"I see a recovery. It's only getting stronger." - The 5 Minute WrapUp by Equitymaster
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"I see a recovery. It's only getting stronger."

Jul 14, 2010

In this issue:
» Foreign tourists eyeing India in bigger numbers
» Chinese rating agency downgrades US debt
» Do profits have a place in microfinance?
» Global investment banks line up to tap the Indian opportunity
» ...and more!!

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00:00
 
The global economic picture remains hazy as of now. One good news is followed by one bad news and vice versa. The concerns especially lie in the way the European crisis is evolving. Even US is only showing scattered signs of recovery.

Amidst all this, there remains one optimist, who was also an optimist in the depths of the crisis (October 2008). We are talking about Warren Buffett.

In a recent interview with a leading US newspaper, Buffett was asked, "When you look at this recovery, what do you see?" And he replied, "I see a recovery. It's only getting stronger." He does not think that predictions of a third depression are right. In fact, he thinks that the American economy, which almost sputtered to a stop in 2008, is 'coming back'.

For those who remain worried about the future crises and their impact on investments, Buffett had a suggestion. It was - "We do not live in a world where the next 100 years are all going to be good years. We do live in a world where out of the next 100 years, 80 will be good and we just can't predict exactly when those other 20 will happen."

Buffett has a merit in his argument when he talks about the nature of crises and that they occur several times in one's lifetime. Trying to predict the economic cycle before investing in stocks is not just tough, it's impossible! The best one can do is to protect his portfolio against future shocks by investing in quality companies.

Anyways, are you fearful of the next crisis while making your investment decisions? Share with us, or post your comments on our Facebook page.

01:05
 Chart of the day
 
'Atithi Devo Bhavah' (guest is God) has long been India's mantra to invite foreign tourists into the country. But this plan did not play out much in putting India on the global tourism map till the end of the last decade. Things have however taken a turn for the better since then. Since 2002 (and till 2008 - latest available data), foreign tourist arrival in India has grown at an average annual rate of 14%, must faster than all other of its BRIC peers. During the same period, the growth in tourist arrivals into China stood at 8%.

Data Source: United Nations

01:31
 
The words that link countries like Greece, Portugal, Japan, Spain are - too much debt. Countries across world are being downgraded by esteemed credit rating agencies for having too much debt. But none have ever 'doubted' the credit-worthiness of good old US. In fact the US finance secretary Timothy Geithner says the US will never lose its credit rating. But US does have debt. In fact loads of it. In June, the total US debt topped US$ 13 trillion for the first time in history. The International Monetary Fund (IMF) projected that the US deficit will stand at 64% of GDP this year, rising to just over 96% by 2020.

Amidst this, a credit rating agency in China has downgraded the quality of US debt. Some see this as China's way of getting back at US for criticizing the former's Yuan policy. But the numbers do suggest that all is not as well in US as some think it to be.

02:09
 
Rainfall and inflation are two closely associated topics in India. For if it rains less, food prices rise dramatically, thus pushing up inflation. This is what has been happening in the last year or so. The government has been looking towards a good monsoon this year to alleviate the country from high food prices. But some economists are quick to point out that rainfall alone is not the only thing that can tame the beast of inflation.

The RBI, through its monetary policy, has a huge role to play. The problem is that the RBI is sometimes seen as having a conflict of interest. On one hand, it manages the financing of the budget deficit on behalf of the government. In this role, it would like to see lower or stable interest rates. On the other hand, for fighting inflation it would look to have higher interest rates. And higher interest rates would not be such a good thing for the government's borrowing plans. This dilemma somewhat takes away from the RBI's ability to purely focus on inflation fighting policies.

02:49
 
Microfinance. This term entered public consciousness thanks to the efforts of Nobel laureate Muhammad Yunus. It goes without saying that the normal channels of bank lending are all but effectively shut for the country's poorest of the poor. This is where microfinance steps in. It tries to make an impact on this impoverished section of the society by providing them loans at affordable rates.

Now, the question that begs itself is - "Do profits have a place in firms that provide microfinance?"

This question has once again come to the fore thanks to the impending IPO of SKS Microfinance, India's largest microlender. Needless to say which side of the debate Mr Yunus would want to be. In fact, Mr. Vikram Akula, the founder of SKS, has honed his microlending skills right under the tutelage of Mr. Yunus.

The latter believes that Akula is indeed not going in the right direction. Akula, on his part, begs to differ. He is of the opinion that he does not rely on volunteers and also wants to expand his business aggressively. Hence, some amount of profits will have to be built into the model. Plus, Akula charges people 18% above the company's cost of capital. This is only 3% higher than the 15% limit set by Mr Yunus for the lending to be effective to the poor people. Both the gentlemen seem to be right in their own way. We are of the opinion that there are various stakeholders in a business. As long as one stakeholder is not having an undue advantage at the expense of the other, all stakeholders can profit from the business. And Akula could do well to remember this point as his company trades its first shares on the bourses a few days from now.

03:53
 
It is there for all to see that India is definitely faring much better on the economic front as compared to its less fortunate peers in the developed world. And this optimism has also rubbed onto the investment banking community in the country. Otherwise what would explain the brisk pace at which fund-raising for companies is taking place in India. This is despite the pall of gloom that is being witnessed in Europe on account of the debt crisis. Indian equity markets surged in the past one year as money flowed into stocks.

Even now, though the Indian markets have lost some steam, investment bankers are not too worried. They believe that the deals will rise at a steady pace given that India is a growth market and a multi-year market. According to investment bankers, India has seen 46 fund-raising deals in 2010 so far. These have raised close to US$ 16 bn in all. And although some big deals are not adding significantly to the bottomline, investment banks are still scrambling to get a share of the pie. These banks have already burnt their fingers very badly in the global financial crisis. Little wonder then that emerging markets are offering them the salve that they are craving for!

04:38
 
Anyways, Indian markets had a decent outing today. The BSE-Sensex was trading with gains of around 60 points (0.3%) at the time of writing this. These were propelled largely by buying in realty and banking stocks. IT stocks however were the worst performer today, seemingly weighed down by Infosys' weak results yesterday.

Among other key Asian markets, Japan was the best performer with 2.7% gains. It was followed by China (up 0.8%) and Hong Kong (up 0.6%).

04:54
 Today's investing mantra
"I've seen more people fail because of liquor and leverage - leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing." - Warren Buffett

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11 Responses to ""I see a recovery. It's only getting stronger.""

Rinkesh

Jul 15, 2010

I do fear when i choose a stock for the long term basis, but at that time of period i be save by choosing fundmentallly strong stock..!

Like 

Neville Sequeira

Jul 14, 2010

I have a great deal of respect for Warren Buffet. However he is not a God, he is just a man and this was proven in 2008 when he made some serious investing mistakes (eg. ConocoPhillips, Irish Banks, etc) and failed to see the depth of the problems facing the US and the rest of the world. In fact there are people I track who got called the market right in 2007 and 2008 but Warren Buffet was not one of them and he did not see what was coming. I believe that he cannot be fully objective about markets when most of his wealth is infact invested in the same markets. Many of the people I regard highly in the investment world (Robert Prechter, David Rosenberg, Bob Janjuah, Tim Wood, John Mauldin, etc) are currently warning about the next phase of the bear market, just as they did in 2007. And as was the case in 2007/2008 no one is listening. "This time is different" is a mantra I have heard all too often from the investment community. In fact any time I have seen someone try to draw a parallel between the current bear market and the great bear markets of the last 400 years, you have people turning around and saying that "this time is different". What I have learnt is that history repeats itself and markets are never different. If the current bear market is to take it's course (like all the great bear markets of the past) then the next low on the S&P500 will be in the 500s and the Dow should touch the 5000s. I hope that "this time is different" but I somehow doubt it.

Like 

KOUSHIK DAS

Jul 14, 2010

Is the next crisis will come? Is there any reason for next crisis?

Like 

P.V.Ranganathan

Jul 14, 2010

It appears that the colours for India and China have been interchanged in the Chart for today (number of tourists)

Like 

sunilkumar Tejwani

Jul 14, 2010

yes, the current stock rally is going to be a short lived affair. If market forecasters at Elliot Wave theory are anything to go by. The current rally as per chartists resembles similar pattern of 1930s where the Dow recovered about 55% of the fall & once again collapsed like a pack of cards.

Like 

Harish Rijhwani

Jul 14, 2010

Yes,i am afraid to make fresh long term investments at the current valuations,in my opinion they are too high,and,one just has to keep their fingers cross and wait for the major correction in the market.

Like 

AHMADKHAN D. DALWAI

Jul 14, 2010

THIS QUOTE SHOWS WARREN BUFFETT'S OPTIMIST SIDE. HE
MUST BE GOING THROUGH ALL TYPES OF MIXED NEWS SIGNALS...HE MUST BE ANALYZING THE SITUATION CONTINUOUSLY... BUT HE IS NOT DETERRED BY IT. HE IS PROGRESSING ON THE CHOSED PATH OF INVESTING.

I LIKED YOUR "TODAY'S INVESTING MANTRA". IT IS INDEED
AN EYE-OPENER.. FOR CORPORATE LEADERS AS WELL AS FOR
AN ORDINARY MAN.


Like 

VB

Jul 14, 2010

MICROFINANCE should be made a priority sector by the goverment. If meaningful credit flows into Rural and Poor sections of India then we can see the next BOOM in the consumption theme. Goverment should take far reaching proactive measures to stimulate this industry. HATS OFF to the genius of Mr Vikram Akula -- I completely agree with his viewpoint. A non profit approach will NOT attract talent in this sector. If we want this industry to thrive then we need big ticket investments from established Financial Institutions like SBI,LIC, IDBI etc.

Like 

ABP

Jul 14, 2010

Having traveled around the world, India's potential in terms of tourism has not been tapped at all. If you are seeing the growth numbers, one may be satisfied, but considering the potential, if certain basic steps are taken, India's tourism industry (and together with the hotels, transportation and other related industries) can grow in much larger numbers. Key is, united efforts of all states to build required TOURISM INFRASTRUCTURE. For example, what has been done in Goa for beach resort development is not done in Karnataka which has a bigger coastline, greenery & woods, holy places, splendid architecture and good weather. The situation in Karnataka is really sad as the government here is focused only on quick benefits out of things like illegal mining and land grabbing.
I have written many times in the past to different governments and ministries that we need to have a consistent tourism policy and infrastructure. What are Thailand,Malaysia, Sri Lanka in terms of places on offer compared to India? Nothing, but they make more revenues from tourists from the west than India does.

Like 

Agnel Pereira

Jul 14, 2010

In this article, there is a section where an IPO of SKS Microfinance is discussed. Being interested, I searched the NSE and BSE websites for details, but could not find any. When is this IPO hitting markets? Please provide further details.

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