Can you trust these people with your money?

Dec 21, 2010

In this issue:
» Indians' great liking for gold
» Consumer prices in India; easing but still high
» FDI inflows into India have dropped
» Will oil prices do a repeat of 2008?
» ...and more!!

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In an already fiercely competitive mutual fund industry in India, another one is set to make its entry. And this name was once revered in investment banking circles globally. We say 'once', because the recent financial crisis has stripped it of its halo even though the company infamously claimed that it was doing 'God's work.'

The firm we are talking about is Goldman Sachs and it looks all set to launch its MF business in India in 2011. Goldman had received approval from the SEBI way back in 2008 but the escalation of the financial crisis meant that the firm had to put its India MF business plans on the backburner. Thus, the bank is now looking to enter the Indian markets for the second time.

And so the question to be asked is, would you want to park your money with Goldman Sachs' mutual fund? Do you have complete conviction that your money with these guys is safe? What we know is that 'having a famous name' alone is not reason enough to make investments in any mutual fund. Goldman Sachs in the past has not proved to be above blame. Even though it has gone on record to harp otherwise umpteen times. Scams have been unearthed and the bank has not been able to prevent itself from going with a begging bowl to the US government. We do not have any reason to believe that its mutual fund business in India will not do well. But we are of the opinion that be it any mutual fund, investments have to be done on basis of the purpose for which the fund has been set up, the quality of the fund manager and how focused it is on ethics. And not just on the 'name' tag.

 Chart of the day
Consumer prices have been high in India for some time now. But as today's chart of the day shows, these have eased in the last three months. Although they are still on the higher side. The government and the central bank are confident though that this should come down considerably by the end of March, especially since monsoons have been quite good. But one will have to wait and see.

Data Source: The Economist

Indians have been known to have a great liking for gold. This is clear from the statistic that India's current demand for the metal is almost 21% of the global demand. This is despite the fact that gold prices are at their historical highs. As per an Economic Times report, Indians (including the banks) hold around US$ 800 bn worth of gold, or around 11% of the world stock of the yellow metal.

The irony however is that this huge asset is unproductive and simply lies in the coffers. Also, since India does not produce much gold, we buy a large part of our requirements internationally. As such, rising gold consumption is taking up a good chunk away from the foreign exchange kitty.

So what's the solution? Or what's the alternative to India's likeness for gold? Financial savings - like stocks and bonds.

But a shift is not going to happen soon, given the low depth of our financial markets. However, the fact remains that there lies a great potential for financial savings to grow and take a major pie of the household savings in the future. If that happens, it will do a great deal for the Indian stock markets, which are still dependent on the shifting moods of the foreign investors.

There are quite a few commodities out there that are hitting new highs in terms of prices. Copper, gold, silver etc. Little wonder, people have become bullish on oil as well. And this optimism is not without reason. Year to date, oil has gone up 21% and with economic recovery on the mend, there is no reason why it couldn't go up further. However, the WSJ reports that things could be a little different this time around. First, there is a lot of spare capacity ready to be brought on stream if there is a price spike. Secondly, countries and corporates are better prepared than in 2008 when oil reached all time highs of US$ 145 a barrel. Not to forget the far more fragile nature of the global economy especially the developed world. Hence, a prolonged period of high prices could sow the seeds for its own decline. In other words, persistently high prices would weaken economic recovery which in turn will have a negative impact on oil demand. In view of all this, a repeat of 2008 looks unlikely to us. Policymakers could well breathe easy for now.

India's infrastructure sector is currently the blue eyed boy of every investor in the country. And you don't have to look too far to know the reasons for the same. Any newspaper that you pick up will have reports on swelling order books of Indian engineering companies. Every government agency is formulating policies focused on infrastructure development. It is the focal point for annual budgets and elections mandates. So much so that most of FDI coming into India is routed to infrastructure. Investment in this space is pegged at more than a trillion dollars over the next 5 to 7 years. It is likely to be the highest ever. More so because a third of the money is expected to come in from the private sector; entities that are typically not capital starved.

But we often ignore the most important aspect of infrastructure building - cost of execution. Infrastructure projects are viable investments only as long as the return on them is timely. As also commensurate with the risk undertaken. The returns get eroded in the event of execution delays and cost overruns. Until the execution delays are addressed in this space, we reckon that the sector will fall short on promises.

In the first ten months of 2010, FDI inflows into India dropped by a significant 27%, to US$ 17.4 bn. This is despite India chugging ahead strongly at over 8%. So, if India's growth story is still intact, why are foreign investors not willing to bet their money on it?

Post liberalization in 1991, cash-rich MNCs exploded into India. Its relatively untapped, huge population was a major draw. However, post the global economic recession in 2008, these MNCs were badly hit. Sluggish growth hit their profits hard. Uncertain economic recovery hurt their overseas expansion ambitions. Volatile currency movements added to the mess. The recovery came in 2009, but it was "too little, too late". It was 'anemic', according to the World Bank. Now, the Indian government has recently come under the scanner. Various scams have spoiled its image. FDI in multi-brand retail has still not opened up. We thus feel that FDI into India may still face more resistance. But cash-rich Indian companies, fueled by a strong domestic recovery are eager to push overseas. Bharti created history with its landmark deal with Zain. This may have been one of the first, but it definitely won't be the last such deal.

Investors have been flocking to India. These include renowned private equity (PE) groups. The spectacular multi-bagger returns that some of the PE firms have earned through their investments in Indian companies is now attracting more firms. But despite these attractions, firms are hesitant when it comes to investing. This is because of the red tape that dominates the country. There are execution risks and delays on account of procedures and processes that are mandatory to be fulfilled. Another concern for them is the lack of management skills especially at the middle level in the companies.

These concerns are justified to a large extent. In sectors like power, infrastructure, etc. the red tape is worse than what it is in sectors like healthcare. However, investing in India is much simpler now than what it was 10 years ago. But there is always scope to make it easier and better.

In the meanwhile, the Indian markets were trading well above the dotted line during the post noon trading session. The BSE-Sensex was up by about 160 points at the time of writing. Stocks from the banking, metal and realty spaces were amongst the top gainers today, while FMCG and healthcare were not in favour. As for the other Asian markets, they ended on a firm note with China, Japan and Hong Kong ending higher in the range of 1.5% to 1.8%.

 Today's investing mantra
"In evaluating people, you look for three qualities: integrity, intelligence, and energy. If you don't have the first, the other two will kill you." - Warren Buffett

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2 Responses to "Can you trust these people with your money?"


Dec 22, 2010

reg the usage of gold -- how about if we pledge the gold and use the money to invest in stocks. of course, it wud be worthwhile only if the returns from stocks exceeds the (principal+interest) --- any thoughts on this?? regds


Abdus Salam

Dec 22, 2010

yes I can trust them.your company is trust-worthy.

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