The most precious resource no one is talking about

Oct 12, 2010

In this issue:
» India's trade balance worse than BRIC peers
» Metal prices are touching new highs
» EPF trustee to test equity investments
» Wall Street sees a steep rise in compensation
» ...and more!!

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The importance of oil in today's world cannot be undermined. It is an important resource for fuelling growth in economies around the world. But there is another equally precious resource whose availability has been taken for granted. Because this resource is freely available, not enough thought has been given to conserving it. The resource we are talking about is water.

Take the findings of Water Resources Group (WRG), a consortium of private-sector companies formed to tackle water scarcity. It pointed to a global gap of 40% between the supply and demand for water by 2030. This is assuming business remains as usual. And this scarcity is more pronounced in India and China. Because the water is not enough to cater to the needs of their ever growing population as well as industries.

In India particularly, agriculture consumes 90% of the water in the country. Plus, it is the means of livelihood for nearly 60% of the country's population. Thus, unless serious efforts are made to address this issue, most of India's river basins could face a severe water deficit by 2030. India also has to contend with sharing rivers not just with Pakistan but also within its states. This has already created many tensions in the past.

Oil, its availability and prices have increasingly grabbed the headlines in recent times. At the same time, there have also been efforts around the world to focus on alternate sources of energy and reduce the dependence on this black gold. The same cannot be said for water. In India especially, where agriculture still plays a very crucial role, the government will have to take the necessary steps to harvest water and improve irrigation techniques. Indeed, there have been wars fought over oil. One does not want the same scenario played out over water.

 Chart of the day
Today's chart of the day shows that India's trade balance is worse as compared to its BRIC peers. While China, Russia and Brazil have reported surplus in the data available for the latest 12 months, India has been saddled with a deficit. Meanwhile, the US takes the cake for having the largest deficit, ahead of its peers by a huge margin.

Data Source: The Economist

The Chinese economic miracle has largely been export driven. It has come to the point where every company has to consider routing its supply chain through China. So strong is the dragon nation's manufacturing prowess. The Chinese success also means that it consistently has a trade surplus. In fact, China may report a US$ 17.8 bn trade surplus for September as per an estimate of economists surveyed by Bloomberg. It would cap the biggest quarterly surplus since the financial crisis in 2008. And given the difficulty faced by the US at its home front, it is expected that it will call for import protection. It will also increase the pressure on China to revalue its currency. After all, a more expensive Yuan will make Chinese products costlier for importers.

And while we are on China, FT reports that the Chinese dragon is on the prowl yet again. It seems to have run down its inventories that were built during 2009 and is now in a restocking mode. Little wonder metal prices are touching new highs. Copper for delivery in 3 months time has risen to a two year peak. And it is showing no signs of slowing down. Investors are already expecting another 20%-25% up move over the next year or so. Aluminium too is at a six month high. Of course, gold and silver stories have already been well documented. Since commodities are pure demand supply bets, it looks as if manufacturers worldwide are yet again struggling to keep up with China's demand. However, it can't be said with a great deal of certainty that the trend is likely to persist. China is attempting a delicate balancing act. It is trying to wean its economy as much away from exports as possible. But such changes are not going to happen overnight. The moment the developed economies began to falter, China will also feel the pinch. Hence, investors could do well to remember this vulnerability before they plunge into metals headlong.

For India, a high savings to GDP ratio (in excess of 35%) has been the key reason for economic stability. And the Indian government can ill afford to dis-incentivise high savings at this point of time. Thus the apex body that looks into the investment of employee provident funds (EPF) has been very averse to put EPF into equities. While equities are certainly high risk investments, a small exposure for long term into safe stocks could do wonders to the single digit EPF returns. However, the government's proposal to allocate just 15% of the fund to stock markets has been repeatedly turned down. In contrast, several pension funds in the overseas markets have some exposure to equities. Nonetheless, in what could be a game changer for Indian stock markets, the government has managed to convince the EPF trustee to test equity investments. To begin with 5% of the funds will be invested. But at Rs 150 bn, the inflow of long term funds into Indian markets could help resist some shock arising from FII outflows.

The Highways Minister Mr. Kamal Nath has ambitious plans. His ministry has unveiled a programme to construct 35,000 km of roads by March 2014. This is expected to be the largest public private partnership programme in the world and is likely to attract a massive investment of US$41 bn, including FDI, from the private sector. Mr. Nath is confident of attracting international financial institutions and infrastructure companies to participate in the National Highways Development Project (NHDP). This is especially on account of the government's determination to bridge the huge infrastructure gap in India. However, while harbouring ambitions is good, execution will remain the key. Sadly, India has not had a good track record in this regard.

They may have been responsible for triggering a crisis in US, but that doesn't stop them from paying themselves. We are referring to the band of financial institutions collectively referred to as Wall Street. This year, the total amount paid out as compensation and benefits, by these firms, is expected to be a whopping US$ 144 bn. This is a 4% increase compared to the US$ 139 bn paid out last year. Lower interest rates and stronger international markets have helped in increasing the revenues for these firms. Not yielding to pressures from the government, these firms continue to link their compensation packages to the total revenues earned by the firms. This has led to a remarkable increase in their total pay structures. It is interesting to note that the increase in compensation is more than the increase in the revenues. While government officials have criticized this move and sighted it as detrimental to shareholder value, we don't think the employees would be too upset with this move.

After opening positive, markets slumped into negative territory. The BSE-Sensex was trading 153 points lower at the time of writing this. Some gains were seen in the auto and IT sectors. The capital goods and metals space witnessed the most selling pressure. The rest of the Asian majors were mainly trading weak with Japan down over 2%. China was however trading 1.2% up.

 Today's investing mantra
"Abnormally good or abnormally bad conditions do not last forever. This is true not only of general business but of particular industries as well. Corrective forces are often set in motion which tend to restore profits where they have disappeared, or to reduce them where they are excessive in relation to capital." - Benjamin Graham

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