The most encouraging sign for Indian stockmarkets

Aug 18, 2010

In this issue:
» Financials of Indian political parties
» The second largest private sector employer is not Indian
» US, UK's AAA ratings in danger
» Why US government bonds are a bad bet?
» ...and more!!

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Indian households have typically been wary of investing in stocks. Data from the RBI shows that bank fixed deposits are the most preferred investment avenue for Indians. Primarily because they are conceived to be much safer despite the lower yields. In an economy with no provision for social security like in the West, safety of investments is paramount. However, the stock market scams and bubbles wherein many investors lost their shirts are also responsible for the low exposure. Unfortunately, each time Indians warmed up to investing in stocks, a scam or a bubble hit the market. As a percentage of GDP, Indian households' investment in stocks nearly halved in the past decade. It has come down from the highs of 8% in FY95 to 3.5% in FY10.

Nevertheless, as they say, every cloud has a silver lining. And in this case, the silver lining is equity investments not being restricted to the metro cities. Equity research as well as trading services have become more accessible. Thanks to the penetration of the internet to the smaller town and cities. As a result, cities like Kochi, Rajkot, Hyderabad and Pune accounted for 5.4% of the total cash turnover of the National Stock Exchange in FY10. While Mumbai continues to dominate with 56% share, the other metros lag with single digit shares. What is encouraging is that the share of smaller towns has grown exponentially over the past two years. And we hope that this trend continues. What would be interesting to see is whether the interest in equities sustains in event of markets correcting. After all only then will Indian stockmarkets have the ability to do away with dependence on FIIs.

 Chart of the day
India is one of the biggest consumers of crude oil globally today. And unless we adapt to more renewable resources, the share is only set to increase. This could be a huge burden on Indian consumers as prices of crude oil move higher. As today's chart shows, the price for a barrel of Indian basket of crude has quadrupled in the past decade. When most economies were going through economic downturn, India's oil import bill went up 26% YoY in FY09. This was the result of increased consumption as well as higher prices. However, with domestic production of hydrocarbon lagging behind, importing a higher share of crude going forward could weigh heavy on India's trade deficit.

Data source: BP Statistical Review

What is the first thing you would do to know whether a business is doing well or not? Most likely, you would look at the financials. The same could be said about politicians and political parties. At a time when our esteemed MPs want to give themselves a massive pay hike, the financials of political parties are in the pink of health. As per the Times of India, the Congress had the highest income at Rs 5 bn for FY09. Between 2002 and 2009, its assets have increased by 42%. The BJP and BSP have declared their income for FY10 at Rs 2.2 bn and Rs 1.8 bn respectively. The maximum growth rate in total assets from FY03 to FY10 has been shown by BSP (59%) followed by NCP (51%) and SP (44%). Brilliant numbers, won't you say? They could teach a lesson or two on running profitable operations to entrepreneurs. But then we have always suspected that politics is a fantastic business. Mind you all these are merely the official numbers!

India has many large private sector companies. But surprisingly, one of the biggest employers in country is not an Indian company. Rather, it is American. Yes, as per an Economic Times report, the second largest private sector employer in India is none other than IBM. Thankfully, the list is topped by our very own TCS.

The report also cites sources within the company as saying that IBM's India employee strength could soon cross that in the US. The company employs about 155,000 people in the US. Understandably the company is not very forthcoming about this topic. With close to 1 in every 3 of its employees being Indian, we can already picture a very angry Obama breathing down its neck.

Indian IT outsourcing firms have made a break through into markets across the world. Be it US, Europe, Latin America or the Middle East. These firms have created a footprint in one and all. However, China has still remained a tough nut to crack in terms of outsourcing. Indian IT firms have found it difficult to grow business from China in this area. Problems range from different cultures, language barriers to difficulty in private firms doing business with the state run firms in China. However, China is too big a market to ignore. Most Indian IT companies are setting up shop in China to be able to capture a part of this big pie. IT majors like Wipro and TCS have set up their operations in China and are recruiting locally to overcome some of these challenges. The Government too is doing its bit. The commerce minister recently got a personal commitment from his Chinese counterpart to focus on IT as a part of rebalancing their bilateral trading relationship. We hope this move yields the desired results.

The US and certain European nations are grappling with very high debt burdens. And yet they enjoyed triple AAA credit ratings. In effect putting a question mark over the rating practices of agencies themselves. However, the prolonged bleak picture in the developed world has compelled rating agencies to have a re-look at these ratings. And so, Moody's has stated that the top AAA ratings of the US, Great Britain, France and Germany are 'well positioned'. But these countries could face new challenges that would increase the possibility of a downgrade. Most of these governments injected massive doses of liquidity when the crisis was at its peak. That yielded some benefits for a short period. But have not done much in bolstering the recovery process. Meanwhile, most of them have been saddled with dollops of debt. This should be reason enough to downgrade their ratings further. But Moody's for some reason chooses to defer the inevitable.

'Dr. Doom' Mark Faber continues to talk about doomsday. And it's the US bonds this time. In an interview with CNBC, Faber has advised investors to stay away from US government bonds. He has said that there are already signs of inflation in food prices and thus US government bonds are a very bad bet at these levels. The explanation we can think of is that when inflation rises, interest rates also rise. This makes bond prices fall as these are inversely related to interest rates. Anyways, Faber has maintained his positive view on gold. He sees China diversifying its forex reserves to yellow metal that would put an added pressure on the US government bonds.

The Indian indices managed to hold on to the early gains for most of the session today. The benchmark indices gathered strength from buying interest in auto, pharma and banking stocks. Asian markets are trading a mixed bag with Japan and India leading the pack of gainers. The BSE-Sensex was trading nearly 86 points higher at the time of writing. The European markets have opened on a cautious note.

 Today's investing mantra
"The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it." - Warren Buffett

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4 Responses to "The most encouraging sign for Indian stockmarkets"

K K Patnaik

Aug 20, 2010

middle class investment is the best.


michael joseph

Aug 19, 2010

all the tips are attractive we have very cautious to select the most froutful tips.


m j joseph

Aug 18, 2010

I was quite surprised when i saw in the news paper today that IBM is the 2nd largest private sector company employing indians.
The u s politicians have their battles to fight - they need to get their ratings up and finally get reelected.
I do not understand why we are helping them to win their battles . can the media be a little more discreet.perhaps so should you be.


Momi Jeinow

Aug 18, 2010

It was very interesting to go through your 5 minutes wrap up.I liked the pun used here and there. Also your work "Investment Guide for Women" is appreciable.

Equitymaster requests your view! Post a comment on "The most encouraging sign for Indian stockmarkets". Click here!