India's trump card against a painfully slow Govt

Oct 15, 2010

In this issue:
» World may begin to avoid US dollar
» Our primeval instincts are an investor's worst enemy
» Trickle of FII inflows may turn into a flood
» Gold prices a dampener for Indian gold users
» ...and more!!

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The 'demographic dividend' is often used as a catchphrase for flaunting the advantages that emerging countries enjoy. This phrase usually implies the benefits that will arise out of most of the emerging world staying young while the rich world ages.

However, there's another subtler but extremely important feature within this trend that deserves closer attention. The number of young entrepreneurs in places like India are rising. And at an astonishing rate. In a report, the Economist points out to Infosys founder Nandan Nilekani. He expressed recently how he now comes across mould-breaking young leaders wherever he goes in India.

It further goes on to illustrate IT company 'Globals' as 'one of those fast-growing Indian IT companies that Westerners simultaneously admire and fear'. Its chairman is a mere 24 years of age. Most of its employees too are also in their mid-twenties. New business models and aggressive innovation are turning out to be the hallmarks of such young entrepreneurs.

This phenomenon gains importance for India in light of the sloppiness that the corruption soaked government has often shown. When it comes to rapid reforms and development, the government is the last thing you want to bet your money on. It is this young India, and its thriving entrepreneurial spirit, that will see the country through to those ambitiously high rates of growth we so desire.

 Chart of the day
Today's Chart of the Day illustrates the total external debt of various large countries around the world in 2009. External debt is nothing but the total debt owed by both government and private entities in a country to people outside that country. At an estimated US$ 13.4 trillion of external debt, the US by far owes the maximum quantum of money to the rest of the world. It is no wonder that it is often said in financial circles 'when the US sneezes, the world catches a cold'. Afterall, if anything were to go wrong with your biggest debtor, it is no one but you who will end up paying the price.

Data Source: Wikipedia

Top market observer Jim Grant believes that the world is going to avoid the US dollar. According to him, the US is more burdened now than collectively it has ever been. He mentioned about an interesting anecdote where European hoteliers in the 1970s would ask their American clients to pay them in anything except the US dollars. Thus, as per Grant, the world has avoided the US dollar before and there is no reason for it not doing the same in the future.

Grant also opined that he does not want to get into the guessing game. He argued that people like Paul Krugman and Niall Ferguson may have differing views about what is going to happen in the future. But as per him, people in this business are only good at analysing the present. However, when it comes to predicting the future, an expert is as ignorant as a cab driver. The only thing he is certain about is the fact that the US dollar would be avoided by the world. If the world continues to invest in dollars given US debt levels, cash injections and low interest rates, "they would be an unusual set of creditors," he is believed to have said. Well said indeed.

Modern civilization has been able to put a man on the moon. But the circuitry of our brains remains essentially the same as our forest-dwelling forefathers. Which means our motivations and impulses are similar to hunter-gathers. Only, the context has changed drastically. As a result, our instincts lead to some below-par results. For example, take investment choices in particular. For a pack of hunters it made sense to stick to a group. The strength in numbers could save lives when faced with physically superior predators. But such herd mentality can lead to wrong investment decisions. In fact, it routinely does.

The best example is the cycles of booms and busts that stock markets go through. Why does a sector or two catch the fancy of investors- be it tech companies, real estate or power? And then why do they lose favour? What explains the mass entry and the mass exit? It's the our hard-wired tendency to follow the herd. That made sense once upon a time. However, it can be disastrous in a situation where the right choice is inherently likely to be unpopular. This tendency explains why such few investors make any meaningful money on a consistent basis.

Foreign funds have been pouring money into the emerging markets. This has been largely fuelled by the lack of investment opportunities in their own countries. Off late, many emerging market countries have grown wary of this sudden influx of funds. The possible impact on their economies and their exchange rates has forced some of them to take a strong stance against further inflow of these funds. India on the other hand continues to avoid taking any such strong measures. The Finance Minister, Mr. Pranab Mukherjee, does not see any major impact on the Indian economy due to foreign funds. However, if other emerging markets close their doors, then the quantum of foreign fund flow to India may increase exponentially. The rupee has already appreciated significantly. We just hope that India reverses its stand before this hurts the economy.

IT major Infosys declared results that exceeded expectations. The low cost outsourcing model still continues to earn laurels for the company and the industry as a whole. But the model is now turning expensive for the companies themselves. With a revival in the domestic job market, companies are finding it increasingly difficult to retain employees. The cost of replacing the employees is going up too. With high inflation rates in the country, employees are now demanding higher pay packages. To add to this, US has increased its visa fees, which translates to higher costs for the IT companies. The appreciation of the rupee doesn't help the situation either. All in all, the IT industry's 'low cost' model may be in for a tough time going forward.

The Diwali festival is just around the corner. But the appetite for gold has just dried up. Especially after gold prices reached the psychological Rs 20,000 per 10 grams mark. Gold prices have gained significantly since the global financial crisis escalated after the collapse of Lehman. With governments in the developed world printing money at the drop of a hat, gold has gained prominence as a preserver of wealth. And so many investors have flocked to this precious metal not only for jewellery but for investment purposes too. Prices have risen so steadily that concerns have begun to emanate that gold is in bubble territory. Understandably, buyers in India looking to make gold ornaments are not ready to buy gold at such high prices. And so gold demand this festival may not rise to the levels probably seen in the past.

After opening positive, markets slumped into negative territory. The BSE-Sensex was trading 200 points lower at the time of writing this. IT stocks saw the most selling pressure on profit booking, after Infosys posted its 2QFY11 results. Realty stocks were trading moderately positive. The rest of the Asian majors were mainly trading negative with Japan down 0.8%. China was however trading over 3% up.

 Today's investing mantra
"I'm not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I've reached that state." - Charlie Munger

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2 Responses to "India's trump card against a painfully slow Govt"

Raghvinder Joshi

Oct 16, 2010

Dear Sir,

I normally agree with most whatever you say but

Your remark on performance comparison of New York Bankers to Cab Drivers is insulting to Cab Drivers.

The cab driver normally knows where the next turn is going to take him and his passengers.

Yours truly,

Raghvinder Joshi
(A customer of LTEF since 2006)



Oct 15, 2010

On Indian ITcompanies, i do not agree with your statement that increase in US visa fees has affected the margin..after all this visa fees is just a minimini scule of over all costs of It companies..what would really affect their margin is their increase in manpower cost..that is it..

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