»5 Minute Wrap Up by Equitymaster

On This Day - 21 JANUARY 2010
Has Warren Buffett got it completely wrong?

In this issue:
» Warren Buffett's perplexing act
» What do Indian fund managers think of the Sensex in 2010?
» Auto companies to hike their R&D spends
» Bond yields all set to rise in the US
» ...and more!!

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Regular readers of this column are perhaps well aware of our admiration for Warren Buffett. It is also a fact that we are not big fans of the current US Fed Chairman Ben Bernanke. Thus, we were left puzzled when Buffett became quite generous in his praise for Bernanke in a recent interview. It is not that Buffett has not praised Bernanke before. But this one surely took the cake.

This is what Buffett said of Bernanke, "He did a magnificent job over this period, when I look back at September, October 2008, he took action. Maybe he extended his authority, but he did what he should have done in response to the economic Pearl Harbor."

We disagree. We believe all that the US Fed has done is just paper over the problems. It has tried to solve a problem of excessive money supply and leverage with still more money supply. Currently, injecting more money is looking like a great step what with asset prices enjoying a great deal of recovery. But we believe that we have set ourselves up for an even bigger blow up in the future.

So, what explains Buffett's fascination with Bernanke? Maybe self-interest? His net worth is so inextricably linked to the fortunes of the US economy that he is forced to take Bernanke's side. Alternatively, it could also be due to his affinity for an entirely different school of economics. Whatever be the reason, for once, we tend to disagree with Warren Buffett.Do you think Buffett is right in his assessment of Ben Bernanke? Please share your views with us.

The Indian stock market outlook for 2010 is locked. The intelligentsia has given its verdict. If you are looking to invest in stock markets from a one year perspective, expect your returns to be in the region of 10%-20%. No, we are not saying it. This conclusion was drawn from a survey among India's top fund managers who manage a whopping Rs 1.7 trillion collectively between them. The survey that was published in one of India's leading dailies has fund managers believing that insurance money could be a big driver during the next stage of rally and the same could help the Sensex move in a narrow band in 2010 with an upward target of 18,000 on the Sensex.

We would however refrain from giving such exact numbers. But even we would want to side with the majority of the fund managers in the survey. Our research is not throwing up as many fundamentally good stories available at attractive valuations as it used to do say about a year back.

 Chart of the day
Taking the finding of the survey forward, today's chart of the day also tries to depict something along similar lines. The chart shows the yearly returns for the stock market index for emerging markets since 1994. It clearly highlights that whenever the index has tended to rise in the region of 45%-50% in any particular year, the return for the next year has been far less and has even gone into the negative. The index returned 63% in 2009 and thus if history is any indication, the returns for the current year i.e. 2010 are likely to be far less than 2009. Some sort of vindication for the fund managers in the survey we should say.

Source: Morgan Stanley

The impact of economic stimulus is being seen nowhere better than China. The dragon nation has just recorded the quickest pace of economic growth since 2007 in the fourth quarter of 2009. Its GDP grew by 10.7% during the quarter.

Data Source: IMF, Bloomberg report

In normal times, such a growth will bring cheer for any country's policymakers. But if times are bad and if such a growth is built upon nothing but cheap money, it's a fearful feeling. Such strong growth in fact must add to the pressure on Chinese central bankers to rein in surging credit. Otherwise, it threatens to destabilize the world's fastest-growing major economy. And with it the entire global economy.

Keep aside stocks, real estate and gold. This time the speculation about bubble-like symptoms is being associated to the bond markets as well. Typically known to be a haven for risk-averse investors, even the bond markets are no more the place to be for the long term. This is particularly in reference to the US bond markets. With budget deficit hovering at 10% of GDP, the treasury yield curve is showing record steepness. The biggest bond fund manager in the US, Mr Bill Gross believes that US Treasury bond yields could go above 4%. The same would mean correction in bond prices. At the same time, with short term interest rates at 0.5%, investors would have to wait for 1,000 years for their money to double. Indeed a difficult situation for investors looking for safe and reasonable returns. No wonder emerging markets are luring them in hoards.

Rising inflation has cropped up as a serious concern; one that the Indian government will have to address on an urgent basis. And the first chief statistician of India Pronab Sen seconds this view in an interview with Mint. Sen is of the opinion that given the poor monsoons and the subsequent adverse impact on food production, prices were bound to rise. Further, the devaluation of the rupee meant that imports would also be expensive. But he has pointed out two interesting facts. One is that there does not seem to be a vociferous protest against inflation. Does that then mean that nominal income has risen so much that the price rise is not hitting hard as it would have otherwise? The second point to be noted is that inflation has manifested itself strongly in retail prices but not as much as in wholesale prices. The other worrying factor is that signs of inflation are beginning to appear in non food items as well. Indeed, it will be interesting to see how the government chooses to tackle this problem in the months ahead particularly when it does not want to compromise India's GDP growth.

As per a leading business daily, Indian automakers are expected to increase their expenditure on Research and Development (R&D) by 25% to 30%. The move is expected on the back of fierce competition from global auto giants. They are keen on India, which is among the most promising auto markets. In fact, they have designed compact cars specifically for the Indian market. Toyota's Etios, Volkswagen's Polo, General Motors' Beat and Ford's Figo are prominent examples.

It may be noted that the international giants have much higher R&D expenses as a percentage of sales than their Indian counterparts. As a result, barring Tata Motors' Nano, few Indian models have managed to grab headlines. However, Maruti Suzuki will soon launch its first fully India configured small car. In our view, advertising and R&D are examples of the expenses that actually aren't. Actually, they are more like assets. In fact in many cases, they hold the key to the competitive advantage of companies. Even nations. Hence, it is not surprising that India's and China's total R&D spending as a percentage of GDP is at 0.8% and 1%. Compare that to 2.7% and 3.3% for the US and Japan and that too on a higher GDP base of these two countries.

Meanwhile, key market indices plunged in the afternoon session today, reportedly on the back of both global as well as domestic economic concerns. At the time of writing, BSE-Sensex was down about 380 points whereas NSE-Nifty was trading lower by around 110 points. Weakness in engineering and power heavyweights were weighing heavy on the indices. While Asian markets closed mixed today, European markets have opened the day on a strong note.

 Today's investing mantra
"I don't want a lot of good investments; I want a few outstanding ones." - Philip Fisher

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