An upside to stocks and savings finally here?

Sep 21, 2011

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In this issue:
» Can stocks double your money in next 10 years?
» China set to dominate India's GDP growth
» Can Rs 31 a day make a family above poverty line?
» This Indian company dominates manufacturing in the UK
» ...and more!

It is 12 and counting! Yes, the Reserve Bank of India (RBI) has made a dozen attempts so far in the last 20 months to cut down the threat of inflation to the Indian economy. Each time, it raised interest rates and made liquidity tighter for banks and Indian corporates. Retail borrowers too felt the pinch as interest rates on loans moved up at a faster clip than deposits. Unfortunately, all these measures have had little or no impact on inflation. Meanwhile, growth rates and profit margins have certainly taken a dip with the steep funding costs.

Concerns that the Euro crisis and the US' stubborn policy of keeping interest rates near zero for an extended period may keep the RBI ultra conservative cannot be sidelined. However, if the RBI's latest views are anything to go by, there seems to be very little pain left. RBI governor Dr Subir Gokarn has cited confidence that the cumulative impact of rise in interest rates should arrest price rises soon. That combined with a higher base effect should do the needful in keeping inflation well below double digits. It effectively means that interest rates in India have nearly peaked.

For India Inc. any cue of downside in interest rates comes as a huge relief. Not only will it give companies more headroom for growth but also ensure higher profitability. For those that have kept their balance sheets strong during the liquidity crisis can now look forward to borrowing at cheaper rates. The government's worries about raising funds at steep rates and putting the fiscal balance to greater risk can also get resolved to a great extent. Most importantly, households can look forward to higher savings as both interest costs and inflation rate make disposable incomes look better.

What does this mean for the Indian stock market? Well, it is common knowledge that high interest rates act as gravity on stock valuations, exerting a downward force. Thus, with this force expected to blunt down a good deal, stocks could once again start heading northwards. Looks like good times for savers are here again.

Do you think lower interest rates will help improve household savings rate? Let us know your views or post them on our Facebook page.

 Chart of the day
Coal shortage is finally showing its colour on India's power supply scenario. Unavailability of the critical fuel had so far only threatened capacity expansion for thermal power producers. But, as today's chart shows, in the month of August 2011 even the existing thermal power capacity in the country operated well below target. At the end of August, 22 power plants across the country had a supply of less than seven days of coal. In other words, it is becoming more and more difficult to tie up fuel supply for the nearly 5,000 megawatts of coal-based capacity that has been added since the beginning of this fiscal.

What has bailed out the power sector so far is the stupendous growth in hydro-powered capacity, which has been chugging along at 20% plus rates in the past three months. But with the monsoon coming to an end, and the slower rate of capacity addition in this sector, that may not last.

Data source: Mint

What is the rate of return that one can expect from US stocks over the next decade? If John Bogle, one of the most respected voices in the financial industry is to be believed, an investor can double his money in stocks over the next 10 years. This amounts to a yearly growth rate of 7%. Investors could do well to recall that US stocks provided nearly zero returns in the decade just gone by. In other words, the money that they put in the broader stock market at the start of the last decade stayed nearly the same by the time the decade came to an end.

Thus, with this kind of track record, what gives Bogle the confidence that stocks will do much better in the current decade? Bogle has argued that markets tend to move in cycles. Therefore, the poor returns over the last decade was nothing but a compensation for the fantastic returns provided by US equities during the two decades preceding the last decade. Thus, with normalcy being nearly restored, US equities should now grow at around 7 odd percent over the next 10 years.

Can the same principle be applied to Indian markets? Quite certainly yes we believe. The only difference being that long term average returns in Indian stocks has not been 9% like in the US but a little higher and in the region of 18%. And since Indian markets have grown at around 18 odd percent in the last decade and since there doesn't seem to be too much overvaluation currently, the index should return 18% over the next decade. We would like to mention that we are reasonably confident about this prediction, give or take a couple of percentage points.

The National Security Council of India is jittery. And it has a very good reason to be so. The reason is that China is all set to conquer India. We are referring to the domination of Chinese in India's GDP (Gross Domestic Product). The Council estimates that by 2014-15, over 75% of India's manufacturing would depend on imports from China. This means that China's share of Indian manufacturing would touch US$ 304 bn. Manufacturing itself is expected to be around US$ 429 bn by then. This in itself appears to be a big threat as per the Security Council. Indian companies depend on China for imports of chemicals, metals, hardware, infrastructure, etc. And by now they have got used to using the cheaper Chinese goods. As a result, they have reached a stage where they are hesitant to change suppliers as this move would hurt their margins.

But China is playing out a double strategy. On one hand, it has made companies dependant on it for raw materials. At the same time, it is also flooding the Indian markets with their own finished products. By tweaking the prices of raw materials they make the Indian goods expensive in comparison to the Chinese goods. This in turn makes the consumer buy more of the Chinese manufactured goods. As a result, the Security Council has a very good reason to be jittery of increasing dependence of Indian manufacturing sector on China. Hopefully the government would listen to it and put in measures in place to bring this under control. Otherwise China would end up conquering India, at least economically if not politically.

What can a family of five afford with Rs 31 a day for survival in a city like Delhi or Mumbai? Knowing the inflation levels the country is facing, the question may seem out of place to most of us. However, as per the Planning Commission that happens to be top most planning body in the country, this much of daily expense is enough to keep the public out of the poverty relief schemes run by the Government. It is to be noted that this is a revised criteria, the earlier borderline was drawn at a daily expense of Rs 20 in the urban areas and Rs 14 in the rural areas as per 2004-05 prices. Out of this, Rs 12 and Rs 17 were supposed to take care of just food needs.

This is how close the government is to the ground reality. We should hardly be surprised to see the lack of reforms and the failure of the few that are undertaken. Perhaps it is too convenient for the Government to accept this result as it will lessen the number of people falling in below poverty line (BPL) category and keep its food subsidy losses in check. The commission claims that for the first time, poverty estimates are likely to show a reduction in the number of the poor. The Government might expect a pat on its back for performing well 'statistically'. But it's an eye opener for the public - it is important not to get too bogged down in the numbers and to keep the big picture in mind.

It's been 64 years since India became free from British rule. How far have we come? Well, India's leading conglomerate has a very telling answer to that. You may have probably guessed who we are talking about. Yes, it is the Tata Group. An article in the Economist points out that today Tata UK is the biggest manufacturer in the UK. Not just that, it is also the biggest employer with about 40,000 workers on its payroll. In fact, if you add the services staff, the number crosses 45,000.

Emerging economies have been scooping up big ticket acquisitions in the ailing developed economies. UK has been the second-most preferred destination for investments after the US. You would be surprised to know that Tata indeed has had a century long association with the UK. The company had opened an outpost in London dating as back as 1907 to buy supplies for its Indian operations. In 1975 Tata launched its first British venture in the form of Tata Consultancy Services (TCS), which pioneered the outsourcing of computing to India. Then in 2000, Tata made a major leap into the British industry by acquiring Tetley. The relatively recent acquisitions of Corus and Jaguar Land Rover further bear witness to Tata's growing foreign ambitions. Today, the Tata group garners about 60% of its total revenues from the UK. From slave to master, India has indeed come a long way.

After China's banks went berserk while lending to the property sector in the country, the Chinese government had no choice but to put in place some curbs with the aim of preventing bubbles from forming. But that does not seem to have done much as the Chinese have turned their attention overseas for borrowing. Indeed, Chinese banks and companies taking advantage of cheap dollars to circumvent lending restrictions at home have amassed US$ 333 bn in foreign loans. Out of this, as much as 60% is said to be from European banks. The problem is that the debt crisis has deepened in Europe and if European banks are adversely impacted as a result, Chinese borrowers will be in trouble. And with the government back home not ready to ease lending restrictions, the possibility of growth being stifled in the Chinese economy cannot be ruled out.

Despite buying interest in mid and smallcap stocks, the Indian indices nosedived into the negative territory in the second half of the session today. At the time of writing, the BSE Sensex was trading lower by 67 points. Most other Asian markets closed higher. However, Europe has also opened on a negative note.

 Today's investing mantra
"The risk among any group of investors is that they only pay attention to what they already agree with. That's limiting in our opinion, and dangerous." - Michael Mauboussin

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6 Responses to "An upside to stocks and savings finally here?"

shome suvra

Sep 23, 2011

Household savings is not immune to interest rates. Owing to the precarious situation of low domestic savings it is necessary for banks to increase the household savings keeping in mind that FIIs are also decreasing.


Adi Daruwalla

Sep 22, 2011

The Tendulkar committee report that says that Rs 32/- per day is adequate per person is not justified. Mr Montek Singh lives on 1368 X 32 per day, also he stated that this figure x 4 is enough for a family of four to stay above the poverty line. There is a fundging of figures and the policy makers may not have so much money to play with therefore the additional numbers of people that will come under the BPL will increase creating a burden for the policy makers t manage and handle. Its a mockery that while crores that are lying abroad can be put to good use such futile games with lives of humans continues in India. We continue to tolerate.....we dont stand up and put a united fight for our rights



Sep 22, 2011

Posting a comment on your article is a frustrating exercise, since, one never knows if the comment will be at all posted or when it will be posted ! Editing or moderation (as stated by you) may be done citing a time frame for the commentators' convenience !!!



Sep 22, 2011

I fail to understand why every one always complains about high interest rate when real rate of interest is negetive without any doubt.when majority of our people are still below poverty line stock market should not be big concern unless we are concerned about our personal interest only.



Sep 21, 2011

I work for Tesco, we have 200k + staff in UK , it is thus not right to say that Tata is the biggest employer


anupam garg

Sep 21, 2011

& how can govt patt its back by giving such a statistical figure of Rs. 31? even if they report lower poverty figures, they'd be the only ones clapping coz the rest of us know the reality too well

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