What We Feared is Coming True...

Oct 29, 2010

In this issue:
» Soaring rupee threatens economy
» Oil prices ready to soar
» RBI dilemma: Choice between infrastructure and food inflation
» India is a land of contrasts
» ...and more!!

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Foreign money has been flooding Indian stock markets in recent times. Well, we all know that. Be it stocks in the secondary segment or IPOs, money is just pouring in. All this is leading the stock markets to touch new highs.

The Indian government does not see any harm in these flows. They opine that this flow is the testament of India's spectacular growth story. After all, these institutions invest only in the long term growth stories. And while India's growth story remains intact, this money will not go anywhere.

So why are these 'long term' institutions cashing out on IPO gains? A leading daily has reported that top institutions like Citigroup, Morgan Stanley and Goldman Sachs are among those that are selling their shares on the listing day.

These institutions have been no exception in investing in the huge flux of IPOs that have come out in recent times. Most investors would think that their investments are driven by valuations. After all they all have huge research support that critically evaluates every investment. Therefore, their investment in any company should indicate the strength of the fundamentals of the company.

But this doesn't appear to be true. They appear to be investing only with the purpose of getting listing gains. This means that they themselves are not convinced of the fundamentals of these companies. Or maybe they do agree that the valuations of some of these issues are stretched.

Whatever the reason, we would advise investors to be careful while selecting their investments. Good fundamentals are as important as good valuations. Just following the footsteps of a big institution may not necessarily mean that the stock is worth investing in. After all, big institutions are not as long term investors as they make themselves out to be.

 Chart of the day
The India growth story has been repeated by everyone. There are arguments as to whether India's GDP would grow at 8.5% or 9% or higher. Numbers are playing a key game. Therefore, it is interesting to note that the numbers for the standard of living in the country give a different picture altogether. While GDP has been growing, but then so has the population of the country. As a result, India's GDP per person, which is an indicator for the standard of living, actually ranks at amongst the lowest in the world.

Data source: Economist

A rise in currency value against the US dollar or the euro has been the biggest problem for most developing economies. And why not? It has the potential to completely derail the economy's export competitiveness. For export dependant economies like China and Brazil this is certainly a worry. However for India, exports comprised just 13% of GDP at the end of 2009. And the economic policy makers seem to be in no hurry to stop the ascent of the rupee to save the exports. One reason is because a major portion of exports comprise IT and pharma, both of which offer high value add. Hence, they have some pricing power.

What bears the brunt of rise in rupee is the Indian textile sector. While contributing just 1% of GDP, the textile sector is the largest employer of unskilled labour in India. Hence the strategy to let the rupee appreciate may help reduce the economy's oil import bill, attract more foreign capital and boost stock markets. However, at the end of the day, loss of thousands of jobs may not be something that the government is ready to confront.

Crude oil prices have not been in much news off late. A large part of the reason is that other asset classes like gold and stocks have been much more in the limelight. So investors seemed to have missed out in the gradual rise in crude prices. These have risen almost 15% over the past few months. And if a leading oil economist Jeff Rubin is to be believed, oil prices are headed to the triple digit mark by the end of this year.

Data Source: CNNfn

We wonder if Indian policymakers would take note of this fact. India relies a lot on imported oil, and any spike in prices will create big hole in the pockets of oil companies. And then it would be interesting to see if the government allows these companies to raise product prices as was promised earlier this year!

Infrastructure is the key for any economy to grow. India's six core infra industries including crude oil, petroleum refining, coal, electricity, cement and steel grew at a languid 2.5% YoY in September. This is the slowest growth pace in one and a half years. These raw materials form the basis of every single industrial output. If this slowdown were to continue, then India's growth story could very well come to a screeching halt. Now, our government has two battles on its hands. One is to control the ever growing inflation. And two, is to stimulate infrastructure growth so that GDP growth targets can be achieved.

India is a land of contradictions. On one hand you have a country which had the third highest number of billionaires after the US and China in 2009. While on the other hand it also has the highest percentage of population living below the poverty line as compared to its BRIC peers. So it comes as no surprise when the cheapest and the most expensive car in the world will be sold on the same soil. Tata Motors has already launched the cheapest car (Rs 1 lakh) called Nano amid much fanfare. Now, two years after that launch, French ultra-luxury carmaker Bugatti has unveiled the world's fastest and most expensive street-legal super car called the Veyron 16.4 Grand Sport. Indeed, with the car being priced at Rs 160 m, the target market will be the rising class of super-rich individuals in the country. Whether this model will do brisk business on sustainable basis going forward remains to be seen though.

The US Fed has a peculiar problem. One that most central bankers would dread. And the solution to the problem would be US banks paying money to the citizens to borrow and spend. Or so it seems. Even after the Fed having slashed interest rates to zero, there has been no pick up in loan demand. The growth in consumption in the US remains at historical lows. So if loan growth is to be stimulated, interest rates would have to go in the negative. And that would mean a peculiar situation of banks paying interest to the borrowers! In an interview Yale economist Robert Shiller referred to this situation as the 'liquidity trap'. It may be noted that this phrase was coined by the legendary economist John Maynard Keynes to describe the Great Depression. But even Keynesian economic policies do not seem to be coming to the rescue of the Fed!

Meanwhile, markets continued a day of choppy trade. BSE-Sensex took off post noon and was trading around 15 points lower at the time of writing. Stocks from auto and metals sectors have been the major losers. Most of the other Asian indices have also closed negative today. However, Europe has opened on a positive note.

 Today's investing mantra
"I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy." - Peter Lynch

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2 Responses to "What We Feared is Coming True..."


Oct 29, 2010

It is shocking to know that big institutional investors are selling IPO stocks on listing day.

Then how can they be investors?


santos koshy

Oct 29, 2010

India's GDP is well connected with the Oil Imports and there by rising inflation.
Govt. should effectively set a constructive plan for the implementation of energy revalution to happen in all sectors in the country. That needs tobe done quickly by starting with the civilian areas, where the using of "electric/hybrid" version automobiles are viable option. This would even help to impact the inflation in long term, if rightly implemented. Companies producing such utility vehicles should be given substantial Tax cuts, so as it benefits to the consumers.

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