There was no other way to deal with the crisis!

Nov 26, 2011

In this issue:
» How technology can bring cost of services down
» Has infrastructure sector turned attractive?
» The manner in which Euro crisis is affecting Indian realty
» Is it the turn of airline sector to get FDI status?
» ...and more!
---------------------------------------- Have an enriching Saturday! ----------------------------------------

Can Europe find a solution to end the current economic crisis?

Will the new economic reforms drive the stock markets?

Are we paying a price for bad democracy?

Get answers for all such complex issues straight from Jawahir Mulraj.

Click here to sign up for J Mulraj's 'Straight From The Hip' e-letter! It's Free!


How many times has it happened that we have tried to do an in depth analysis of an issue only to find out later that the solution was not only simple but also right before our eyes all along? Many a times, isn't it? The current situation in Europe can serve as a very good example of this phenomenon at work. Reams and reams of paper have been spent in trying to find out what went wrong and what corrective measures can be taken. But to say that all of these steps have come unstuck would be to state the obvious. The situation is getting worse by the day with still no foolproof action plan being mooted by the member nations.

Amidst all this chaos, an article in the points out how almost all the policymakers and economic experts seem to be showing hardly any realism at all. It talks about how it would be next to impossible for Germany, the saviour of last resort to come to the rescue of troubled nations as well as financial institutions as the sum involved would be too large. And what about funding from China? Well, with the Chinese banking system showing signs of trouble, even that option looks like a remote possibility.

Thus, life seems to have come full circle as far as the Euro zone is concerned. Restructuring and bankruptcy, the very phenomena which the region wanted to avoid all along looks like the only feasible option worth undertaking. In fact, the path which was being followed by policymakers had a dead end from the very beginning, the only difference being that right now, it is smack in front of their faces. Thus, be it a nation or a company, a period of high leverage beyond a certain threshold will have to be followed by a period of deleveraging. Anything else just doesn't work. It is one of those unwritten rule of nature perhaps. This is also the reason why we insist on buying companies with bare minimum debt and some strong competitive advantages.

Do you think deleveraging is the only solution to the crisis or is there any other way? Share your views with us or you can also comment on our Facebook page / Google+ page.

 Chart of the day
Apart from tackling financial crisis, the most brain and money power is perhaps being spent towards making our environment greener and thus, tapping renewable sources of energy. Today's chart of the day highlights the current installed base of renewable energy across different continents in 2010. While Europe seems to be on top currently, the manner in which capacities is coming up in power hungry Asia, it won't be long before Asia takes the lead. It is also worth adding that amongst all the sources, solar power witnessed the biggest jump, growing 70% in terms of installed capacity in 2010 over 2009.

Source: The Economist

Why does your medical bill cost more than your monthly groceries? Or why does your child's education cost more than a plasma TV? According to a famous claim in economics, the cost of services tends to increase as compared to the cost of goods. This definitely rings true as one can barely afford the costs of rising healthcare and education anymore. They seem to be rising faster than overall inflation. Will we be doomed to continue paying exorbitant rates for these necessities? Columbia University professor Jeffrey D. Sachs, seems to have an answer. He believes that a sharp decline in these costs may soon be possible due to the tech revolution. The disruptive forces of technology have changed our lives in many ways. And further development of this field can actually help reduce the costs of highly expensive services. Various educational videos are now being put online for free so that anyone in the world can learn subjects like math and physics. Similar breakthroughs can happen in healthcare space as well to help empower individuals. Investment in technology is without doubt the only way forward.

Once touted as the sunrise sector of India, the infrastructure sector has been getting everything wrong for quite some time. The second quarter ended September, 2011 (2QFY12) saw the infrastructure players posting dismal numbers. Most companies reported significant year-on-year decline in profit after tax (PAT). The poor show was attributable to a steep incline in interest costs, which escalated in the range of 200 to 500 basis points (2-5%). One reason for this was the slew of hikes in key lending rates by the Reserve Bank of India (RBI) to battle the high inflation. The other reason was the high debt burden coupled with a significant increase in working capital requirement. But this is just one part of the story. The other concerns plaguing the sector include regulatory hurdles, land acquisition problems, delays in project execution and such other structural bottlenecks.

So there is no denying that there are ample reasons for the negativity surrounding the infrastructure sector. But we believe that in times of panic, investors have a tendency to be shortsighted. The reactions at such times are often extreme and disproportionate to what the events call for. You could say that such is the current situation of the infrastructure companies, as many of them trading quite below their book value. Value investors may want to scoop up some fundamentally stronger ones amongst them for the long term.

The retail stocks made merry in the stock markets yesterday. They were rejoicing the government approving FDI (Foreign Direct Investment) in the sector. Now the Prime Minister has turned his focus on yet another sector. This time it is the airlines sector. There is a lot of speculation that the government may look at approving FDI in the airlines sector as well. Unfortunately, the sector is not just suffering from cyclical problems but a lot of structural issues also abound. During such times, the pertinent question in our opinion is not whether the government will approve FDI in the sector but would someone want to invest in the sector at all.

What has the debt crisis in Europe and the US got to do with office space prices in India? Quite a lot, it seems. According to Jones Lang Lasalle, a real estate consultancy, nearly 50% of the demand for investment grade office space in India is contributed by the information technology (IT) and the IT services sector. And companies from this space derive a significant chunk of their revenues from the US and Europe. Thus, with both these regions struggling with high debt and recession, the reverberations have been felt in India as well. As a result, the demand for office space in India has slackened.

Besides IT companies, even firms headquartered overseas have been major drivers of the demand for office space. And with the high level of uncertainty in the global markets, these firms are now cautious on buying more office space. All of which means that demand for office space is expected to remain subdued in 2012. So, while 2009 saw around 19.6 m sq. feet of office space leased out across the top 7 cities in India, this figure soared to 31 m sq. ft in 2010. This calendar year is likely to see a modest growth to around 35-36 m sq ft. But in 2012, this number is likely to drop to around 31 m sq. ft of office space. As far as the IT sector is concerned, a deadly cocktail of recession in the developed world and heavy volatility in the rupee has made it wary of investing in office space. All in all not a very bright scenario for the real estate sector in India.

The world markets had a disappointing performance over the week. The equity markets across the globe saw their worst week in two months. Main culprit for this is that there seems to be no end and no solution for the Eurozone crisis which has dragged for so many months now. Further, Germany's inability to sell its 10 year bonds, France's deteriorating rating and Italy's rising cost of borrowing worsened the situation.

Indian stock markets witnessed a fall of nearly 4% this week. The markets were very volatile on concerns of weakening rupee, euro zone crisis and poor fundamentals. Amongst the other world markets, Germany led the losses (down by 5.3%). The German debt agency failed to find buyers for its 10-year bonds. All other markets were on the losing end too with China losing the least (down by 0.8%).

Source: Yahoo finance, kitco, CNNfn

 Weekend investing mantra
"An organization's ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage." - Jack Welch

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "There was no other way to deal with the crisis!". Click here!

5 Responses to "There was no other way to deal with the crisis!"

Narasimha Rao

Nov 29, 2011

Infrastructure sector:Value investors may want to scoop up some fundamentally stronger ones amongst them for the long term.
This is appreciated and i agree.
But it would be kind of you to guide your Subscibers to (Stock select) etc. to suggest which ones to buy: LANCO, GVK Power or NCC or GMR Infra.
Narasimha Rao


Tikam Patni

Nov 28, 2011

Why look elsewhere? India is on the same track as Greece and some others. Leverage, leverage and leverage. And beyond all means. The MG NREGA, Food Security Bill, PDS, Subsidies, Land acquisition bill, The Mining Bill, Right to Education etc etc: nice vote catching names, but all with a common purpose of loot and leverage.Some how get votes, get elected and enjoy the loot for life.


hemant shah

Nov 27, 2011

What else but deleveraging? In India there is a saying which translates in to : spread your legs only as much as your sheet can cover.
Overspending and unaffordable life style choices has resulted in to all this.Back to basics and Gandhi of " selfreliance" can only be the Mantra for individual or a nation.So go back deleverage and start living within your means is the only answer.
You can not possess something for which you have not worked or put in efforts so be productive.
Like Buffet says about gold ,it does not generate any income or productive asset, laid back European culture and USA spending habits are to be contained and cycle has to reverse.


sunilkumar tejwani

Nov 26, 2011

yes, only way is open to retire debt. But sadly, the very people who destroyed euro nations are once again called to solve the problem,Goldman Sachs and company. These are nothing but financial criminals in the guise of Investment Bankers. Pedlars of debt are time and again called upon to suggest the solution. The boys from Goldman Sachs are working over time to suggest newer ways of debt and more debt to solve the existing problem. It is like suggesting sweet drinks to a diabetic.
In return the guys from Goldman Sachs will earn fat pay packets to keep their toxic jobs and ideas.


shome suvra

Nov 26, 2011

Leveraging can bring in some restrictive covenants for the Companies.A firm can take advantage of leveraging if the return on capital employed is greater than the cost of debt where with infusion of more debt, if permitted, ROE can be increased.Capital expenditure which is an important growth driver can be funded from the retained earnings if the co can afford it.A project should be executed just not when it is profitable but when it does not pay to wait for the further profitability.

Equitymaster requests your view! Post a comment on "There was no other way to deal with the crisis!". Click here!