The curse that could strike markets in 2011

Dec 30, 2010

In this issue:
» An investment idea from China
» Difficult to dislodge dollar from reserve currency status
» India Inc better brace up for more competition
» India's ambitious green energy plans
» ...and more!!

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When searched on Wikipedia, the word curse returns the following definition: "A wish that harm or hurt will be inflicted by any supernatural powers, such as spell, a prayer, magic..."

The reason one is able to decode a curse from a random mishap is because curse seems to follow a certain pattern. As per the legend, a curse will keep striking at the same place or to the same members of a clan. Or maybe even repeat itself after every few years with amazing precision. Armed with this definition, a conclusion can indeed be drawn that some sort of curse has gripped the financial markets as well. There are perhaps no other means to explain the constant regularity with which some or the other crisis that keep happening in global financial markets. The table laid out below will make things sufficiently clear.

Year Crisis
1982 Oil and gas bust
1987 Stock market crash
1991-92 Savings & Loan crisis
1994 Bond Market Debacle
1997 Asian Crisis
1998 Long Term Capital Management/Russian Default
2001-02 Corporate Credit Crisis
2007-08 Sub prime crisis
2011-12 ??
Source: Equitymaster, Harch Capital Management LLC

Dig a little deeper though and one would realize that there are no supernatural powers or magic behind the frequent crises in financial markets. These, we believe, are nothing but the handiwork of misguided theories of central bankers and the power hungry politicians. These people resort to printing money and also rake up debt and hence, give the impression that the economic prosperity is for real. However, when the money printing stops and its bluff is called by inflation, boom turns into a bust and the whole cycle is played out again. Since the common man cannot be fooled twice, only the sectors that the crisis affects keep changing. The modus operandi however, remains the same.

As the table shows, we could just be entering dangerous territory again. As per the pattern, the next crisis could well be due in 2011-12. We may not want to predict the timing for the same. However, we are quite certain that crises will keep happening with constant regularity in the future as well. They just cannot be avoided. But an equity investor can certainly come out of it with minimum damage. This can be done by not overpaying for a stock, no matter how good the growth prospects and ensuring that the growth in earnings is not fuelled by too much debt. Follow these golden rules and we are quite certain that no financial market curse will be able to inflict considerable damage on your wealth.

 Chart of the day
Another one on the year 2011. This time around, it is the list of countries that are expected to grow the fastest in 2011. India and China, of course, are the usual suspects. But there are some surprise entries. None more so than the country at the top position. Ghana could well be the harbinger of change that is likely to sweep African continent in the coming decade. While India and China could continue to grow strongly, do not be surprised to find more African nations on the list as the conditions seem to be ripe for the continent to grow rapidly in the future.


It seems the US dollar will keep its reserve status in 2011. Not for its own merits. But because there is no credible alternative to the greenback. Investors held 62.1% of reserve assets in dollars as of June 30, according to the IMF. The figure has fallen from 72.7% in 2001. The next-largest holdings are in euros, comprising 26.5%. But Europe isn't even close to taking up the lead, given its financial woes. The yuan could have been a plausible candidate for reserve-currency status. Especially, given the size and the rapid growth rate of the Chinese economy as also the country's big role in world trade. But China's bond markets are still immature. And given the government's control over its currency and the economy in general, global money may not find yuan a very safe bet. Even IMF's Special Drawing Rights- an artificial basket currency, which was created back in 1969 as an alternative to the dollar, has never played a major role. But this is no reason for the US Fed to congratulate itself. The troubles for the dollar remain intact.

Indian companies so far had been relying on its superior cost advantage to establish a presence in the global arena. But this scenario is gradually changing. Multinational companies sensing the huge opportunity in India are making a beeline for Indian shores. This means that competition is all set to heat up (if it has not done so already). Thus, relying only on the cost advantage will no longer prove fruitful to India Inc. Infact, because of the shortage of skilled labour, wage hikes will only increase. And domestic companies will have to vie with multinationals to lap up this talent. This means higher salaries and consequently higher pressure on margins.

One way for India Inc. to counteract this trend is through constant focus on innovation. Moving up the value chain and laying emphasis on new products and value added services will ensure that market share remains intact. On the other hand, it will also enhance profit margins. But this seems easier said than done. Innovation means companies will have to up the ante as far as R&D spending is concerned. This could then hurt profitability especially in an environment of rising input costs. What this essentially means is that Indian companies can no longer breathe easy. India is growing at such a robust pace and its appeal has been heightened in the eyes of MNCs. Thus, Indian companies will have to ensure that they retain their competitive edge.

Going green seems to have taken on a whole new meaning. A four-fold increase in renewable power generation capacity in India is in the offing. The government recently called for an extremely ambitious plan to increase capacity from the current 17 GW (giga watt) to 72.4 GW by 2022. This works out to 55 GW to be added over the next 12 years. Currently, 2.2 GW (1000 MW = 1GW) is added every year in India. With these new goals, double of this will need to be added yearly. China on the other hand expects to add 500 GW in renewable energy in the next ten years. But at least, we are taking a step in the right direction. If our targets are achieved, clean energy capacity will rise to 16% of the total peak power generation capacity from 11% currently. This capacity addition will in turn contribute 6.4% to the total energy output.

According to IEA, India is projected to be the second biggest contributor to the increase in global energy demand by 2035. Energy consumption is expected to more than double by then. Fossil fuel supplies are expected to dwindle. Serious climate change concerns are all over the news. Thus, switching to renewable energy sources is definitely a step in the right direction. And having an ambitious plan in place is the first step. Kudos to the ministry for this one. This plan definitely deserves the green signal.

Here is an investing idea from China. The Chinese tourism industry had been lagging the other sectors since the past decade. Until now, the main focus for Chinese households had been to build assets. We therefore saw strong growth in home and auto purchases. But now that this demand has been sated, the focus is shifting to travel. As per a Deutsche Bank report, tourism will boom in China in the coming years. The bank expects the tourism industry to grow by 20% on an average per annum for the next five years.

So how does this help us? Although India is lagging behind China in infrastructure, we are seeing the same urgency for building household assets. We believe that once this need is sated Indians will act the same way as their Chinese neighbours. In fact we are already we are seeing the effects of this trend. In the coming years we believe the beneficiaries of this boom will be hotels, airlines and retailers.

Meanwhile, Indian markets appeared volatile today but with the same being limited to a narrow range. The BSE-Sensex was trading higher by around 60 points at the time of writing. Banking and IT heavyweights were seen contributing the most to the strength. Asian markets closed strong today whereas Europe has also opened on a positive note.

 Today's investing mantra
"Mimicking the herd invites regression to the mean." - Charlie Munger

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3 Responses to "The curse that could strike markets in 2011"

Daniel Menezes

Jan 15, 2011

“The common man cannot be fooled twice” in this article is completely wrong. All the time only the common man is being fooled. But, trap will be unique and luring. So every time the common man will have new experience several times and life long.



Dec 30, 2010

i think curreption level should be brought to such level it will not harm nation interest/wgive a push reverse brain drein/give amadmi confidence they are resenebly compenteted/true invourmental/not politacalily managed,reports are presented to indians,so as to go ahead with different power projects,which aptly needed for our progress/hast to be pushed with or without developed nation,such as develop plutenium mining priority to help atomic power schemes/self suficiancy in ore ,tks,jai hind


R. Balakrishnan

Dec 30, 2010

I understand that in China most of the cabinet ministers are Engineers. India can also try to follow this. Insisting the coalition parties to nominate engineer / learned professional (rather than their kins / relatives) for ministership allotted to their parties. This shall help to bring in professionalism and discipline to planning and execution.

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