India will grow, but will investors make money?

Sep 9, 2010

In this issue:
» Youngsters in the US shun equities
» RBI warns banks about too much exposure to infra lending
» Easy money in the west aiding growth in the east, says Faber
» No signs of oil production peaking out
» ...and more!!

------------------------------ Don't Miss ------------------------------
We are delighted to offer you our latest publication - The Definitive Guide To Derivatives.
This guide will empower you with all the necessary knowledge you need to take your first steps to investing profitably in derivatives.
The best part, dear reader, is that this guide is Absolutely Free Of Any Charge. Just reconfirm your subscription to The 5 Minute WrapUp and claim your FREE copy Now!

Strewn all over most international newspapers and magazines today are praises of emerging markets. Their GDP growth numbers make for a very pleasant contrast with those of the developed countries. Not surprisingly, overseas investors have become quite optimistic about emerging market equities. Strong inbound capital flows affirm this optimism.

But things may not be so simple after all. A recent Financial Times report points out to research that suggests that countries with stronger economic growth during a particular period do not necessarily produce better equity returns during that time.

Thus, paradoxical as it sounds, equating a growing country or industry with a well performing equity market might just be the biggest investing fallacy of all time. That's because if future growth is so universally accepted, prices are bound to reflect that. And worse, they sometimes over-reflect that.

The erudite guru of value investing, Benjamin Graham, understood this only too well. He is known to have said once that "no clear-cut arithmetic sets a limit to the present value of a constantly increasing earning power." He felt that in such a situation, with no restraining factors in place, stocks could become worth any value set upon them by an optimistic market.

We believe you would do well to trust him on this one. Sub-par or dismal returns can be a very likely consequence of buying into such a market. Especially if one is not extremely selective with regards to the valuations of individual stocks. A caveat that wouldn't be very necessary in, say, a period like March 2009. The returns from that time have been historic. A function of the fact that no one was bullish on growth at the time.

 Chart of the day
The Asian consumer market is going a sea change. Steadily increasing disposable incomes in the hands of many are leading to a consumption boom. Today's chart of the day shows that this consumption boom is being spawned not only by the average Asian, but also by a big leap in high networth individuals (HNIs) in the region. According to the Capgemini report, the HNI population in Hong Kong and India increased significantly in 2009. Amongst other things, this also bodes well for the scores of companies in these regions that make luxury products. Recent reports show that luxury car brand Mercedes-Benz's sales more than doubled in the month of August. Such instances confirm the ground reality of the trend that today's chart illustrates.

Data Source: Capgemini

Funding of India's ambitious infrastructure plans seems to be falling way short of target. Especially where private participation has not been very encouraging. Bank lending to these projects were expected to fill in the gap. However, the Indian central bank is now seeing red with banking entities having too much exposure to infrastructure sector. The RBI believes that concentration to this sector could lead to a huge balance sheet mismatch for banks. Infrastructure lending is typically long term in nature. A majority of banks' liabilities, on the other hand, are typically short term in nature (deposits). Also, the concentration of risk could also lead to higher default rates.

These warnings from the RBI come at a time when its Chinese counterpart has also raised alarm over the credit boom in the Oriental economy. China is already seeing systemic risks due to excessive lending over the past two years. The RBI certainly does not want to be in the shoes of its peer.

Suppose we give you four words: youngsters, adventurous, risk taking and fixed deposits. If you have a knack for finance, it will not be difficult for you to conclude that the fourth word looks a little out of place in that list. After all, when one is young, one does not really want to invest in fixed deposits. This is the age when most youngsters would rather pump in as much money into equities as possible. Surprisingly though this does not seem to be happening in the US currently. CNN reports that more and more youngsters are shunning riskier investments like stocks and are instead putting more of their savings in fixed income instruments like fixed deposits and bonds.

Experts see this as a worrying sign. They feel that these guys would go on to live longer than the previous generations. Hence, they would need a much greater corpus of savings when they retire. Accumulating the same though would become difficult if more and more investments are directed towards safe but low yielding instruments like deposits and savings account. The youngsters, we believe, may not be to blame. They have grown up in an era of some very severe bear markets. And are thus unable to muster up the courage to put in their hard earned money into stocks. As much as this is true, it is also true that no other asset class has given better returns than equities over the long term. And it is this truism that they will have to believe in if they are to retire safely and also a lot earlier than imagined.

The US Federal Reserve's easy money policy is hurting the US, and where it hurts the most - unemployment. This is what 'Dr. Doom' Marc Faber believes. As he says, "It is a fallacy to believe that easy money... will boost economic activity in the US. Over the last two years, we eased massively in the US and where did the growth take place? In Asia. So when we talk about job creation, do you think that Intel or a small businessman will hire more people in the US because of further monetary printing? No! They will build factories in Asia and hire people in Asia and all the monetary policies in the US create misallocation of capital and unintended consequences."

The peak oil theory is often used to paint a scary picture of the world energy markets in the future. Basically, the theory says that global oil production will peak out at a point. And that point will arrive sooner rather than later. As per an article in Fortune magazine, however, there are no signs of any peaking out. The US has more petroleum on hand today than it has had since at least the beginning of the first Gulf War. And this despite many geo-political disturbances - the Iraq War, the moratorium on drilling in the Gulf, the turmoil in Nigeria and the ongoing cross-border quarrels in Central Asia. Part of this surplus comes from increased production, particularly from the non-OPEC countries. Including the US, where a 'shale gas boom' has created a natural-gas glut. It also comes from poor demand due to the stumbling economic recovery and changing consumer behavior.

While these trends might be temporary, it does appear that we may be looking at an oil surplus for years to come. Since oil consumption is directly related to overall activity, such a view cannot be dismissed out of hand. In our view though, such macro forecasts can change direction very fast. If you look at how widely used oil is and how many potential users exist in India and China, it doesn't appear there would be a surplus for much longer.

The Commonwealth Games in India may have a lot of negative publicity surrounding it. But that has not taken away the country's reputation as one of the preferred tourist destinations in the world. In the recent Conde Nast Readers Travel Awards, India was voted as the 7th best travel destination in the world. This is ahead of countries like Thailand, Brazil and the sublime Greece and France.

So why have globetrotters given the thumbs up to India? This is because they have been warming up to the country's people and hospitality. Not just that, some of India's luxury hotels have also scored points with travelers. Indeed, this comes as positive news for the country after the global financial crisis. And especially at a time when the Commonwealth Games are causing a lot of embarrassment.

After opening above breakeven, markets continued to sustain some positive momentum. However at the time of writing this, they were trading below their intra-day peak with the BSE-Sensex up by 54 points. Stocks from the banking and PSU space saw good gains. Metal and FMCG stocks were trading weak. Sentiments were positive in the rest of Asia's major markets. China was however the major loser, down 1.4%.

 Today's investing mantra
"On one point, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "India will grow, but will investors make money?". Click here!

2 Responses to "India will grow, but will investors make money?"

praveen bhargava

Sep 9, 2010

India has started progress in all the fields from Agriculture, Industry, Service Sector, Infra-structure, housing, Banking ,Mining and what not. The growth in all the fields are robust and it is growing with about 8.5%on yearly basis for the last 10 years or so.
Now this growth in India has helped each Indian to share the fruits of growth for himself also through out whole of India. At the same time it is true that the fruits of growth spread in whole of India unevenly and on sectorial basis.
All Indians have participated in the form of Money, services, Expertise, Skills, Land and as an Industrialist. This participation has yielded more money in return to the Indian Citizens who are now also enjoying the hard earned money in so many other enterprises to grow and earn more money.
In this way when India will grow then all the participants for growth i.e. Citizens from all parts of India will also grow and make money.


jaiprakash Dhanani

Sep 9, 2010

investor can make money only if they take the money out of the market or make decission promptly market is driven by only 2 thing greed and fear only .001 % can control this feeling and win as far as india is growing its very much foolish to think about it india is just heading toward slavery of western world slowly they will dictate their terms and condition

Equitymaster requests your view! Post a comment on "India will grow, but will investors make money?". Click here!