Do you risk your money chasing unrealistic returns?

Dec 29, 2010

In this issue:
» China's vested interest in India's energy resources
» Bailed out banks nearing bankruptcy
» Is the government responsible for India's food crises?
» Will Indian ever have affordable healthcare?
» ...and more!!

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Despite the risks in trading, many investors choose to ignore them at the behest of their selfish brokers. Some even end up losing most of their life's savings to such false promises. The brokers or advisors promising extraordinary returns in short time are certainly at fault. But so are investors who believe in such promises without a sound rationale.

Take, for instance, the most recent scam where Citibank officials in Gurgaon have been accused of cheating investors on fixed deposits. The returns promised on the instruments were double that a normal FD would fetch. Nevertheless, the HNI investors caught in the trap never doubted the promises. They did not bother to question the rationale for the returns. And in the bargain, ended up losing millions in extremely risky speculative bets. We are bemused by their belief in a ridiculous notion while investing millions. That returns on risk free FDs can be higher than that on risky stocks!

This is not to suggest that investors cannot seek returns higher than the average rates. But only if the underlying instruments have a historical track record of attractive returns. Buying stocks of fundamentally sound companies with very high margin of safety in valuations is a case in point. In such cases, investors have very little reason to doubt the possibility of high returns. But otherwise, it would be more prudent to ask your investment advisor the rationale for the unrealistic returns.

 Chart of the day
India's contribution in a growth starved world economy is commendable. The country is stepping up efforts to catch up with neighbouring China in securing the highest rank in GDP growth. Indian stocks have been rerated over the years keeping the prospects of higher returns in mind. But the run up in their valuations seems to be a little premature when compared to the historical economic growth. As today's chart shows, in 2010, the share of market cap of Indian stocks in global market cap was higher than the share of India's GDP to world GDP. Of course, the expectation of higher profits from Indian stocks going ahead could be the reason for the same. But we believe that this also signals that the upside in valuations are limited to that extent.

Data source: World Bank

The Chinese don't mind joining hands with even their arch rivals when it comes to furthering national interest. As per a leading daily, China's largest Government owned energy firm, CNPC, has called upon its Indian counterpart, ONGC for a possible tie up in Indian waters. Yes, that's correct. China, India's staunch rival in the game of overseas oil and gas assets, is keen on forming a JV with ONGC in order to find new Indian oil and gas assets.

Given the high level of mistrust between the two, it looks unlikely that the Government will play ball anytime soon. India does allow 100% FDI in oil and gas but it is a sensitive sector. And hence, giving full access to China is indeed something that needs to be given due consideration. No doubt the Chinese have deep pockets and also have in their possession ultra deepwater technology. But it isn't something that India is desperate for and can get the same from some other friendly countries. Hence, a possible tie up with China is certainly not a do-or-die situation. As per us, unless China works really hard to prove to India that it deserves to be in its good books, India should not readily oblige.

Anesthesia is such a magic drug. So are bailouts. But once the effect goes, the pain hits back. This fact is emphasized by a recent Wall Street Journal report. About 100 banks bailed out by the government are teetering on the brink of bankruptcy. Again? Yes, again!

The banks in question took more than US$ 4.2 bn from the Treasury Department under the Troubled Asset Relief Program (TARP). Interestingly, this was created for healthy banks only. However, the depth of the problems for some of the institutions suggests that a number of them were in perilous shape from the beginning. Based on a review of third-quarter results, 98 banks were battling weakening capital levels, mounting bad loans and heat from regulators. This is up from 86 in similar troubles in the second quarter. Seven TARP recipients have gone under already. And they haven't gone alone. US$ 2.7 bn of TARP funds have also drowned with them. Smaller banks have been the worst hit. But this shouldn't really come as a surprise. A big, big lesson there for the US we believe.

India has been reeling under severe food inflation for the past 2-3 years. Rising food prices have burnt a hole in the pocket of the common man. The best the government has done to control this crisis is to stop exports of some food products. We saw the recent case of onions where the government stopped exports of the same. But this does not seem like a long term solution to contain the crisis that can take even bigger proportions in the future.

The biggest culprit in India's food crisis is the government itself. Its warehousing capacity has lagged food production for many years in the past. This remains the case even now. This has meant that a large part of production rots in the open every year. And this is in a country where a large number of people are dying of hunger! Ironical, isn't it? Call it the government crisis, and not the food crisis!

One of the key responsibilities of any government is to ensure that there is enough investment in the social sectors such as education and healthcare. After all, the productivity of people plays a very important role in enhancing GDP growth. And if the population is neither skilled nor healthy, such productivity will be virtually non-existent. Sadly, in India's case, there is a lot left to be desired at least when it comes to healthcare.

The Indian government spends less than 0.9% of GDP on healthcare. This is one of the lowest levels of government spending in the world. What is more, as far as healthcare expenses are concerned, Indians pay 80% of the same out of their pocket. This is burdensome given that a large swathe of population lives below the poverty line. Not just that, facilities at government hospitals are inadequate to say the least. And this compels people to turn towards private healthcare. The Indian government is strapped for cash. Because of which it is not able to ramp up healthcare infrastructure. And so, this role has fallen onto the shoulders of private healthcare practitioners. Sadly, we believe that this scenario is not likely to change anytime soon. Private hospitals and practitioners will be the ones who will have to shoulder the responsibility of making healthcare accessible to Indians.

Do you think Indians will ever have affordable healthcare facilities? Let us know.

India has the lowest electricity consumption compared to its emerging peers. But, with growth projected at around 9%, the power sector is assuming critical importance. This is indicated by the ambitious US$ 1 trillion investment in infrastructure expected in the 12th 5-year plan. A third of this huge outlay is expected to be allocated to the power sector. This works out to US$ 300 bn or Rs 13.5 trillion. This amount is double of what was estimated for the previous plan period. 100,000 mega watts (MW) of power capacity are now expected to be added from FY12-17. Each mega watt costs Rs 50 m. The cost of adding new capacities equals Rs 5 trillion. The rest will be used for distribution, transmission and generation work in progress.

The current plan ending FY12 will only be able to meet 80% of its capacity addition targets. We hope that this time around ambition and execution go hand in hand. With demand growing, missing lofty targets narrowly is no longer enough. This time around, the cost of underachievement will be even higher.

Led by strength in FMCG, commodity and banking stocks, the Indian indices have had a strong outing since the start of the session today. The BSE-Sensex was trading 169 points higher at the time of writing this. The BSE Midcap and BSE Small cap indices were up 0.6% and 1.0% respectively. The Indian indices were amongst the lead gainers in Asia while the European markets have also opened higher.

 Today's investing mantra
"I look for businesses in which I think I can predict what they're going to look like in ten to fifteen years time. Take Wrigley's chewing gum. I don't think the internet is going to change how people chew gum." - Warren Buffett

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14 Responses to "Do you risk your money chasing unrealistic returns?"

Sarat Palat

Dec 31, 2010

First of all distinguish between health care and ill care. In India both are not adequate. If the people are health consious then the latter will reduce. However, the Govt. hospitals in the country are in a pathetic condition. The first thing to change is the attitude and the behaviour of the staff. Taking this as an advantage, the private hospitals are taking undue advantage. Remeber,the future of the country lies in productive people. If the people are not healthy they cannot be productive.


Dr Malpani, MD

Dec 30, 2010

The Indian healthcare system has become sick. Doctors are illness experts and not healthcare experts. Healthcare needs to learn from the revolution which has occurred in microfinancing. When given money and the freedom to use it as they see fit , even very poor people have come up with remarkably innovative ideas which could never have been planned, designed or anticipated by the traditional experts - bankers!

Information Therapy - the right information at the right time for the right person - can be powerful medicine ! Ideally, every clinic , hospital, pharmacy and diagnostic center should have a patient education resource center, where people can find information on their health problem .

Information Therapy is the Best Prescription !



Dec 29, 2010

Affordable healthcare and Government sponsored healthcare are two very different things.Current state of healthcare in countries lIke UK and US, that have huge govt. sponsored healthcare systems should serve as a warning to those who propose increased govt. spending. The only role that govt. needs to play in this is to get rid of the potential impediments to private participation and strengthen remedial/redressal mechanisms for malpractices...Make conditions even bearable for private sector and sit back and watch India entrprenurship solve the problem.


N Kannan

Dec 29, 2010

Healthcare scenerio in India will never change. In Tamilnadu Karunanidhi is distributing free TVs to everyone - poor and rich - for voting him to power. How many crores are wasted and how many crores have been swindled in the process!! But for constructive ideas, he will say no enough money with the Govt.


Prabha Krishnan

Dec 29, 2010

It depends on how we define healthcare. We need to concentrate first on delivering determinants to health such as safe water sources, solid waste management, nutrition. Affordable housing and sanitaion together with adequate food supply elevated the health of the masses in Europe PRIOR to mass vaccinations - because the Industrial revolution needed steady supply of healthy able bodied workers. Drugs, antibiotics and vaccinations are unsustainable, and elevate costs without measurable benefits.
Yes money stashed in Swiss banks can be used for spending - but spending on what?
The focus should be on preventative care -- India's claims to growth are hollow when 25% of all children who die between ages 0-5 come from India.



Dec 29, 2010

I have been reading your articles for sometime now and what I have seen usually is get the bad feeling about India.

I believe in saying that you can be happy only when you are contempt as there is never an end for desire for more. having said that I am not voting that everything in India is bad or good. We should also look at the people's life in each of these countries when we are comparing the some huge numbers on terms of GDP which I can never relate to my daily living. If your article can focus in giving such insights then it would be great for every Indian who can most out of it.

Example when comparing about health care,
I am currently in US with Family and vising US for almost 8 years now. Getting Medical help is very easy, accessible and cheap in India compare to that here in US. It just take at least 2 weeks to get an appointment for the doctor no matter if its for Kid or Adult. If you go for emergency you have to pay more than what you could even think of paying.

So such way if you compare then our Indian brothers and sisters would get right information from article if you include such insights. I think we all should strive for showing people ways to be happy and not be in tensed.



Dec 29, 2010

Do you really think it will ever happen? After our dear MMS has shown what it takes to corrupt a so called honest person to change his definition of honesty!
A real, true Indian will never be able to afford anything let alone quality health care.


Om Prakash Sharma

Dec 29, 2010

Dear Sir
I really appreciate your comment on China. I joined IAF in 1963 when China took advantage of the good intentions of our reverred PM Mr Nehru in 1962.It is still continuing with its Agenda. Any country believing China will suffer. US is suffering for the Actions of Mr. Nixon going overboard for friendship with it.


Nanda Kishore Biswal

Dec 29, 2010

Give ideas about profitable investment.


JS Pandher

Dec 29, 2010

There is no hope from private hospitals n practitioners since they are there no make money.

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