What India can learn from this life-changing event

Sep 17, 2010

In this issue:
» Why you should be paying lower prices for stocks now
» Real estate promoters pledge a lion's share of their holdings
» India's infrastructure buildup to boost global growth
» China pays a heavy price for its rapid growth
» ...and more!!

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For long, the US has been the envy of the world. With some of the best levels of lifestyles on the planet, hoards of students and professionals from developing countries have yearned for living the American dream. That dream though has now turned sour. And like never before. The US government released yesterday some distressing data about how drastically the fortunes of its denizens have changed in the recent past.

The country's poverty rate jumped to 14.3% in 2009, its highest level since 1994. At 43.6 m, the number of Americans now in poverty is the highest in 51 years. According to some analysts, poverty is expected to continue climbing. Reaching a high of about 16% over the next decade. Consequently, another 10 m Americans are expected to slip into poverty.

So, what has gone wrong with the world's most prosperous country?

Perhaps it is to do with its major misallocation of resources. Crony capitalism and too big to fail corporates have ensured that financial resources continue to be in the hands of those who have made disastrous decisions. Business success has come to depend on close relationships between large corporates and state officials. Furthermore, wasteful but massive defense expenditure has ensured that resources are taken away from sustainable nation building activities.

As India grows rapidly, policy makers must be acutely aware of not repeating such mistakes in our country. As a wise man once said 'All I want to know is where I'm going to die, so I'll never go there.' A lesson well worth noting as we lay the foundations of our own economy.

 Chart of the day
Today's chart of the day puts the unemployment problem in the US in historical perspective. It reveals that the unemployment rate in the US is now near almost a 3 decade high. A pointer to the magnitude of the problems it is facing currently. Unemployment causes huge opportunity costs for a country. Where a huge part of its productive workforce who could otherwise contribute to the nation's GDP, is instead whiling away its time at home.

Data Source: IMF, World Economic Outlook Database
2010 data is as per IMF estimates

Opportunity cost is central to investing. In simple words, one should always compare the expected returns from stocks with the returns available elsewhere. Interestingly, the returns available elsewhere are going up. Recently came the announcement that Employees' Provident Fund will now pay 9.5% instead of the earlier rate of 8.5%. And now that the RBI has hiked the repo and reverse repo rates, your bank deposit is likely to earn more soon. Thus, the opportunity cost has gone up for every single rupee that an investor has put in stocks. Higher opportunity cost acts like gravity - it pulls downs the valuations of investments. Hence, an investor should be willing to pay relatively lower prices for equities now. So far, the markets do not seem to reflect the fact. But sooner or later they will.

All industries can broadly be classified into two major categories. Cyclical and non-cyclical. Cyclical industries have periods where they have problems generating enough cash flows. And most investors have no problems accepting this fact. What could however be unacceptable is when companies require substantial cash injections even during good times. The Indian real estate sector is a case in point. As per a leading daily, as many as six well known real estate and construction companies have been identified as ones where promoters have pledged a lion's share of their holdings to raise finances. This, at a time when real estate prices have breached even previous highs at quite a few pockets. All this makes one wonder whether real estate companies will ever make money for their shareholders.

China may have been growing at a scorching pace in the past. But higher growth has come with a very heavy price. The dragon nation has now been branded the world's worst polluter. What is more, it needs to spend atleast 2% of GDP a year to clean up the 30 years worth of industrial waste it has built up. And that's not all. The Chinese cannot afford not to clean up this waste every year. Because failure to do so may cost the Chinese economy half as much again in blighted crops, health costs and pollution-related expenses.

But China also faces a double whammy. Because of these environmental concerns, stricter laws against new pollution are being imposed. This in turn would raise the cost structure of companies. India, too has been growing at a fast pace and is aiming to reach that magic double digit mark. But in its quest for a faster growth, India cannot afford to make the same mistake that China has. Otherwise it would have serious consequences on sustaining growth over the long term.

That India suffers a lot due to its poor infrastructure is a widely known fact. Weak infrastructure creates hassles for proper functioning of businesses. While the government has always laid out grand plans for improving the same, the actual results have often left lot to be desired. As per the latest plans, we as a country are planning to spend US$ 1.5 trillion on infrastructure in the ten years to 2017. This will be towards overhauling our poor roads and power projects, which have long been seen as a drag on the economy's growth.

Whether this will happen or not is another question. But our policymakers already believe that India's infrastructure buildup will boost global growth. This is given that it would involve massive imports of foreign equipment, which will then act as a stimulant to the struggling international suppliers of such equipment.

July 2010 saw the highest sales ever in a month for the auto sector. This record was quickly broken in August. With the oncoming festival season, the great Indian auto story seemed to show no signs of abating. This was until the interest rate dampener came in, with RBI hiking rates for the 5th time this year. This higher than expected hike, will make auto loans more expensive. Industry stalwarts however have mixed reactions on the rate hike. SIAM president and M&M auto head, Pawan Goenka, and Maruti's CFO both feel that the hike will not affect demand too much. However, Hyundai's marketing head feels that there could be some impact on demand in the festive season. The December quarter is supposed to be the best for the industry. Whether demand still remains upbeat in this 'make-it' or 'break-it' quarter is what remains to be seen.

While rankings do not really matter, they definitely give a 'feel good' factor and boost confidence. A definite confidence booster was to see loads of Indian companies in this year's Forbes list of 'Asia Fab 50'. This year, 16 Indian companies made their way into the prestigious list. Together India and China account for 32 of the top 50 companies in the list. This is way better than last year when only 5 Chinese companies and 3 Indian companies were a part of the Asia Fab 50. Some of the Indian names in the list include Infosys, ITC and Axis Bank with a special mention on the latter two commending them for their superior businesses. Well as we said, the rankings definitely give a reason to celebrate, though they should not be treated as a determining factor for investments.

After opening in the green, markets were trading strongly in the positive territory at the time of writing this. The BSE-Sensex was trading higher by 190 points. Gains were seen across the board, with stocks from the consumer durables and metals space leading the gains. PSU and power stocks however, gained the least. Sentiments were positive in the rest of Asia, with the Nikkei and the Hang Seng both up over 1%.

 Today's investing mantra
"Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. I would want to address the problem right now." - Charlie Munger

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9 Responses to "What India can learn from this life-changing event"

diapak prajapati

Sep 23, 2010

it is a nice movement for the stock market at this time past investors are very profitable situation in this movement. at the end of the diwali sensex can be go 22000.



Sep 23, 2010

Pl. advise which are the 6 real estate companies who have pledged their shares for raising finances



Sep 20, 2010

In my view the market will go up still furthe, may be reaching the Sensex beyond the 22000 level, only thru FII's playing around "A" Grade scrips. Many of medium fundmentally strong companies are keeping away from this rally, is a unscrupulous trend in the market. Definitely a down turn is sure that would erode all this climbs after reaching a certain level, may be after Diwali.


Ramakrishna Maiya B C

Sep 19, 2010

I think 19500 is the peak. Now I am scared to invest. I am thinking of offloading everything and head for a bank. What is you opinion?



Sep 18, 2010

Mr Ajit Dayal had commented that the markets will cross 22000 by July and your newletter is worried that the markets are looking expensive at 19000 levels.This is contradicting Mr Dayal's forecasts. Please elaborate further on this subject, looking forward to read more on this debate.


Benedict Abraham

Sep 18, 2010

Excellent survey of Indian Economy. Are the Policy maker making right path for the growth to sustain? Are we giving right infrastructure for the agricultural sector? I love to see your analysis on this sector which only can sustain our development.



Sep 18, 2010

If we assume that the correct level for the Sensex was 14500 on 31st march 2008 and just add 10% growth of sensex for the next 3 years we get a figure of 19299.5 for 31st March 2010.


Mrinal Dasgupta

Sep 17, 2010

Todays Wrapup edition is a good one! Keep it up.


Ramanathan L K

Sep 17, 2010

Excellent economic and corporate survey

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