We may now have fewer Enrons and Satyams.

Dec 24, 2009

In this issue:
» Where to invest if the world economy does not recover?
» Is this a bull run for dollar?
» Some more hot IPOs in the pipeline
» Pension funds queue up in emerging markets
» ...and more!!

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What could be the biggest risk to your investment in a stock? Management's poor execution abilities? Unstable economy? High inflation? Wrong business decisions? Or lack of ethics and corporate governance? While each of them have the potential to wreck your expected returns, the last one can take the stock price to near zero. The unfortunate shareholders of Satyam may want to vouch for that.

Competitive business scenario, greed for bigger bonuses and desire to impress investors with supernormal profits has often thrown ethics out of the window. But things could change soon. And for good.

Mr. Deepak Parekh, the chairman of HDFC group and member of the team leading Satyam's saviour has some important suggestions in this regard. In an interview to a business daily, Mr Parekh suggested that corporate governance must be voluntary. It should come from the top management, and it should percolate down to the entire organization. Given that the organization he has built is best known for its ethical practices without compromising on growth and profits, one cannot take his comments lightly. Mr. Parekh suggested that companies flouting laws should be delisted. Also, SEBI must force the promoters of those companies to pay back the money to the shareholders. This could set a precedent for action against unethical managements.

We believe that if SEBI takes Mr Parekh's suggestions seriously, India could see fewer Enrons and Satyams in the days ahead.

 Chart of the day

Source: India Infrastructure Report 2009

It requires only a walk down the streets of any major city in India to see the poor level of sanitation and waste management in the country. It is thus difficult to believe that more than one third of the Rs 336 bn funds allocated towards urban infrastructure are going towards these. To overcome the resource constraint and introduce urban reforms, the government had launched the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in FY06. It aimed at improving urban facilities in 63 identified cities. However, the pace of execution has been dismal to say the least. Out the 351 projects sanctioned under JNNURM till November 2008, only 22 projects have been completed till date!

If readers wish to know where they should be investing in different economic scenarios, the following lines could be a beacon of light. "If the world economy improves, commodities will lead the way due to demand and shortages. If the world economy does not get better, commodities are still a great place to be because governments are printing so much money. And, if the world economy doesn't get better, they will print even more money!" These words of renowned investor Jim Rogers are clearly reflective of his opinion on commodities, particularly precious metals like gold and silver.

Rogers opines that since no new large gold mines have been opened in decades and the 100-year old ones are depleting soon, the supply of gold is restricted. At the same time, central banks that have huge gold reserves above ground are less interested in selling than in the past.

Sometime in 1984, Suzuki Motor Corporation of Japan started a revolution of sorts in the Indian passenger car market. However, little did the company know that nearly 25 years later, the revolution would snowball into something so big that it would strip its own country of origin, Japan of an honour. The honour of being the world's largest seller of super compact or the small cars. Yes, that's right. As per Moneynews, nearly 0.9 m cars will be sold in India this year, surpassing the 0.7 m cars forecast for Japan. Little wonder, the who's who of the global automotive industry wants to make India as its manufacturing hub of small cars. However, India can get complacent at its own peril. As highlighted in the article, the auto industry in India still faces headwinds in the form of bureaucratic red tape, labor unrest, inefficient ports, poor infrastructure and competition from Thailand and South Korea.

The Bretton Woods system collapsed in 1971. Since then, a somewhat inverse relationship has developed between the US$ and gold. During times when one advances, the other falls and vice versa. The gold has been in rip roaring form these past few months whereas the dollar has been rather subdued. However, of late, signs of reversal have emerged. Gold is taking a bit of a breather these days while the dollar has gained some lost ground. Hence, what better time than now to once again bring the age old question out in the open. Is the rise of the dollar about to spell doom for gold prices?

Certainly not if few experts are to be believed. The current rise in gold prices could be in part because of a fall in dollar but it has to also do with a lot of other reasons. The most prominent among these is a general disbelief in paper currencies and the current vulnerable global economic climate. Thus, even if the dollar were to rise from here, one can rest assured that gold prices may not move in the other direction. The case for gold being a very important part of one's portfolio is stronger now than ever before. And mind you, it is just not based on the weakening of the US dollar. Gold bugs can thus breathe easy.

Coming up are some more red hot IPOs that are going to hit the market sometime soon. Jubilant Foodworks - operator of Domino's Pizza stores, animator DQ Entertainment, Talwalkar's Better Value Fitness and India's largest cable television operator Hathway Cable & Datacom are amongst them. As per reports on Bloomberg, 48 companies are already planning IPOs in 2010. Most of these are attracted to Indian domestic consumption boom. The steadily increasing discretionary spending power has left them greedy for bigger franchises and larger reach. There is no denying that some of these companies might earn big bucks in the future as their businesses gather steam. But whether this would mean big bucks for investors is highly doubtful!

How times change. Just a few years back, 'developing countries' like China, India, Brazil and Russia were considered to be 'risky'. Now the term 'developing countries' has been replaced by the more enthusiastic 'emerging markets'. The risk is still there. But now in the opposite context. Overseas asset managers are now seeing a big risk of not being invested in these countries, rather than the risk of investing in them. As per reports, a large US based fund manager has been recently quoted as saying, "Most pension funds have maybe five to ten percent in emerging markets, I bet in 10 years that number is closer to thirty per cent."

The growth that these economies witnessed even during the years afflicted by the credit crisis have left most of the developed world spellbound. Stocks markets too have reflected that. In the year 2009 so far, the MSCI Emerging Markets index has soared 68%, stacking up quite well with the 24% advance for the Standard & Poor's 500 index. The pace and volume of FII flows into India this year says it all. However, there is also a negative side to this newfound fascination of global money managers with emerging markets. For Indian investors, this means higher valuations. And higher valuations mean lesser opportunities to buy good stocks at good prices.

Meanwhile, Indian markets witnessed a volatile trading session today after a positive start. The BSE-Sensex was up nearly 66 points at the time of writing. Stocks from the auto and commodity sectors were amongst the lead gainers. Amongst global indices, while the Asian markets ended in the positive, Europe has also opened in the positive.

 Today's investing mantra
"If you want to have a better performance than the crowd, you must do things differently from the crowd." - Sir John Templeton

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6 Responses to "We may now have fewer Enrons and Satyams."

Mony Narayanan

Dec 24, 2009

As a small investor, I have a few problems with Mr. Parekh's suggestions to delist companies that flout the laws.

One, to delist after they flout the law is 'locking the stable door after the horse has bolted'

Two, if a company is found flouting the law, it normally is a prolonged process, with courts et al. And, amybe after 10 years, long after the issue has gone out of the public eye, one fine day, comes the verdict - delist. And, lo, the share price will drop like a bomb shell in one day....Small Investors would have no clue of the impending lightning!

Instead, I would like to have a grading / rating system. I like to have some certainity....


mayank pandya

Dec 24, 2009

Excellent post... good understanding of Investment...Good job done...


Rustom Dalal

Dec 24, 2009

I dont see how gold can be anything but an insurance against a rapid fall in paper currency. In a hyper inflationary scenario or in aclimatic disater setting who would buy your Gold Funds? Only the super rich or speculators. And they may be the ones who are hit the most. So returns are illusory . Gold is not a productive asset unlike silver which has uses in Industry.



Dec 24, 2009

What is the future of Sesa Goa if Iron ore export is banned as it is feared since long?


Sunil Kumar Singh

Dec 24, 2009

Fewer Satyam & Enron? Whom to blame? Management of such companies or innocent investors who have herding mentality. There will always be smell where there is something rotten. Few very simple checks: Receivables start stinking if they do not route through cash flow in reasonable time frame. Company's operating cash flow will start crying if profit from Income Statement does not kiss it as soon as possible. Same thing about SPVs. Satyam, Enrons and act of madness by high caliber finance professionals in USA are to name a few. Until unless investors are rational, these high caliber finance professionals will search ways to steal money from innocent public. If you suggest making tougher rules, please make rule, anyone who opens DMAT account should pass some elementary exam. Corporate governance is something which has a very important role to play. Rational investors can punish such stocks more than anyone else.



Dec 24, 2009

Companies flouting laws.... it is the companies management and not the shareholders should be punished. So delisting the companies is not the right suggestion. If Satyam were to have been delisted, the shareholders whould have suffered even more. The management in these cases should be debarred from directorship of any more companies or even forming a partnership company.

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