The 'lie' called global recovery

Oct 27, 2010

In this issue:
» Cap on bonuses hindering investment banks
» 14 states fail to use infra funds
» MNP risks await Indian telecom players
» Another innovative masterpiece from the Tata stable
» ...and more!!

------------------- We made a huge blunder... ------------------- If your recommendations are so good, why don't you put your own money and make millions.

This is the gist of a recent email that we received. And it made us realize that we are making a huge blunder.

You see, recently we have been writing to readers like you to try ValuePro, our long term portfolio recommendation service. This service is based on a time tested and proven stock picking process and has a goal of multiplying money 4x - 6x in 5 - 10 years. Despite this, response has been muted. Only several hundred have signed up.

Now we know why... we missed telling something very critical - the fact that we're putting a total of Rs 1.2 million of our own money behind the recommendations we make. (Our existing members know that Equitymaster invests Rs 100,000 in every recommended stock with a 10 trading day lag.)

So, we are putting our money where our mouth is. That's precisely why we are strongly recommending that you try ValuePro... Please read on for full details... Hurry! This opportunity is available only till November 1st.


When you are very thirsty, can you quench your thirst with a glass of cold beverage that is only one-fifth full? You would be lying if you said 'yes'! Unfortunately when it comes to global growth and economic recovery such a blatant lie is being overlooked. Emerging markets are expected to act as saviors to a limping global economy. Their contribution to recovery efforts so far has been remarkable. But that said, there are limitations to such contribution.

The GDPs of the BRIC nations taken together constituted just 23.5% of global GDP at the end of 2009. Of these the lead growth engines, China and India constituted mere 12.5% and 5% respectively. As against this the European Union and the US constituted 20% each. Given such statistics the lack of growth in the developed world is indeed worrying. Any logic explaining how in its absence emerging markets could still drive global growth sounds shallow. Infact in a very candid statement the RBI governor Dr Subbarao has dismissed the chances of emerging markets growing by their own. He called such assumptions 'unrealistic'.

Thus at a time when growth in developed economies is relying heavily on further monetary stimuli, the fate of the rest of the world is all but uncertain. At the risk of sounding overtly pessimistic, we would like to highlight the lie that experts refer to as 'decoupling'. Emerging markets including India are not decoupled from the rest of the world. And the ripples of any negative news impacting global markets are bound to impact Indian markets as well. Investors would do well to ensure that their portfolios are equipped to withstand any such shocks.

 Chart of the day
These days retail investors are the cynosure of fund raisers' eyes. Every issue be it an IPO or a long term bond is targeting the investor class. In fact even regulators like the SEBI are keen to attract more such participants into the market. Given such a scenario retail investors have little incentive to keep their funds locked away in boring bank deposits. Especially when the latter continue to offer relatively unattractive rates. Thus, as today's chart shows, banks' term deposits have clearly not been the recipients of surplus liquidity in the past quarter.

Data source: RBI

Really strange are the ways of the human mind. Never for it is the middle path. It always believes in going to the extremes. Take the case of regulation. Financial regulation to be precise. Just before the financial crisis, there was no regulation to speak of for the world's investment banks. They were literally free to do whatever they wanted to. Consequently, they took such extreme risks that the entire financial sector was brought to its knees. As if to compensate for the same, regulators have now decided to move to the other extreme. So much so that some institutions are feeling almost strangulated by the excess regulations.

FT reports that Swiss banking behemoth UBS is lobbying Swiss regulator to abolish a rule that puts a US$ 1 m cap on cash bonuses paid to its top bankers. Apparently, this restriction is making it very difficult for executives to keep up with their fixed obligations. While we are all for stricter regulations, we do not think capping executive bonuses is the perfect solution to the problem. What is instead needed is a better risk management and greater oversight. Perhaps the Swiss regulators take some lessons from our very own RBI.

If you hate paying taxes to the government for the reason that this money is not utilised properly, this might make you even angrier. As per a leading business daily, 14 states in India have failed to utilise the funds allotted to them for road development. And this data comes straight from the Ministry of Road Transport and Highways. It reveals that a sum of over Rs 28 bn of cess funds is yet to be utilised by these governments for improving the road network in their respective states. The sorry state of governance continues!

There is good news for people who want to change their mobile service provider but have not done so as this would mean the hassles of a new number. Telecom minister has stated that the much awaited mobile number portability (MNP) will be available from the 1st of November onwards. MNP will allow subscribers to switch mobile service provider without the need to change their number. As seen in countries where MNP has been introduced, there will be some churn for operators as some subscribers will switch operators in the short term. However, over a medium term to long term horizon the dynamics stabilize. The high quality network providers are able to regain and maintain market shares. MNP will be launched in phases with the facility being provided in Haryana and 11 other circles initially.

China and India have come to carry a lot of weight on their shoulders in recent times. For one, the global economy's growth prospects now lie in the hands of these two. More so considering that most have given up hope on developed countries doing anything substantially positive. Now, even the global auto industry has its hopes pinned on India and China. The head of the International Organisation of Motor Vehicle Manufacturers' recently opined that 'Asia pacific markets - China & India - are the backbone of the global automotive industry.' The Chinese market is expected to grow by 24% YoY to 17 m vehicles in 2010. India, coming second, is expected growth over 22% YoY in 2010. This even as the once largest markets for autos, US and Japan, lie staggering in the wake of the recession. No wonder then that major auto companies from around the world have drawn up aggressive plans to increase their presence in India and China. However, this also increases the danger of over investment in auto capacities in India.

Indian companies, over the last several years, have made several strides to leave a mark on the global arena. Be it entering newer geographies or making big ticket acquisitions. But when it comes to innovations, India is still way behind either the US, Japan or Germany. That does not mean that India has no innovations to speak of. The country has been steadily making headway. And the latest in its repertoire is an inexpensive water purifier developed by Tata Chemicals. This purifier is aimed at households. Plus it does not need electricity to run. More importantly, when its filtration capabilities are exhausted, it prevents water from passing through. This is a safety measure designed to keep unsafe water from being accidentally consumed. The purifier branded as 'Tata Swach' has bagged the top prize in The Wall Street Journal's Asian Innovation Awards. Indeed, innovations such as these will go a long way in ensuring India's rise on the global map in the future.

While markets across Asia except Japan have been in the red today, India and Hong Kong are amongst the key losers. The BSE-Sensex was trading 295 points lower at the time of writing this. Stocks from the auto, telecom and banking sectors saw the maximum profit booking today. The European markets have also opened lower on concerns over the next round of monetary stimulus.

 Today's investing mantra
"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that." - Warren Buffett

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4 Responses to "The 'lie' called global recovery"

indra sen singh

Sep 4, 2011

very good



Oct 27, 2010

if you buy the same security you recommended in next 10 trading days, and that too such an amount, subscribers might end up paying more price if they buy during / after that period. you should be buying after a month - give subscribers chance to buy low first.


Agnel Pereira

Oct 27, 2010

In an article to the regional conference magazine of ICAI Bahrain chapter in Jan 2010, I had stated that, the growing strength of India and China was such, that, if the global meltdown was to happen 5 years later (say in 2013), the impact of it would have never been felt as India and China would have been more stronger to absorb it. Sadly it happened now (2008-09). But good that it happened then. Else, India and China would have been complacent. Now they will grow carefully.

Please shed you inhibitions of India and China's contribution to the global economy, just because their economies are much smaller than the west. The fact is, as one of the British speaker recently put it in an event in Bahrain recently, the US and European models are based on high priced products & services and China and India (and Indonesia & other Asia) are based on lower prices.
So, what I reckon is, even if China and India grow 100% in prices, they will be still lower than the west, whereas there is no scope for US, UK,Japan and Europe to grow at all! and that is what will differentiate the two blocs so to say. An example was given about a barbie doll sale price in US (around $25) v/s its cost in China ($1). Imagine US realising a better price than $25 - Never. Imagine China realising a sale price of $2 (100% increase on cost) - Very high. This is where India and China will dominate, along side every other seller of product and services based on massive work force, improving skills and/or higher efficiency.
(You may present the excerpts of the above as part of your daily dose if you require - you may state it to be a subscriber feedback)


sudhir apte

Oct 27, 2010

The action taken by Swiss bank is the best thing which has happened since the financial crisis. I am surprised that you are criticizing this action. Dont you know that excessive bonuses paid to the investment bank officers was single most important factor responsible for bringing about the crisis. Is there any other compensation system in the world which pays huge bonuses to officers if their gamble pays off and taxpayers bear the burden if they are wrong ? Restricting their bonuses drastically, is the only way to save the world from their greed.

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