The 'super-growth' sector in BRICs is not commodities but... - The 5 Minute WrapUp by Equitymaster
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The 'super-growth' sector in BRICs is not commodities but...

Jul 14, 2011

In this issue:
» An intelligent solution for the debt ridden European economies
» Is FDI the solution for better food supply in India?
» Mobile banking presents fee opportunity in billions
» Why inflation is amongst the biggest threats to the US?
» ...and more!
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00:00
 
Commodities have had a glorious run in recent times in terms of demand and prices. Investors who did not spare a thought for the boring sector were caught on the wrong foot. They missed out on some fantastic returns from commodities that far outstripped stocks and bonds. The growth in the commodity sector has been largely based on the demand potential in the BRICs. Populous economies with growth in infrastructure investment made the ideal setting for this sector. And the requirement is yet nowhere near being satiated. Hence few would want to believe that there is a superior scope for growth in any other sector. But when it comes to BRICs, we think that 'super growth' in this other sector is not a possibility but a necessity. And investors can afford to ignore this opportunity at their own peril.

Some statistics first. Global spending on medicines will grow by 12% to touch US$ 1.1 trillion in the next 4 years. As per the Institute of Healthcare Informatics, of this 28% will be spent in India, China and Brazil alone. This is while the developed world sees a cut down in healthcare spend. More importantly the world's biggest drug markets will see their share shrinking! That of the US will come down from 41% of total drug market to 31%. While Europe's will come down from 20% to 13% during this period.

Pharma majors in India, China and Brazil meanwhile have their plates full. One, they have to cater to a growing population with rising income levels. Two, pharma MNCs (multi-national corporations) will be vying for a tie up with them to get a share of the BRIC pie. The fact that drug research is cheaper in these economies adds to their advantage. Hence growth by way of both organic and inorganic means will be plentiful for players in the sector. Upfront cash payments for MNC tie-ups to create generic versions of branded drugs will be an added sweetener. Not only will this augur well for the balance sheet of BRIC pharma companies, but also help them grow with less debt.

With so much going in its favour, we believe that pharma is one sector that will grow despite all odds. Hiccups in GDP (gross domestic product) growth, lax policymaking and high inflation are least likely to dampen the prospects of this new sunshine sector.

Do you think the pharma sector can yield better returns for investors than commodities over the next 4 to 5 years? Share your comments or post them on our Facebook page.

01:20
 Chart of the day
 
It is a rare thing to hear of someone who has celebrated their 100th birthday. It is rarer still to meet such a person. But with improving health facilities a day would come soon that there would be more than a million such people in the country. As per the estimates of United Nations (UN), there would be five countries wherein the number of centenarian (people who reach 100 years in age), would exceed a million. And that too within this century. China is expected to get there first and reach this milestone by 2069. India would take a little longer and achieve the feat by 2084.

Data source: Economist

02:00
 
A few days ago, the Euro zone went through another round of panic. This time it was because of Italy. Markets went into a panic attack due to concerns surrounding Italy's ability to sustain the huge mountain of debt that it has accumulated. The Italian government has decided to adopt strict austerity measures to avert the crisis in the country. To avoid a situation similar to that of Greece, it has decided to increase private sector participation. The country has intelligently decided to sell stakes in the state owned companies once the crisis is under control. This would help reduce the burden on government's funds and help it balance the budget by 2014. Such a move should be taken as an example particularly by the nations who are currently in crisis because of their huge debt burdens. Such long term measures are what can help them get back on their feet.

02:30
 
The news that inflation is a serious risk for the US economy is perhaps as old as the hills now. But do you have any idea of how high the number may reach? Well, we for one are pretty much clueless. However, if a rare expert in the study of monetary systems is to be believed, the CPI (Consumer Price Inflation) in the US could run as high as 100% over the course of a year! No, we haven't erroneously added an extra zero here. The inflation could certainly reach as high as 100%. This same gentleman, who answers to the name of Terry Coxon, has gone on to say that the growth in the monetary base in the US has been far more rapid than even the high inflation period of the 70s. The only reason it is not currently showing up in inflation numbers is because the US Fed is paying interest to banks on their reserves and hence, the banks are not eager to lend out or invest in T-Bills. However, if the US Fed continues to sit on its hands for a while and allows the situation to go out of hands, then all hell can break loose. Well, we dare not attempt to disagree. Can we?

03:10
 
The government is finally taking steps to ensure that food gets distributed properly and there is minimum wastage. In his last budget speech, the Finance minister indicated that 40% of the food produced gets wasted in India. The Food Ministry has scheduled a meeting with grain producing and consuming states of the country. Punjab, Haryana and Uttar Pradesh are among the producers while Assam and South Indian states are the consumers of food grains in India. The offtake of grains from the states is low because they lack adequate storing facilities. The agenda of the meeting is to take stock of existing storage facilities and distribution chains. In July, stocks for the central pool were 64 m tonnes but available storage capacity with Food Corporation of India (FCI) and state agencies was only 63 m tonnes. This causes rotting of grains that are not being stored properly.

Another point of focus will be how to ensure timely transportation of the food grains during harvesting (especially for wheat and rice) so as to check wastage. We have been stressing on the need for improvement in supply chain to ease all the above mentioned problems as also the inflation problem. The solution could lie in permitting FDI (Foreign Direct Investment) in Retail.

04:00
 
In a constantly evolving financial services and telecom space, another phenomenon is expected to establish a presence in a big way. We are talking about mobile banking. So enthusiastic is the industry over this that a report by Boston Consulting Group expects mobile banking to generate fee-based income of Rs 202 bn over the next five years. The income will be shared between banks, telecom operators, service providers and device makers but bankers are set to benefit more from this. The fee will be available largely due to the US$ 350 bn worth of transactions in the mobile banking and payments space. About 70% of this income is expected from an urban customer base while the remaining 30% will be from the rural areas. What is expected to make mobile banking attractive is the lower cost of transaction, favourable regulatory environment and the government's unique identification campaign. At least in terms of cost of transaction, mobile banking is set to score over bank branches. Financial inclusion by banks is another factor that would play its part in boosting mobile banking. Having said that, while the opportunity does seem to be there whether it will be on the scale envisaged by the industry remains to be seen.

04:30
 
Dampened by the terror strike in Mumbai and mixed start to the second quarter results, the benchmark indices in the Indian stock market took off to a poor start and languished in the red for most of the session today. The BSE Sensex was trading lower by about 49 points at the time of writing. Heavyweights like Infosys and HDFC Bank were seen leading the pack of losers. While most indices in Asia closed in the red today, Europe is trading in the positive currently

04:45
 Today's investing mantra
"In any business, there are going to be all kinds of factors that happen next week, next month, next year, and so forth. But the really important thing is to be in the right business." - Warren Buffett

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3 Responses to "The 'super-growth' sector in BRICs is not commodities but..."

anupam garg

Jul 14, 2011

wrt to mobile banking: elimination of costly POS mahcines at vendor outlest will definitely boost cost reduction...mobile banking if promoted properly will lead 2 a win win situation for all

if i m not mistaken, cash transfers between 2 mobiles can bypass RBI, unlike cash transfer via net banking...something worth paying attention 2...

who wld hav thought 2 decades back tht communication wld b possible so easily...from calls 2 SMSes to social networkin via mobiles...gettin in touch requires just a green button, waitin 2 b pressed

the idea of a similar funda wrt to money is xciting...wallet & phone service in a mobile is more than welcome.

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Ashish Maheshwari

Jul 14, 2011

Yes the next sunrise sector will be "healthcare" along with Pharma. More and more people are opting for health insureance and this makes them to focus more on quality healthcare rather than money on healthcare services. Hence stocks like Apollo and Fortis can be multibagger.

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Rajni Mohan

Jul 14, 2011

Developing nations like India,China and Brazil will continue to grow because of their demographic advantage.Despite of the inflationary pressure infrastructure and other developmental activities will continue to grow creating demand for steel & cement and adding pollution in the atmosphere.Serious health problems and new diseases will create demand for good quality medicine.

Demand for medicine for cardiac diseases, cancer, diabetes will be more.Then there are many Indian pharma company, Old and New, which can produce all these drugs at a reasonable cost .

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