Crash, boom, bang! Can Asian markets save the day?

Aug 19, 2011

In this issue:
» Can GST be the remedy for black money?
» 'Spiraling gold prices to crash'?
» Warehouse norms to help control food inflation
» SEBI gives options to promoters to reduce stake
» ...and more!

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The global stock markets have crashed on fears of a recession in the US combined with the debt troubles in Europe. The Asian stock markets have followed the cues and have come spiraling down. Everywhere stock prices have plummeted. Investors and experts fear that this is a repeat of the meltdown of 2008. But at that time, the Asian markets had recovered at a faster rate compared to its western counterparts. The big question this time is can Asia do a repeat of 2008?

For this we need to examine history a bit more closely. One of the big reasons behind the recovery of 2008 was the flow of cheap money into the Asian markets. The huge economic stimulus plans launched by the US had sent a lot of dollars into the Asian markets. This in turn had led stock prices to shoot up to new highs. With no such plans announced this time round, the recovery in stock prices may not be as spectacular and as fast as it was last time.

Coming to the fundamentals, the performance of Asian companies would depend largely on the domestic demand in the countries. This is due to the slowdown in demand from foreign shores as the West goes into recession. At the same time, the Asian countries are themselves grappling with slower growth and high inflation. But these are just cyclical problems. There is no structural problem in Asia as is the case with the developed world.

Therefore, we are optimistic that fundamentally Asia would emerge as a winner yet again. Maybe the recovery would be slow but it would come around much faster than that in the developed world. The recent crash is just an opportunity to buy fundamentally sound stocks in a bargain sale. Those who can take advantage of this sale would emerge as winners in the long run.

Do you think Asia would sink into a recession like the US or would it emerge as a winner as it did after the 2008 crash? Share your comments with us or post you views on our Facebook page.

 Chart of the day
The Indian economy has grown at a spectacular pace particularly in the recent times. This has led to an expansion of the overall GDP (Gross Domestic Product). As a result, the tax proceeds to the government have come down as a percentage of the total GDP. This is despite the fact that the tax proceeds have increased in an absolute term. As per the Ministry of Finance, the total tax proceeds have risen by nearly 17.5% YoY during the fiscal year 2010-2011 (FY11). However, as a percentage of total GDP it has come down to 14.7%. This declining trend over the past few years reflects that the Indian economy has grown at a healthy rate. But is this tax to GDP ratio sustainable? Only time will tell.

Data source: Ministry of Finance, Business Standard

India is undergoing a major transformational change. While the country stood shamefaced on account of a slew of scandals, this exposure had its own positives. A lot of blame for the muck in the system goes to flawed government policies. However, there is much hope from the launch of Goods and Services tax (GST). The new indirect taxation policy is expected to block avenues for generating black money. Under GST, tax would be levied at each stage of value addition, right from raw material to point of sale. Any break at any stage due to evasion of taxes would be easily detected, unless done right from raw material sourcing to finished product sale. It will discourage tax evasion as the seller will lose credit for the taxes paid at the earlier stages of the value chain if he sells the product without a bill. He will not be able to claim refund for the taxes already paid on the product.

High expectations rest on the GST tax reform. However, the most important tax reform has fallen victim to long delays. Many states are holding back the approval since it may take away from them the authority to collect their own taxes. As the crusade against corruption and black money seems to be gaining momentum like never before, it is time to make a case for implementation of GST, else one more reform will end up going on the backburner.

When it comes to gold, the battle lines are getting more distinct by the day. On one side are the gold bulls who argue that despite its 11th consecutive year of price rise, the yellow metal is far from finished yet. On the other side however, are the gold bears who reckon that it is only a matter of time before the bubble bursts. Some economic experts at Kansas State University in the USA have chosen to be a part of the latter group. "People were lulled into thinking housing prices could never fall, but they fell more than 30 per cent in most American cities. The same thing could happen to gold; it's not risk-free," one of the experts argued. Still another added that gold prices have gone up by an average of 8% a year since 1960 but inflation has risen at less than 4%.

Thus, if gold is believed to be inflation hedge, it should not rise more than the rate of inflation and hence, the gold price is ripe for falling. We would like to disagree. Sure, gold cannot be valued the way we value stocks. They don't have earnings and hence, cannot be assigned P/E multiples. But there's another way of finding out whether gold will rise from here or not. And that is by way of looking at the magnitude of the gold buying mania. It should be noted that the yellow metal is far from being extremely popular as an investment. There are still a lot of investors who've not considered investing in gold yet. Then there are the central banks where gold buying has just scratched the surface. Furthermore, the yellow metal has not become the topic of choice at cocktail parties yet. It is when all of this happens that you may consider selling your gold. For the time being though, hold on to it. However, please do not make it a very large part of your portfolio.

Tired of higher food prices eating into your wallet? Fed up of the central bank's incessant rate hikes? Well, the Warehousing Development and Regulatory Authority (WDRA) may have just found a way to tame the inflationary monster. The WRDA has come up with certain regulatory changes that can help control the prices of food items, benefitting farmers and changing the warehousing landscape in the country. It can also help solve the anomaly where food grains are rotting on one side of the country, while people are starving on the other.

As of now, farmers are often forced to sell their produce at very low prices. As there are inadequate storage facilities, they fear that their goods will perish, leading to losses. Now, while the farmers get next to nothing for their efforts, the middlemen usually reap most of the benefits. These various supply side bottlenecks are the main reason why inflation remains persistently high. The WRDA plans to now allow the issuance of electronic receipts on the basis of the value of the commodity warehoused by the farmer. These receipts will be traded on the spot, much like shares on various commodity exchanges. This will help enable proper price discovery, and eliminate the artificial gains of middlemen. If this works out, we may be able to breathe easy on the inflation front. Plus there will be gains to the economy in terms of reducing wastage, and expanding production capacity.

In the interest of shareholders, the SEBI in 2010 had come out with a proposal asked firms to have a minimum 25% public shareholding by March 2013. The idea was to bring in accountability and transparency in listed firms. This means that promoters of companies who have more than 75% (around 65 companies on BSE 500 of which 27 are state owned) holding will have to pare the same. And in order to do SEBI is considering giving two more options to promoters. Currently, promoters are allowed to lower stakes by selling shares to existing shareholders or rights issues, or fresh shares through follow-on public offers (FPOs). More options being contemplated by SEBI are issuing shares through qualified institutional placements (qip-in-stock-market?utm_campaign=SEO-K'>qip-in-stock-market?utm_campaign=SEO-K'>QIPs) and preferential shares. While preferential allotments and QIPs take 4-5 weeks to complete, rights issues and FPOs take around 4-5 months as SEBI approval is required. Hence, assuming that this proposal does get accepted, one should not be surprised if the QIP and the preference share route take precedence over the FPO and rights issue route given that the latter is time consuming. However, it remains to be seen as to when this would get implemented.

In the meanwhile, the Indian stock markets continued to languish. At the time of writing, the benchmark BSE Sensex was trading down by 380 points (2.3%). Te stocks in the technology and capital goods space are witnessing the majority of the losses. All major Asian indices closed in the red today. Europe has also opened the day with losses.

 Today's investing mantra
"If past history was all there was to the game, the richest people would be librarians." - Warren Buffett

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4 Responses to "Crash, boom, bang! Can Asian markets save the day?"


Aug 20, 2011

It is all a game of FII,s to make a fast buck from Indian market.
The game is buy low sell high. The game is also to strike first in selling and buying.
The India's growth story till date (my opinion) has raised the sensex from 2000-3000 levels to 14000 to 15 000 levels
FII,s today have muscle to bring the Sensex up or down by ~ 4000 .
They have now started the selling spree and are waiting for the Sensex to touch ~14000 to 15000 to go on their buying spree may be in jan/Feb.
They are helped in their endevour by local & panic selling .
In this situation the best in my opinion is to stay put till recovery and not worry.
I wish our internal finance inputs ( by inputing into market matching the FII's ) could match the sting of FII's and markets remain stable
- but then what will the news channels and pleuthoria their advisers do ?????



Aug 20, 2011

Felt nice reading your article and knowing about GST & WDRA and its benifit. But all its success would have reached to common Indians long ago had the Ministers in Power would have been honest and had a desire to effectively implement the Law the today Anna Hazare would not have to come out on street and so many response from all over India. There has to be FEAR for Law breaking people.Like the Verdict of an Iranian court declared the Face of the Boy to be damaged in the same way by Pouring Acid on his face the way he damaged the face of a girl who refused to his appeal for love(its not by force ,it has to come spontaneously). But the Rich and Powerful Lobby has shown Thumps up to the existing Law ( DGP Rathore to Ruchika Girhotri family) and its not the poor.Small thieves( pickpockters when caught by Police are severly thrashed even to death) but A.Raja,KaniMozi,Kalamadi are in 5 star Jail.Scams after Scams but ZERO punishment." Only lecture Law will take its own course", Boforce case has been give Clean Chit by CBI( compelled). Whats more to say. Thanks Equitymaster.



Aug 19, 2011

crash boom & bang may happen only when sytems are not well insulated from the external factors.political instability and uncertanity may be the main cause.our honourable prime minister is a honest person but not honest to his work.


Tamal Dasgupta

Aug 19, 2011

China will not go into recession. India will go into recession unless it focused on the steps for reform. Corruption is a problem, but it is not the only problem. Lack of infra; ports, airports, new roads, linking waterways; blocking nuclear power plants; blocking thermal power projects/land acquigsition; blocking back end warehousing and storage to bring down inflation; the list is endless. Whilst Indians criticize the US for not undertaking pain to reduce debt; what pain has India undertaken to improve growth?? In India, interest rates, social spending and inflation keep galloping at the cost of diminishing growth. Anna Hazare is another red herring.

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