Markets may not have a very pleasant October

Sep 29, 2010

In this issue:
» Will data security hurt Indian businesses?
» US Senate's changed stand on outsourcing
» Chinese government prefers gold over US dollars
» The first step towards empowering Indian poor
» ...and more!!

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Some statistics first. Out of the BSE 100, 41 stocks gained more than 20% in the last 9 months. Out of the 38 stocks that debuted on the bourses in 2010, 18 have locked in gains in the range of 20% to 233% till date. No prizes for guessing that we are trying to draw your attention to the fantastic rally that Indian stock markets have seen this year. Infact not just India but stocks across global markets have been riding on the back of optimism over better economic outlook. But will this continue for long? If the opinion of legendry investor Marc Faber is to be believed, it could well turn out to be otherwise.

In an interview to a business daily, Faber has warned that stock markets that have got overheated may witness a very grim October-November this year. But the silver lining here is that his emphasis is more on the developed markets. He believes that the economic scenario in those markets is not yet healthy enough for companies to deliver attractive returns. In fact, he goes to the extent of advising investors to have atleast 50% of their investment in emerging market stocks.

This could certainly boost confidence for investors having long term exposure to Indian equities. However, the fact that not every stock under the sun will participate in the rally is something that even investors in India cannot ignore.

 Chart of the day
Despite being amongst the biggest savers in the world, Indians do not rank very high when it comes to holding financial assets. This is primarily due to low financial inclusion. As a result the proportion of financial assets to GDP has increased only marginally over the past few years. But with better availability of bank credit, financial liabilities have seen a steadier rise. As today's chart shows, the proportion of Indian households' financial liabilities to GDP has risen from 3.8% in FY06 to 7% in FY10. Having said that the ratio still remains one of the lowest amongst developing markets and leaves a comfortable gap between assets and liabilities.

Data source: RBI

Security is a big issue in India. And the government is trying to not leave any stone unturned on this front, at least when it comes to the mindset. So while the country remains vulnerable, the government is trying to address a part of the issue via its control on the telecommunication network. As a New York Times article suggests, "Prompted by fears of digital-era plotters, (Indian) officials are already demanding that network operators give them the ability to monitor and decrypt digital messages..."

Anyways, there are critics of such a government tactic - business houses who are at the forefront of growing their businesses using the communications channels. They believe that India's campaign to monitor data transmission within its borders will impact the country's aim of attracting global businesses and becoming a hub for technology innovation. Businesses are specifically worried of the government's planned restrictions on the widely used Blackberry services.

Common sense finally prevailed in the US Senate. The Republicans blocked the proposed tax bill that aimed at 'raising taxes on the overseas profits of the companies'. The Republicans have blocked the bill on the ground that passing it would force business corporations to just shut shop in US and move to another country. They called the bill a ridiculous attempt to gain political footage. The proposed bill was expected to hamper the quantum of outsourcing by US companies to overseas locations like India. Finally the Indian IT industry can breathe a sigh of relief to some extent. At least there are some politicians in US who understand the importance of open markets. We can just hope that the other protectionist measures sought by US are not carried out either.

Restrictions on China's gold imports have eased. And this means that the dragon nation is set to hog the limelight in the gold market. Earlier, the Chinese government was wary of importing gold for fear that it would lead to a drain of US dollars. Obviously, given the poor state of the global economy, the Chinese government seems more interested in gold, a tangible asset of value as compared to the US currency. It wants to hedge its position in the event that the value of the dollar considerably falls. And so, Chinese gold demand is expected to show at least single digit percent growth this year. This is despite high prices curbing buying in other major physical markets like India. Moreover, jewelry buyers in China are also upbeat about the growth that the Chinese economy is displaying. This has led to jewelry demand seeing an increase of 5-10% every year. What is more, the status of gold as a wealth preserver cannot be undermined. And China wants to make sure that it has enough of it at a time when it has been increasingly discontent with the US dollar.

Banking the unbanked and financial inclusion are some of RBIs major priorities. 50% of India's population does not have a bank account. Only 5.2% of our 650,000 villages have bank branches. This is despite 39.7% of the total branch network being in rural areas. Clearly, banks are targeting more profitable areas of rural India, leaving behind the vast majority.

With this in mind, the RBI recently allowed firms to play an intermediating role to spread rural banking. RBI has now allowed individuals, NGOs, cooperative societies, post offices and companies with a large retail outlet spread to become business correspondents (BCs). These BCs will be able to raise deposits, disburse small loans, sell micro-insurance, mutual funds, pension products, etc. The activities will be conducted miles away from bank premises and ATMs. Currently 36,000 BCs are in play. They have not seen much success, however. Banks will need to work doubly hard to make this model viable, due to high operating costs. High interest rates for these small loans seem to be the only solution. It's sad that the poor have to pay the price for banking inefficiencies.

Acknowledging the existence of our poor citizens is the first step in empowering them. This was the premise on which the Unique Identification (Aadhaar) project is based on. And articulated brilliantly by Mr. Nandan Nilekani. A major milestone has been reached in the project. The Prime Minister will distribute the first set of Aadhaar numbers today in Maharashtra's Nandurbar district. We believe this is a shining example of how India's private sector expertise can be leverage for public good. With the right people in charge, Indians are quite capable of delivering projects on-time. And certainly Mr. Nilekani knows how to deliver projects and also keep a low profile. Little wonder than the project which began in August 2009, is within its estimated time of 12-18 months. The Aadhaar number will improve the efficiency of the delivery systems. It will ensure that the leakages are reduced and the benefits reach the intended people. We hope this will bridge the gap between the welfare policies of the Indian state and its actual implementation.

After a brief stint in the positive territory, profit booking in index heavyweights has brought the Indian indices below the dotted line in the final trading hours. The BSE-Sensex was trading 98 points lower at the time of writing this. Stocks from the FMCG, auto and commodity space saw the maximum profit booking today. Sentiment across the rest of Asia was mixed with Hong Kong and Japanese indices leading the pack of gainers. European markets have started on a cautious note.

 Today's investing mantra
"What's the sense in getting rich if you just stare at the ticker tape all day?" - Warren Buffett

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5 Responses to "Markets may not have a very pleasant October"

Pradeep Kumar Nair

Sep 29, 2010

Hi Venkatraman,
Warren Buffet may be over-rated, but the data points to the fact that he is the 2nd richest man in the world. Of course a title like that may mean nothing in the cemetary or for people like us, but it does open out the mind to the possibilities that exist for all of us to create wealth while not leching on the limited natural resources in the world



Sep 29, 2010




Sep 29, 2010

aadhaar project will soon face problems..already vested interests have started protesting against this project..they will soon get the political backing..till now many politicians have not really known what this project is...when they come to know they would put all efforts to stall it..Nandan nilekani or any one for that matter can not really stand against that type of opposition...vested groups already started saying the info.collected under this project will be misused...that is bharat...



Sep 29, 2010

You are very right in telling that 'the banks will need to work doubly hard'. I would like you to check up whether the rural Branches of the banks are really in RURAL areas or are they in the satellite areas of towns and cities? My perception is that most of the banks have not at all gone to the rural areas. There can be a bank baranch in every 25 area. Connected to that branch should be a 'Read, Write, Education' institution supported by the bank & some NGO or Govt. Education department.



Sep 29, 2010

Today's investing mantra
"What's the sense in getting rich if you just stare at the ticker tape all day?" - Warren Buffett

What is the point of getting rich if you are never going to enjoy what ever you earn? If you are going to have an investment of over 30 years. When do you book profit?. Most of the investments are bought when the company was private.
I believe Warren Buffett is over rated.

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