal reforms need to be continued if India is to improve her sovereign rating. The agency also believes that the Indian government needs to rationalise use of public funds. Instead of being spent on subsidies the same deserve more productive application. We completely agree with the rating bodies. At the same time, we also understand the political sensitivity of this issue. While the reforms must be gradual, a sudden exit from socialist measures could be suicidal for the government.

In the meanwhile, at the time of writing this, Indian markets were trading flat. After starting off positive in the morning, some volatility was witnessed in the benchmark indices. Stocks forming part of the PSU, and banking sectors were amongst the top gainers, while those from the IT and FMCG were amongst the top losers. Market sentiments in other Asian regions are also positive with Singapore leading the gains.

 Today's investing mantra
"Our investments continue to be few in number and simple in concept: The truly big investment idea can usually be explained in a short paragraph. We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong. " - Warren Buffett

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3 Responses to "The list of great investments is just about to shrink"

v g karve

Jul 4, 2010

Pl provide 275 co. list


kaushik pathak

Jul 3, 2010

keep it up,A very intelligent short and readabel 5 minute wrap up thanks



Jul 2, 2010

pl provide the list of these 275 companies so that the readers can readily make use of it

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