Is the world's last hope crumbling?

Sep 2, 2011

In this issue:
» Euro crisis could take centre stage again
» China's growing influence in Africa troubling US
» Goldman Sachs back to its old ways
» Real debt of the US is a mind numbing US$ 211 trillion
» ...and more!

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The developed world really seems to be running out of ideas. No matter what it does, its economy hardly shows signs of getting hold of the right end of the stick. This is not worrying the experts a great deal though. They believe that with emerging economies, most notably the BRICS, humming along at an impressive rate, the world economy is hardly at risk of falling into the big, dark hole of recession. A leading business daily however begs to differ. It does not think that the emerging economies are strong enough to lift the world output out of danger. It cites the example of how an index developed by Goldman Sachs and containing US companies with the most developing nation exposure has fallen 15% since April. This is in fact its biggest drop since the current bull market began in 2009. Investors in the index are not the only pessimists though. A lot of renowned international brokerages have also pressed the panic button on emerging markets.

The news that BRICS, arguably the last hope of the global economy, is crumbling does make for a good headline story. Furthermore, it also helps traders to take their buy and sell decisions as it affects sentiments, the primary mover of prices in the near term. But the long term investor who believes in the value of the stock rather than its price and who invests based on long term fundamentals should hardly be deterred. Please be informed that as far as India is concerned, its growth may well slow down, but the economy will still manage to grow at a positive rate. This means that fundamentally strong companies will be able to grow their earnings and in the process, increase their intrinsic value. Thus, the BRICS group of nations may not be able to have the same impact on global economy as before. And this may cause traders to sell their positions and the selling to be overdone. For long term investors though, it could present a great opportunity of buying into fundamentally strong companies at attractive prices.

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 Chart of the day
Till about a decade back, thermal energy was easily India's most dominant source of energy. As today's chart of the day shows, it still accounts for a lion's share of India's power source but its influence has waned to some extent. In fact, as years go by, we would see thermal energy playing an even smaller role. Important to add that renewable energy is now 11% of India's total generation capacity as friendly Government policy gave it the impetus it needed. Another source of energy that is likely to increase its share is perhaps the nuclear energy as the feelers about the same are fast gaining ground.

Source: Torrent Power

Just a couple of weeks back, a Goldman strategist sent a private report to hundreds of its hedge-fund clients. The report drew a very gloomy picture of Europe, arguing that the European banks were in such bad shape that they needed capital in the range of US$ 1 trillion to shore themselves up. Needless to say, the report suggested ways to make money out of the European financial crisis.

At this juncture, we would like to inform you that this very Goldman Sachs and its rivals are competing for the banking and advisory businesses of those same troubled European countries. For instance, Goldman and two other major banks recently hosted a presentation in which the Spanish economics secretary planned to outline Spain's fiscal austerity measures and pitch Spain's case to investors. It comes as no surprise that Goldman has a leading position among banks in facilitating sales of Spanish sovereign debt. In fact, if you remember, Goldman pulled off a similar trick during the financial crisis of 2008 as well.

Alas, the world economy has to suffer the nastiness of opportunistic bullies such as Goldman Sachs! Even worse, the sad irony is that these same 'big banks' get bailed out by the 'big brothers' (read governments) despite all their wrongdoings.

Food inflation is once again causing crease lines on Mr Pranab Mukherjee's forehead. After a gap of over five months, prices have once again entered the double-digit zone. For the week ended August 20, food inflation was up at 10.05%. The Finance Minister describes this trend as "disturbing". He intends to try and remove possible supply constraints on food items. But the RBI is quietly waiting in the wings. Seeing the sudden spike in inflation, the central bank may once again hike rates in its monetary policy review scheduled for mid-September. However, if more rate hikes are on the cards, GDP growth will take a further hit. Definitely a worrying sign for India Inc.

If you thought that the official debt of the US is indeed on the higher side, wait until you hear this. Laurence J. Kotlikoff, a professor at Boston University and also an advisor to former President Reagan, says the US debt totals US$ 211 trillion. This is more than 15 times the official figure! Indeed, so far the talk has been on how important it is for the US to reduce debt, but all this is with respect to the debt that is 'official'. No one seems to be taking into account 'unoffical debt'. This includes Social Security, Medicare and Medicaid benefits and the amount that the government is required to dole out for these is only expected to worsen government finances. Moreover, what is worrying is that the US government does not appear to be giving serious consideration to this aspect. And hence the possibility of this issue blowing up in its face in the future cannot be ruled out. All this has only heightened the element of uncertainty and when the US would finally be able to cut its debt down to acceptable levels is anybody's guess.

Amongst other things, China's infrastructure is an example in the speed of execution. There can be little doubt that it is one of the most important contributors to the country's high economic growth rates. And now it seems that China is willing to extend a hand to other nations as well by exporting its developmental model. China is making rapid investments in African nations which have seen a dearth of capital. In fact, it is also sharing ideas with African countries to attract foreign capital which is the foremost requirement for growth. However, this has resulted in a major cause of concern for US. Rising trade balances (through investments and sharing of know-how) between China and African nations has dethroned US as far as influencing the political and economic ties in African countries is concerned. While officially the US has been supporting Chinese investments in these countries, it has also vouched for transparency and stricter norms for investments. Though it appears as if there is tug of war between these two countries, it would not be wrong to say that it is a blessing in disguise for the African nations.

The 18-month long Euro sovereign debt crisis has been characterized by a series of market shocks. However, in recent months, the downgrade of the US' sovereign ratings has taken precedence for economists and markets to follow. But the stage seems all set for the Euro crisis to take centre stage yet again. The silence of political leadership in the Euro nations during the summer months is expected to break shortly. What it means is that the debt restructuring debate for economies like Greece and Portugal and Ireland will heat up. The money poured into the Euro debt crisis by the likes of Germany and France has already caused sufficient financial tress to the stronger economies in the EU. Whether the policymakers will allow that to continue remains to be seen. Argentina's 2002 default, which broke up the peso-dollar peg, was key to bringing the South American nation back into positive growth. Will the hopes of the same positive impact on Greece and others induce the European Union to force it away from the Euro?

Meanwhile, despite a two day break, the benchmark indices in the Indian stock market seemed in no mood to let go of its optimistic mood as they are trading in the positive yet again. At the time of writing, the BSE Sensex was up around 80 points. Heavyweights like RIL and ICICI Bank were seen driving most of the gains.

 Today's investing mantra
"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over." - Warren Buffett

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3 Responses to "Is the world's last hope crumbling?"

Commodore Suresh Bhandoola

Sep 5, 2011

I believe that large cap companies have reached close to their high valuations and it is the mid and even some small cap companies bought on the basis of being value buys for the long term will be the ones to give the best results. As a large number of such companies are from BRICS I agree it will be the ones to save the world economy from total doom.


shome suvra

Sep 3, 2011

Though MSCI index of developed countries shows a high positive correlation among them,inspite of the fact that the intra-Asian trade has increased substantially the emerging countries' intermediate products have final feeding in the OECD countries. If dollar appreciates there will be massive sell-offs in the global markets. Temporarily in India bottom-up approach is suitable.


anupam garg

Sep 2, 2011

All US companies are on the decline...the question which shld b posed is that wht proportion of operations of those US companies were exposed to BRICS? Stats can b easily modified to make headlines...although i do believe tht BRICS alone r not strong enough 2 uplift global sentiments

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