Here's another strong reason to bet on India

Oct 10, 2014

In this issue:
» Better days ahead for Infosys?
» QE4 could well be in the offing
» IMF tells governments to spend more
» China is addicted to debt
» ...and more!

As the developed world is struggling to recover from recession, the emerging markets have increasingly become attractive investment options for investors. Large part of the optimism is because of the strong growth rates of these economies. Even if these have slowed down in recent years, the growth is nevertheless higher than what the rich economies are reporting.

But while the prospect of higher returns is mouth watering, investors cannot ignore the fact that emerging markets also have a higher degree of risk attached to them. These could be in the form of an uncertain political climate, corruption, bureaucracy, red tape etc. The other bigger risk that these countries face is poor disclosure standards and obtuse corporate governance practices.

However, this could slowly be changing. In recent times, post the Enron scandal and post the global financial crisis, the concept of 'socially responsible investing' has only increased. This type of investing is also otherwise known as 'ESG' investing; ESG stands for environment, social and governance. The statistics further reinforce this fact. As per an article in Wall Street Journal, there were 116 funds incorporating social criteria in August, up from 77 in 2003. Total assets grew to US$ 61.5 bn from US$ 23.5 bn over the same period. Some of these funds have exposure to emerging-markets of around 65% or more.

It can be said that emerging countries themselves have improved considerably when it comes to disclosure norms than was the case in the 1990s. Indeed, a lot of this initiative has been driven by the need to attract foreign investment to take growth to the next level.

But not all countries are there yet. China, for all the stupendous growth it has reported in the last decade, is notorious for its poor disclosure practices. Especially with respect to its public sector undertakings.

India, we believe, is on a much stronger footing. For one, we can boast of some world class companies such as Infosys, Asian Paints, the Tata Group to name a few. These are companies well known as much for their healthy corporate governance practices as they are for their business models.

The other thing that works for India is the regulator SEBI, which has been very active in recent years to protect the rights of minority shareholders. Shareholder activism, itself has increased, and this is something we had highlighted, in a recent edition of the 5 Minute Wrapup, citing examples of Tata Motors and Maruti Suzuki to name a few.

That is not to say that the country does not face challenges. Corruption is still rampant and the laws with respect to insider trading among others still require considerable overhaul. This is the case for many other emerging countries as well. And that makes the prospect of investing in socially responsible companies that also generate shareholder wealth not very easy.

Having said that, emerging markets including India, despite various risks, still continue to remain attractive investment bets for long term investors. And even those investors who want to combine attractive returns with social criteria can still stand to gain as corporate governance practices improve over time in these countries.

Do you think that there are enough socially responsible companies that can also build wealth for investors in India? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
Infosys kicked off the earnings season with a bang today. The company's revenues and profits were up by 4.5% and 7.3% (both QoQ) respectively. Infosys declared an interim dividend of Rs 30 per share. The board has recommended a 1:1 bonus issue to expand the retail shareholder base. More importantly, investors were impressed with CEO Dr. Vishal Sikka's outlook for the firm. He stated that Infosys will aim to get back to industry leading growth and profitability by focusing on its human capital. This will be done by investing in new technologies to improve internal operations as well as by training its staff in the latest skills. The new vision for the company will also include acquisitions. However, it was good to hear that Infosys will not buy companies just for the sake of growth. Instead, with strategic acquisitions, the plan is to fill up gaps in areas where the company lags behind its peers.

Dr. Sikka also stated that a company like Infosys can grow sustainably at over 15% YoY. The company's long term focus on its employees will hold it in good stead in this regard. This focus was evident by the fact that about 12,000 people were promoted in the quarter. This helped to prevent the attrition rate (at 19.5%) from rising any further. With a new CEO and management structure in place, investors can expect the company to see better days ahead.

Better times ahead for Infosys?

The world has gotten used to blaming its economic problems on the developed countries. And with good reason. They've long spent beyond their means, and used debt to be able to continue to do so. The current mess is in large part a result of this bad habit endemic to governments and consumers from the developed world. While the results of doing this have been anything but satisfactory, there is another large country that seems to have been finding it difficult to resist the seductive charm of this habit. And this one isn't a developed country. It is none other than China.

Reports suggest that over the past 5 years, it has pumped over US$ 13 trillion of credit into its economy. Further, as of 2013, total private and government debt stood at 217% of GDP. This was just 147% in 2008. This betrays China's addiction to high single digit growth rates, and its consequent desire to keep them at that level by any means possible. China has clearly chosen the path of credit fuelled growth. And by far the biggest problem with doing this is the distortions it often creates in an economy. Credit unworthy recipients, overbuilding and over capacity in China has already got a lot of people on the edge of their seats. The last thing that the global economy needs is another crisis - and this time from a so called 'emerging market'.

Will the US Fed raise interest rates or will it not? Will its money printing binge stop or not? These questions have been the key drivers for the world financial markets for quite some time now. When the US Fed has anything to say, the markets are all ears.

Now, here is an interesting piece in Money News that we came across today. The US Fed has hinted that it will end its third round of quantitative easing (QE3). So does this mean that the Fed's bond buying program will come to an end? Very few market commentators are ready to believe this. Most see it as the likely beginning of the next round of QE which will probably be called QE4. Peter Schiff, the CEO of Euro Pacific Capital is certainly one of them.

He goes on to say that the Fed never really had a plan to raise interest rates or stop the money printing program. Of course, the Fed cannot say that. What it can instead do is pretend that they will raise interest rates. And then when it is time to do so, they can point at the economic situation and excuse themselves out of the situation. Take for instance the US dollar rates. It has scaled a 6-year high against the yen and a two-year high against the euro. The last thing that US policymakers want is a strong dollar. A strong dollar will hit the economy hard... So it's a going to be an edge-of-the-seat thriller for global investors as they wait and watch the Fed's moves. But we're fairly convinced that the Fed is in a helpless self-inflicted wreck and no amount of QE is ever going to resolve the credit excesses.

They seem to have tried everything from their respective tool boxes. And yet, the problem refuses to go away. This is the general conclusion that the International Monetary Fund has drawn from its assessment of the global economy. It is of the view that six years of crisis fighting have now come to an end. However, there are no signs that the global economy is on a stable footing. And while the prognosis is indeed correct, what has shocked us is the medicine being prescribed. The fund is of the view that it is time the Governments opened the taps and spend more on infrastructure projects.

The standard argument given is that since the public is not spending, the aggregate demand in the economy has fallen and therefore the Government should step up and fill the gap. Our long time readers know that we've never been supporters of this kind of an approach. Simply because it just doesn't work over the long term. In the short term, it can indeed boost the economy and create more jobs. However, if building roads and bridges to nowhere would have been the solution, Japan wouldn't have endured the lost decade. The idea is for the Government to step back and let the markets figure out the best way to get the economy going again we believe.

In the meanwhile, the Indian stock markets continued to languish in the red in the post noon trading session. At the time of writing, BSE-Sensex was trading lower by 173 points (0.7%). Majority of the sectoral indices were trading in red with metal and FMCG stocks being the biggest losers. IT and pharma were among the few stocks trading positive. Barring Taiwan, all the Asian stock markets were trading in the red with Hong Kong and Korea being among major losers. Even the European markets have opened the day on a weak note.

 Today's investing mantra
"Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts," or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it. " - Warren Buffett

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1 Responses to "Here's another strong reason to bet on India"


Oct 13, 2014

The move to charge the period of locking the investment for more period by the mutual funds is against the intial offer is like changing the rule in the middile of the game.Exsisting investors shall not be charged .

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