Are global asset prices in bubble territory? - The 5 Minute WrapUp by Equitymaster
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Are global asset prices in bubble territory?

Nov 12, 2009

In this issue:
» India has lower old age dependents
» Uncertainty surrounds India's solar power plans
» RBI rules out curbs on capital inflows
» China's factory output surges to a 19-month high
» ...and more!

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Last year was witness to dollops of pessimism as property markets crashed, stockmarkets around the world plunged and credit froze. But this year so far has had a different story to tell. While the recovery process seems to have begun, property prices and stockmarkets have rallied at a spectacular pace at least in the emerging markets. Infact, they have risen so fast that concerns have started emanating that there could be another bubble in the making. However, David Riley, head of global sovereign ratings at Fitch Ratings thinks otherwise. He is of the opinion that concerns over global prices of shares and property having risen to unsustainable levels is 'premature' and spare production capacity will help contain inflation. He said, "Some concerns about the asset-price inflation are overstated. Policy makers want to reflate asset prices as part of the recovery; if that starts getting out of hand, then you can get worries about future asset bubbles. These concerns I think are somewhat premature."

In the emerging markets especially, asset prices are rising due to abundant liquidity as interest rates continue to remain benign in the US, UK and Japan. We believe that Riley might be correct in saying that the world is not in bubble territory just as yet. But that does not mean that policymakers around the world can rest easy. They will have to be on their toes to ensure that no more bubbles are created just when the world is beginning to limp back to normalcy.

 Chart of the day
India scores over its developed peers on many points and one such advantage that the country has is the lowest number of old age dependents. As today's chart of the day shows, the percentage of old aged population (65 years and above) as a percentage of working population (15-64 years) in India is lowest as compared to Japan, UK and US and even its BRICS peers. For the developed world, rising aged population means that there is that much more pressure on governments to provide healthcare , pensions and other such benefits. A lower ratio in India means that the scope for contributing to the country's growth is higher. What is more, in the healthcare field, the rising aged in the developed world means more focus on low cost medicines to keep healthcare costs under control and this provides immense opportunity to India pharma players.

Data Source: United Nations Development Index

If you are hoping Indian exports, especially to the US, to regain its lost glory anytime soon, you may have to hold back our optimism a bit. We say so because it looks like even the most influential policymakers in the US do not feel that the US consumer can be relied upon to drive the world economy in the near term. Treasury Secretary Tim Geithner has opined that if the world economy is to grow in a stable way, it is going to be less driven by the US consumer and one needs to see a change in the sources of growth. Little wonder, governments in major Asian economies like China and Japan, which are also large exporters to the US, are offering incentives to their own citizens so that the void left by the US consumer could be quickly filled up. The US in the meanwhile, will have to encourage its citizens to save more rather than spend so that the huge trade imbalances that have been built up over the past few years, and which in a way contributed to the current economic crisis by keeping interest rates artificially low, are given enough time to correct themselves.

While the RBI continues to remain worried about the excess liquidity stoking inflation, the government seems to be in no mood to pay attention. The government has ruled out any curbs on capital inflows even though the inflows in the initial months of the current fiscal have far exceeded the expected levels. India saw foreign investments inflows to the tune of US$ 27.5 bn in the first six months of this fiscal. At the current pace, inflows could cross the US$ 61.6 bn for FY08, when the country undertook tough measures including imposing restrictions on participatory notes (PN) and external commercial borrowings. While the government may still be concerned about capital inflows as is evident in the fact that it has no immediate plans to raise the cap on FII investments in corporate bonds from the current US$ 15 bn, the lure of forex inflow seems to be getting hard to contain.

There is energy all around us. In fact so abundant, that we may never need to worry about electricity shortages ever again. However, the sad truth is that India continues to face power deficits. So while the sun shines down upon India every single day, we are still not in the position to harness that rich source of energy despite the energy shortages that plague our industry and stifle its growth. Some of the reasons for our dismal performance on this front are high funding costs and our negligible solar panel manufacturing capacity.

But there might just be hope. Earlier this year the government announced a US$ 19 bn plan to produce 20 GW of solar power by 2020, with this increasing to 100 GW by 2030 and 200 GW by 2050. Looking at the country's performance on the thermal power capacity addition front, these ambitious projections don't exactly inspire confidence. But like the telecom and internet revolutions took the world by storm and changed the way we live in a short period of time, so may solar power technology when the time is right. Until then, the efforts are on.

If the data on factory output is anything to go by, looks like China has put the ill effects of the global financial crisis behind it. As reported in a leading business daily,Chinese factory output surged to a 19 month high in October. Having said that, there was a dip in the pace of investment and loan growth and exports have yet to take off in a significant manner as the US and Europe are still reeling from recession.

Despite this, the Chinese economy is expected to log in a decent 8% growth in GDP in 2009. While domestic demand seems to be improving, it is the excess liquidity that is also playing a role in bolstering growth. Famed economist Andy Xie was certain that the Chinese bubble was set to pop.

More importantly, there are concerns that global investors are confusing the Chinese 'stimulated' growth with sustainable growth. It is well known that a large part of the growth in China's economy over the past decade came from exporting and lending to the US. Now with the latter in a deep recession, the former is suffering from overcapacity. Hence, even if China does manage to grow its economy by 8% this year, it remains to be seen whether the same will be sustainable in the next two years.

Given that the global crisis has had a massive impact on financial institutions in the US, in some sense it is not surprising that these banks are vary of lending. However, the bigger problem that the US may be facing is that creditworthy companies may simply not want to borrow. This does not bode well for the Obama administration given that it is desperately looking at ways and means of spurring the US economy and making corporate and consumers spend. But if companies do not want to take on more debt right now, that strategy is not likely to be very successful. Not just small companies but even larger corporates are reluctant to borrow. And what is more, even among companies that are tapping credit markets, the money is going to shore up balance sheets rather than to pay for hiring, investment or expansion. Hence, credit in the US may be thawing but the spending is not taking place which will be a worrying factor for the US government.

The Indian markets witnessed an extremely volatile session today as alternate bouts of buying and selling were seen throughout the trading session. At the time of writing, the BSE-Sensex was trading lower by about 75 points or 0.4%. While IT and capital goods stocks were in favour today, those from the realty and metals spaces bore the brunt of profit booking. The Asian markets ended the day on a mixed note.

 Today's investing mantra
"Understanding how to be a good investor makes you a better business manager and vice versa." - Charlie Munger

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4 Responses to "Are global asset prices in bubble territory?"


Nov 14, 2009

How will offering loans to companies create demand in the US markets ? Of course companies don't want debt if their good are not going to sell.



Nov 13, 2009

pls tale me some stocks in which i invest upto 2 yrs

pls, reply me soon


O.P. Sabherwal

Nov 12, 2009

When speculative buying pushes up prices indiscriminately,
well above their correct valuations will global asset prices risk being in bubble territory.



Nov 12, 2009

Dear sir,

I have invest 40000/- in shares of satyamcomp from before 2 months. at the price of 125/- per each. Now what i can do for further. Please give me your needfull to me

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