»5 Minute Wrap Up by Equitymaster

On This Day - 6 JANUARY 2010
When can India break this 2% barrier?

In this issue:
» 40% odds of double dip recession
» Gold could continue to fetch attractive returns
» China may trump India in the commodities game
» Berkshire Hathaway had a rough 2009
» ...and more!!

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 Chart of the day
Economic performance must reflect in stock prices, or so they say. But that was not the case nearly at the start of the previous decade. India's total market cap, for instance, lagged its economic might by a big margin. The gap has however been filled by the stock market rally of the past few years. India's current share of global market cap seems much more aligned with the economy's current share of total world GDP.

Even if we take the case of countries like the US and China, their share of market caps have also got aligned to their share of global GDP over the last six years. As we stand now, for both the US and India, share of global market cap stands well above their respective share of global GDP. However, in case of China, stock valuations continue to remain at a discount to the country's GDP share. This anomaly can be explained by the higher profitability of the US and Indian companies as compared to their Chinese counterparts.

Data source: Mint
Note: Country market caps are representative of their benchmark indices

Nonetheless, that does not justify the premiums enjoyed by Indian and US companies over their economic might for long. As seen in the case of the US, the premium in stock valuation over GDP has corrected since 2003. This was as companies in emerging markets became larger and more profitable. It was also due to US' share of global consumption, trade and GDP shrinking.

India currently has just about 2% share of global trade, consumption and GDP. For Indian stockmarkets to have a higher share of global market cap in the future, we believe that the economy needs to move beyond 2% on all these other parameters as well.

Stephen Roach, one of the world's leading economists believes that the US monetary stimulus should be withdrawn sooner than later. In an interview to a business channel, Roach opined that if the concerned authorities wait for too long to withdraw the stimulus then the world economy could see the emergence of few more asset bubbles and consequently, the bursting of them once the stimulus is withdrawn.

He also observed that while the worst could be behind us, the global economy is still very vulnerable and assigned a probability of as high as 40% for a double dip recession. The vulnerability, he believes, is because of the fact that the banking sector, especially in the US has not yet accounted for the drop in value of assets on their balance sheets. Also, as per Roach, the US consumer, the driver of the global economy, has pulled back big time on his spending and this is the primary reason why global economic growth could be impacted for quite some time to come.

So you made some good money investing in gold over the past year! No? Do not despair as you still have the opportunity to earn some good returns from the yellow metal over the next few years. With central banks printing money like never before, the lure for the yellow metal is only going to rise in the future. Who knows it better than China - the country of all things big the world has seen over the past decade.

Now, China is gearing itself to enter big time into gold buying in the current year. The country is, in fact, expected to buy around 440 tonnes of the yellow metal during this year. This would be around 30% higher than the demand expected to emerge from India, long considered as the biggest consumer of gold in the world. But not anymore!

Fears are rife that sugar will touch the Rs 50 per kg mark soon. The commodity's wholesale prices have touched a record high of Rs 4,250 per 100 kg in the Delhi wholesale market off late. This is on expectations of higher demand in the coming months, as also a lower January sugar release by the government. As per reports, the government has maintained that prices are moving up in reaction to high international prices. However, this could also have a collateral effect on the prices of related products like biscuits, cold drinks, confectionery, chocolates and other processed foods that use the commodity. With food inflation already at such high levels, a further rise in sugar prices could further exert pressure on the same. More so, considering that sugar is widely used as an input in a whole host of food and non food products.

China and India are the two fastest growing economies of the world. That means a huge population base that is trying to increase its standard of living. That in turn means there is a huge appetite for all basic commodities - energy, metals, agricultural commodities. The demand is so huge that it cannot be met from domestic sources. As a result, we find China and India hunting for commodities all around the world. Often leading to face offs. So far, China has been more proactive. Be it Myanmar or Africa. China has deeper pockets and greater political flexibility. It also began early. For example, it has offered billions of dollars of cheap loans, infrastructure support and even military aid to African nations. All with an eye on the massive high quality reserves present there. India is playing catch up. Indian oil & gas companies such as ONGC, Reliance Industries and Indian Oil are now present in Sudan, Ivory Coast, Libya, Egypt, Nigeria and Gabon. But the billion dollar question remains - will India be able to match China in the great commodities stake? From all indications, we believe it won't.

The subprime crisis has had a crippling impact on banks and financial institutions in the US. So much so that the former Fed Chairman Paul Volcker has been increasingly advocating the separation of commercial banking and investment banking. Volcker drives home the point that the core of the financial system remains commercial banking. Therefore, if that breaks down then you have a major crisis on your hands. Further, he believes that commercial banks have expanded into capital market activities which are not so central. According to him, capital markets should be left to their own devices. Infact they should not expect any government protection. However, the existing safety net should be kept for the commercial banking system. He also believes that US needs to restore its manufacturing industry. The sector has been impacted due to Wall Street luring away talent by promising big bonuses. We believe that Volcker's stance certainly carries a lot of weight. Whether the US government thinks so is a different matter altogether.

The extent of the stock market recovery in 2009 was truly remarkable. Stocks across geographies made an amazing turnaround. The stock of Warren Buffett's Berkshire Hathaway has beaten the stock markets in 15 out of the last 22 years. Not in 2009 though. Berkshire advanced 2.7% during the year as opposed to the 23% rise in the Standard & Poor's 500 Index. The last time the broader indices beat Berkshire was in 1999, when the former gained 20% while the latter fell by 20%. In our view, Buffett's performance this year can be attributed to two facts. Firstly, he manages an enormous capital base which cannot match the returns of his earlier years. Secondly, as he himself admits he didn't not make use of the market crash to the fullest extent.

Meanwhile, Indian markets witnessed a volatile trading session today after a positive start. The BSE-Sensex was down nearly 16 points at the time of writing. Profit booking in stocks from the commodity and IT sectors led the weakness in the benchmark indices. Amongst global indices, while the Indian and Indonesian indices were the only losers in Asia, Europe has also opened in the negative.

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 Today's investing mantra
"When reward is at its pinnacle, risk is near at hand." - John Bogle

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