The trade of the decade is...

Nov 23, 2009

In this issue:
» Indian pharma tormented by the EU
» Centre's new disinvestment plans
» Insider's view on asset bubble in China
» Why real estate prices may not correct
» ...and more!

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One investment that has taken investors for a wonderful ride this year has undoubtedly been 'gold'. Agreed that stocks have returned even higher, but investors have taken equally high risks to achieve these returns. As for gold, investors have turned to it as a safe haven asset and it has rewarded them for their faith, rising by around 44% over the last one year.

Renowned commodity experts like Jim Rogers are predicting gold to double over the next few years. We also have Addison Wiggin, the noted author of international bestsellers like 'The Empire of Debt' and 'The Financial Reckoning Day', who shares a similar view. Addison in fact has recommended gold as one of the assets in his 'trade of the decade'.

It would interest readers to know that Addison has maintained his bullish view on gold since the start of this decade. His exact trade of the decade was to sell the Dow (US stocks) and buy gold. And he has been right in his view so far. Since the start of this decade (January 2001), gold has returned around 313% point to point. US stocks in the same period have declined by around 5%! In the Indian context, the scenario was hardly different. While gold returned 299% in rupee terms, the Sensex has moved up by around 296% in the past decade. So, even Indian stocks have not really outperformed the safe haven gold!

Data source:, Yahoo Finance

In a recent interaction with us through the Equitymaster WebSummit, Addison outlined his view that his trade of decade holds true even for the next decade. This is considering that the US central bank is laying the ground for very high inflation in the future by printing excessive amount of dollars right now. And that's going to take gold even higher in the future.

We also hold our belief in the future of gold. And our view is positive. Nevertheless, while having gold in your portfolio does make sense, make sure that you do not go overboard with it. A 5-10% allocation (out of your total investment portfolio) to the yellow metal is just about fine.

 Chart of the day

Source: Asian Development Bank

Access to internet in today's world can be equaled to having a television and a telephone in the yesteryears. Just that the internet has no geographical limitations. The whole concept of low cost outsourcing, for which India is very popular in the West, rests on this. It would thus be shocking for readers to know that India still lags far behind its Asian peers in internet penetration. Many call it 'the digital divide'. As today's chart shows, with less than 10% of India's population having access to internet, the country lags far behind her neighbours. Also, imagine what would happen if this figure moves up to even 50% in the next 5 years. We could have the remotest towns of India serving as low cost back-offices to billion-dollar MNCs!

Tormented by illegal seizures of high quality Indian drugs by the European Union, India is set to make a case against it to the WTO. The motive behind EU's actions is that many of these drugs have patents in Europe which have not yet expired. These drugs are otherwise off patent and are being exported by India to less regulated markets both of which hold no patents. Little wonder then that the former is crying foul. In this regard, India is not alone as Brazil is also facing the same set of problems. India contends that such seizures violate the Trips Agreement (the WTO agreement on intellectual property). This allows generic producers of medicines that may have patents in other countries to be exported to developing countries on public health grounds. Hence, the rationale for making a case against the EU to the WTO. Most of the domestic pharma companies cater to the semi or the less regulated markets. So a quick solution to this matter would be welcome to them. However, judging by the quarterly results that have been declared, the EU's actions do not seem to have played much of a role in impacting sales from this region.

We had earlier written about why we did not agree with the markets' reaction to the government announcement on diluting stake in profitable PSUs. We believed that execution risks apart, the stake sale process will not lend any value to the investors. This is because the PSUs will continue to remain government owned and managed. Also, the share sale proceeds will go to the government coffers rather than aiding the company's growth.

The Centre has now come up with a new policy. Here, the government plans to offer six loss-making public sector units on upto 99-years lease to private players. As per a business daily, HMT, Hindustan Fertiliser are amongst the companies that may be offered on lease. Contrary to the earlier announcement, we think this one will have real value for investors in future. One, the loss-making companies get private sector management. Two, there will be a renewed focus on profitability. Eventually if the government offloads marginal stake in them, the offer for sale will be worth watching out for.

India Inc. has acquired foreign firms for growth in the past few years. Even within the energy industry, companies don't hesitate to pick up assets abroad. In the last major deal, ONGC acquired Imperial Energy for US$ 2.3 bn. Now, private sector giant Reliance Industries is bidding for bankrupt refiner and chemicals major LyondellBasell. Interestingly, Mukesh Ambani had mentioned in the company's recently held AGM that "global growth by acquisitions" is the key to boosting revenue.

A lot depends on how much Reliance pays. Reportedly the deal size could be in the range of US$ 10 bn to US$ 12 bn. Much also depends on what proportion of LyondellBasell's problems (it has debt of US$ 27 bn) Reliance inherits. After all, Reliance's previous acquisition Trevira, a German textile firm, has now applied for bankruptcy. However, there is no doubt that it will help the company access the world's largest fuel market - the US. It will also provide Reliance with the latest technology.

China's large stimulus package and numerous interest rate cuts have encouraged US$1.3 trillion of lending in the country. These were with an aim of boosting domestic consumption as the country's exports took a hit. However, this has had an uncalled-for side effect. The stock market has soared. Home prices in 70 major Chinese cities climbed at the fastest pace in 14 months in October 2009. And with that, suspicions of a big bubble building up in China seem to be getting stronger with each passing day.

A recent report quotes the CEO of a leading real estate developer in the country echoing that view. Supporting his view is the fact that in Shanghai's main business area, vacancy rates are as high as 50%. And despite that, prices are rising. This even as they continue to build new skyscrapers. Infact, comparisons are now being made with the asset bubble that was seen in Japan in the 1980s. The bubble finally broke in 1990. But it left in its wake years of negligible growth for Japan, which to this day is a far cry from its 1989 peak.

While the optimistic lot of Americans thinks that the US economy has bottomed out, there are many who disagree. Take the case of renowned US economist Nouriel Roubini who opines differently. Dr Doom, as he is popularly known, has more gloomy news to share about the US job market. The official unemployment rate in US at 10.2% has improved over the past couple of months. Roubini thinks that the US job market will continue to bleed till the end of next year. He also predicts that most of the lost jobs particularly in the construction, finance and manufacturing sectors are gone forever. Low-cost outsourcing hubs like India may gain about 25% of the US jobs to be outsourced in times to come. Infact, as per a business daily, large US banks are expected to outsource US$ 1 trillion worth of contracts to Indian IT companies in the near future.

If you are still hoping for a crash in properties prices to buy your dream home, you will be sorely disappointed. Large real estate companies have raised money through the qualified institutional placements (qip-in-stock-market?utm_campaign=SEO-K'>QIPs) route. This means that they will not be selling properties at a discount. You will then ask what about the smaller real estate companies. While they are sitting on large land banks with permission to build, they don't have cash. Surely these distressed companies would have to sell cheap resulting in a correction. Unfortunately, that is unlikely to happen! Keeping the brother help brother tradition alive, the large real estate companies are using the QIP money to help out the smaller ones. Seeing an opportunity for acquiring cheap assets, large real estate developers are forming joint ventures with smaller firms. Under this, the large developer will take care of the construction and sale of properties. In return, the small developer will receive a percentage of built up land. While this is good news for all real estate companies, it could spell bad news for all potential home buyers.

Meanwhile, Indian markets witnessed a relatively strong trading session today after a weak start and the BSE-Sensex was up nearly 149 points at the time of writing. Stocks from the commodity and banking sectors were amongst the lead contributors to the overall strength. Amongst global indices, while the Asian markets were trading a mixed bag, Europe has opened in the positive.

 Today's investing mantra
"Where the company has the highest credit rating because both its past record and future prospects are most impressive, we find that the stock market tends more or less continuously to introduce a highly speculative element into the common shares through the simple means of a price so high as to carry a fair degree of risk." - Benjamin Graham

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11 Responses to "The trade of the decade is..."


Nov 25, 2009

while you are predicting the Bubble in China (including the property market - 50% only occupy the space) you are infact saying that there in no bubble in Indian Property market. The RBI report has recently said that in 2009 developers lifted 40% of the loans where as the direct users took only 5% loan. After few days same web site says in december the proces aregoing up. Thanks to such articles the end user ends up paying EMI for his life and the developers, medea persons (who help artifiially kacking up the prices) laugh away to the banks. It is a pity that inspite of having subprime crises in US no country including INDIA has learnt a lesson. Same mistakes are repeated again. Only time will tell when and where (China or India or any other country) the next SUBprime is getting birth.



Nov 24, 2009

Yes, we agree internet penetration is poor i.e. just 10% of the total population when compared with other economies. But, we also need to admit that for countries with whom we are comparing (excluding China), the total population in their city/country is just a certain % of India's total population. Secondly, it is not correct to compare the penetration with the total population instead the comparision should be made with the Total literate population. So, in that sense, India's performance is not that bad and we are improving. Don't you agree ?



Nov 24, 2009

good and informative. Go ahead



Nov 23, 2009

I agree fully with your factual comparison on internet penetration.
My experience with BSNL DSL in a Tier-3 city closer to MNCs such NOKIA, Dell, Hyundai is bitter only.
The quality of other service providers with inadequate bandwidth such as tata, reliance, airtel not much improved and/or covered the entire city just 75km from metropolitan chennai.



Nov 23, 2009

I join other readers in validating your brief focussed assessments on the market.


Shivashankrappa Channappa Balawat

Nov 23, 2009

Insted of publishing foreign investors quotes in investing montra, it is worthwhile you strart quoting indian investors/ enterrpenures. This will motivate more.
Only thing is you have to do some research. Please try. it will help all.


Om prakash

Nov 23, 2009

Sir, i have bought Suzlon Energy at 18000 shares so please tell me what is the future target?


Mahesh Soni

Nov 23, 2009

This has a reference to your news item 'chart of the day'. While agreeing entirely that the internet penetration in India is low as compared to China and Pakistan, we have a factor we can call 'shared internet access'. Wherein a large number of people, from cities and from villages, access internet through Internet Cafe. In Chhattisgarh I have seen internet cafes even in small towns with sufficient membership.

Having said that there is no doubt that on the fronts of cheap availability of personal/laptop computers and also affordable tarrifs (+infrastructure) we have still do a big lot.



Nov 23, 2009

If the Chinese Economy does slowdown in 2010, then we could see the commodity prices going down drastically which will have a negative impact on the commodity laden SENSEX stocks. Would request Equitymaster to comment on the possible repercussions of this likely scenario.


vishal s chawla

Nov 23, 2009

Sir, i have bought NMDC at 467 1000 shares so please tell me what is the future target?

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