A signal investors should not be ignoring

Jul 20, 2010

In this issue:
» Can India Inc reserve jobs for the poor?
» India's food security gets washed away
» China topples US as world's top energy user
» Yet another setback to the PIIGs
» ...and more!!

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Most Indians associate buying gold with a wedding or a festive occasion. In the recently concluded Equitymaster Investor Survey 2010, we asked our readers whether they had been buying gold coins or ETFs. And barely 33% of the response was in the affirmative. 23% of the respondents, however, showed willingness to buy in the future.

Interest in the yellow metal has picked up ever since the financial crisis questioned the safety of major currencies. The basic contention is that - gold is the last currency standing as you cannot print more. Also the performance of gold as an asset class in the past decade has far exceeded expectations. Experts including the likes of Jim Rogers and Marc Faber have called it a 'safe haven'. In fact the recent Value Investing Congress had presentations on why central banks are buying gold.

But never before did Indian investors have such solid cues on why they should invest a small portion of their wealth in the precious metal. As per a business daily, India's central bank, the RBI, is getting increasingly bullish on gold. Given its reputation of being one of the most conservative central banks, this indeed is an eye-opener. By mid-July 2010, gold accounted for 65% of the country's incremental forex reserves. On an absolute basis, the share of gold in India's total forex reserves went up from 3.5% to 7% in the past 9 months.

Well, investors could ignore these cues at their own risk. The RBI is a leading authority when it comes to views on currencies. An asset that the central bank is piling on to hedge its risks is certainly not worth ignoring.

 Chart of the day
Players in the Indian mutual fund industry are going through a tough time. Investor participation in mutual fund schemes may have certainly improved as compared to last year. But the same is not just in fresh purchase but also redemptions. As today's chart shows, the mutual fund industry has witnessed equal or more outflows than inflows over the past 9 months. The SEBI's crackdown on malpractices may have certainly triggered this trend. But their performance also left a lot to be desired. As per the regulator, nearly 70% of large cap funds in India underperformed the S&P CNX Nifty Index. Need we say more?

Data Source: AMFI

The government's tryst with the private sector in enforcing employment quotas wasn't that successful. As such, it is now looking at the industry for the same. In a letter to the leading business chambers, the industry ministry has sought views on how manufacturing companies can reserve 5% employment for India's poor. The government is now eyeing sectors where it provides some business incentives. And there's no place better than manufacturing industry for the same. After all, it benefits from several incentives like tax breaks and subsidies.

We see this as an initiative with a noble cause. But how successful will this be is questionable. This is given that the Indian industry needs a lot of skilled manpower, which will be difficult to find in the poor strata of the society. As for unskilled manpower, India already has lots of them!

Do you think this reservation will be a win-win situation? Let us know your views on the same, or post your comments on our Facebook page.

Now, this should be a source of some real embarrassment for the Government. The WSJ reports that tonnes of food grains are rotting in the open on account of heavy rains that have lashed parts of North India. Apparently, these food grains are a part of the huge cache that the Government cornered last year to tackle one of India's worst droughts. The Government though was forced to store a good part of it in the open as it did not have enough storage space with it.

Now, isn't this a case of gross negligence and mismanagement on the part of the Government? At a time when food inflation in India is breaking new highs and also affecting India's economic growth, we have a situation where thousands of tonnes of food grains is being damaged by rains just for lack of storage space! Not just this, the food grains could very well have been used to feed the several million people who go to bed hungry every night. Thankfully, the Government is now waking up to this fact and is planning to construct warehouses across the country on a war footing. But the question that remains is how long will we continue to lock the stable doors after the horse has actually bolted out? Certainly, not fitting of a nation that prides itself on becoming the next superpower.

In the age of global warming, no one wants the tag of being a gas guzzler. So far, the developed world and especially the US, has been blamed for consuming massive amounts of hydrocarbons. In 2000, the US consumed twice as much energy as China. But with the rapid emergence of China as an economic power, the mantle of being the world's top energy user had to pass to China sooner or later. In fact, it appears as if it already has.

As per the International Energy Agency, the dragon nation consumed 2.3 bn tonnes of oil equivalent of energy last year. That's 4% higher than the US. But the Chinese claim that the figure is too high. They point out their efforts on the renewable energy front. China has the world's largest installed capacity of hydropower. The largest solar use for water heating. The largest capacity of nuclear power generators under construction and the fastest growth in wind power development. Even so, in our view, it is inevitable that its consumption of fossil fuels will only go up. Just like India's. The only question is- how long will the planet accommodate such energy intensive growth paths?

Rating agency Moody's cut Ireland's credit rating yesterday. For its part, Moody's has said that downgrade is primarily driven by the Irish government's gradual but significant loss of financial strength. The agency expects Ireland's economic growth to be 2% to 3% per year from 2011. This is below the 4% forecast built into the Irish government's fiscal programme. The ratings downgrade may serve to make things more difficult for the European nation. This is because it will increase the country's costs of borrowings in the market. Thus further burdening a country already overburdened with debt. This vicious cycle has now become ubiquitous amongst the so called 'PIIGS' countries. And one that could eventually contribute to their downfall.

China's exports industry is not completely out of the woods yet. In fact, the country has expressed gloom on its export prospects given that Europe's debt woes are far from over. This is despite exports having grown at a strong pace in the first half of the year. But this is expected to slow down in the second half. The austerity measures announced by European governments means that consumption and investment will be dampened in the EU. And so, China's exports to Europe are not expected to witness any significant growth. Although the global financial crisis compelled China to focus more on domestic consumption, the shift has been gradual. Exports still play a major role in determining the fortunes of the Chinese economy. Therefore, unless there are signs of a sustainable recovery evident in Europe and US, Chinese exports will continue to face the brunt.

After a buoyant start, the Indian indices shed some gains during the session today backed by profit booking in auto and pharma stocks. Markets across Asia except Japan ended higher today. The BSE-Sensex was trading nearly 28 points (0.2%) higher at the time of writing. The European markets have opened on a cautious note.

 Today's investing mantra
"The best protection against inflation is your own earning power. If you are the best teacher, you will command earning power and get your share of the national economic pie, regardless of the value of the currency. The second best investment is in a good company." - Warren Buffett

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19 Responses to "A signal investors should not be ignoring"

S Subramanian,Pondicherry

Jul 27, 2010

In respect of reservation, Only the Economically backward people should be taken into account.This is high time to look into this for the welfare of ALL people



Jul 23, 2010

i think we should increase our earnining to fight poverty.every indian should be able to get job or do some work and should not depend on government for this


radheshyam J yadav

Jul 22, 2010

Poor are at the end of line so they should get priority on basis of economiclly backward not on base of cast,today we have almost 70% resrvation due to various reasons,economically poor should be considered basis to bring to main stream,as they can get training from organisation once adopted.As govt is lacking in implementing new developments so this is the way to upgrade national status.


Sasidharan K

Jul 22, 2010

The thinking is not in the right direction. Job reservations will bring down the productivity ratios.Let the industry contribute a percentage of their profits,voluntarily to central govt funds constituted for such purpses.Providing jobs to those who cannot perform is not the solution.


rolly tewari

Jul 21, 2010

i think reservation should be done at the school level...so that evn the backward class is justified of the wrong done to them ages before n upper caste does not have any grudges against them at the higher institutional level...


Major General A. K. Gupta

Jul 21, 2010

It might be far more sensible, uncontroversial, productive, and cost-effective to train the poor and underprivileged in various skills that are in demand.


Sanjay Negi

Jul 21, 2010

It is an excellent idea...and should be extended to reservations in private sector in general...The main cause of popular support for socialism in India is that the deprived sections imagine the government as their main employer....if the private sector competes with the government in providing jobs to the weaker sections and goes even further, people at large will start detesting socialism and India will suddenly start growing at 25% per year...

No government can provide enough jobs for the vast multitudes...it is the responsibility of the economy to do that....and that essentially means the private sector. In fact ideally the government should downsize and people will not complain if they can find alternate gainful employment...

Mr Tata, Mr. Birla, Mr Ambani please wake up....you have an opportunity to build India's destiny....


Manoj Kumar

Jul 21, 2010

As is amply evident with the last more than 60 years history of reservation, that reservation per se doesn't make much impact on the lives of poor, out caste and downtrodden. It has fulfilled just one objective and that is more symbolic then bringing about any actual change. It has been instrumental in destroying various taboos placed on scheduled castes. Like if you have a scheduled caste as your boss or higher up you cannot visibly scoff at him or take castiest liberties with him. Other than this it has brought no other good to society. As we are already past the various harassing, humiliating and demeaning casteist practices so we should scrap away all kinds of reservations. Reservation in jobs is the biggest reason that caste identities are still alive in independent and modern India. As for welfare of the people, we should focus on education and development of skills in the backward populations of the country.



Jul 20, 2010

The best thing would be to do away with Reservations in total and introduce the concept of " Economically Backward Class"-- I am sure with the prevalent computerisation/PAN card/UIN concept it is possible to classify people on the basis of their income. This will ensure that the really deserving people who cannot afford good education get the opportunity/funds ; once this is done the competent among the poor will be on the same footing along with the others so getting a job will not be a problem. Of course, this requires that political considerations be set aside, which is extremely difficult-- do our leaders have the vision to see beyond thier immediate gains?



Jul 20, 2010

Yes! This is a good idea...though 5% is a very small number, industry can contribute to convert this unskilled work force to semiskilled and skilled force by giving them training. It will pay back in big term in due time. We all owe some responsibility in one or the other way to bring these poor people to main stream of prosperity. They are less fortunate not because of their origin or country, they have been deprived of opportunities. Its is a good step forward.

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