One BRIC nation investors are attracted towards

Oct 10, 2009

In this issue:
» Jim Rogers' prediction for oil
» MNCs hiving-off India back offices...opportunity for Indian IT?
» Auto stocks running ahead of fundamentals?
» Infosys seems short term pains, long term gains
» ...and more!

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It's not just about the relative attractiveness of the BRIC nations anymore. This debate was settled way back. It is now about which one of these BRIC nations. And if a story on Bloomberg is to be believed, most investors seem to be veering towards China. There is no doubt that it has the most attractive growth prospects. But the stocks have also become attractive courtesy a recent correction that saw its index correct by around 6% during the third quarter.

In contrast, Brazil, Russia and India saw their markets gain at least 18% during the same period. However, the fact remains that Chinese equities still trade at nearly 31 times their trailing 12-months earnings while India's BSE-Sensex trades at nearly 21 times earnings. Hence, it is all about the trade off now.

Are investors willing to give a premium to Chinese stocks in view of the higher expected earnings or are content with lower valuations for countries like India and get a slightly lower earnings growth in return?

As for us, we would never pay such a huge premium if these were for stocks in India. Even at the current levels of 21 times earnings that Indian stocks trade at on an average, it's getting very difficult for us to find attractive investment opportunities as compared to the situation that was prevailing six months back.

If you thought nearly doubling your money in the Sensex since the lows of March 2009 was good enough, how about a return of nearly 1.5x. Yes, that's the return that the BSE-Auto index has given over the same time period, making it one of the best performing indices on the bourses. And this euphoria in the sector stocks was not without reason. With commodity prices cut into half and demand slowly but steadily coming out of hibernation, growth in profits was a near certainty. And majority of the auto companies did not disappoint on this front when their first quarter results came out.

Now, as we await another quarter of what we think we could be continued good performance and maybe even better than the previous quarter, the question on everyone's lips would be will the stock price follow suit as well. Unlikely, in our view!

The huge run up on the bourses in the past few months seems to have already accounted for the improved financial performance for the few forthcoming quarters. In fact, any negative surprise could well result in a near term correction. Hence, please tread carefully while investing in auto stocks.

 Chart of the day
Today's chart of the day brings out a stark contract between the productivity levels of employees across some large Asian economies. India stands apart but in the negative sense! India's value added per worker (or output per worker) stands at around US$ 1,450 per year for small enterprises and US$ 13,089 for large enterprises. Compared to this, China's productivity levels are 10 times and 2.5 times India's levels for the same size of enterprises. This speaks a lot about the kind of initiatives that Indian companies have to take to become more productive over the next few years.

India's labour productivity amongst the weakest
Data source: Asian Development Bank

In the meanwhile, while China (up 4.8%) was the best performing global market during the week gone by, India was the worst (down 2.9%). Concerns about valuations seemingly took centrestage here in India, after an almost continuous run up in the past few months without any significant correction along the way.

Jim Rogers, who aired his bullish long term views on gold recently, now sees crude oil prices to touch US$ 200 a barrel over the course of the next few years because of known reserves depletion. Rogers, in fact, remains a bull in oil, agricultural products, and precious metals. As for stockmarkets, Rogers believes that these are 'overdue for a correction' following a strong rally of the past six months.

After AIG and Citigroup, who have sold some of their India back-office units in the past 12 months, there are increasing expectations of similar deals from other Wall Street heavyweights like UBS, American Express, Bank of America-Merrill Lynch, and Credit Suisse. While this might be bad news for Indian back office workers, the move seems pretty straightforward.

When these financial firms are facing severe crunch in demand for their services in the international markets, it does not make sense for them persist with their bloated back-office workforce. Rather, as reported in a leading business daily, some of them are looking to outsource such tasks (on a long-term contract) to third-party service providers.

Are Indian IT companies sensing a business opportunity here? They surely are!

Staying with Indian IT, we saw Infosys announcing good 2QFY10 results yesterday. The company's management subsequently indicated during its conference call that while they continue to see challenging environment in the near term, the future looks bright. The company has already revised its full year FY10 guidance up, but this seemed to be laced with more of caution than optimism regarding growth for the rest of the current fiscal.

The company has however sent out some strong signals with respect to the fact that a full recovery in global demand may just be around the corner. This view is in line with what we've heard from a few mid-sized IT companies over the past month. While caution remains the buzzword for them as well, they're seeing improving interest levels from clients.

Indian IT companies are right in their concern for the short term. This view is validated by a later report from IMF which states that the problems for the US and global banking sector (biggest clients for Indian IT companies) are far from over. In their latest Global Financial Stability Report, the IMF has indicated that while the overall economy is improving, the risks to the banking sector remain.

"The immediate outlook for the financial system has improved markedly since the April 2009...and extreme tail risks have abated. Financial markets have rebounded, emerging market risks have eased, banks have raised capital, and wholesale funding markets have reopened. Even so, credit channels are still impaired and the economic recovery is likely to be slow," says the IMF report. Bad news indeed for global banking fraternity and taxpayers (for it is taxpayers' money that governments are using to keep banks away from bankruptcies)!

 Weekend investing mantra
"Willingness to take small losses in some stocks and to let profits grow bigger and bigger in more promising stocks is a sign of good investment management. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it." - Philip Fisher

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5 Responses to "One BRIC nation investors are attracted towards"

K Triky

Oct 11, 2009

Gold ETF(Reliance gold) are a waste.Dont get into it.
Rel Gold is apparently cheaper than other units but then its not of 1 gm but of .9gm.And it does not move with comex gold rates.

Silver is beyond "aam admi" as it is nearly 2 laks per unit.

K Triky



Oct 10, 2009

Dear Ajitbhai.

Your lucid but straight forward analytical and common sense approach is really praiseworthy. One do not feel bored or
confused for your simple yet very amusing and honest presentation. I would not be surprised if you are called
Warren Buffet of India within a decade.

Regards and God Bless You!




Oct 10, 2009

Wise and pragmatic commentary on market conditions and scenario
The advie of Philip Fisher is very educative.


mithilesh pandey

Oct 10, 2009

thanks ,our equitymaster is really a big thinker i am oblised your all letter which is a sea of knowledge


Bipul Saikia

Oct 10, 2009

A report or study without a reference of the keywords used can not be seriously read. Would you care to provide a linked up reference of the the technical/keywords/jargons used in your wrapup so that readers can easily find out the inherent meaning of the words? Also, please try to shorten the wrapup as a lengthy piece however important might it be, always distracts the line of thought of the reader!

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