»5 Minute Wrap Up by Equitymaster

On This Day - 28 JANUARY 2012
The most irresponsible statement on gold by a CEO?

In this issue:
» Facebook may file for an IPO soon
» China's suspicious looking economic data
» Caterpillar's rosy forecast for 2012
» The thing that could take India's GDP to higher levels
» ...and more


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00:00
 
No asset class is perhaps as misunderstood as gold these days. And this ignorance is not just a hallmark of the common man on the street but even the most elite we believe. Take this CEO of a new-age Indian bank for example. He could easily pass off as the most erudite amongst the modern day CEOs in the country. However, his very recent comment on gold has not gone down well with us. In fact, we are of the view that he has made what could be called as a hugely irresponsible statement.

Apparently, the CEO in question has expressed concern over huge amounts of productive savings moving into unproductive avenues such as gold. "Can India afford the luxury of such a huge part of our discretionary savings going out of productive use?", he is believed to have said.

Indeed, gold's so called unproductive property has become the favourite stick of gold critics to beat the gold supporters with. But this logic does sound a bit hollow to us. Gold is an asset and just like any other asset class, is a medium used by people to park their savings. It is certainly not the case that a person who earlier used to save 30% of his income would now start saving 50% of it if he invests in gold. The proportion of income that will be saved will remain the same before gold investing as after it. So, how does it matter if he invests the same in gold or any other asset class such as stocks or real estate? And tomorrow, if the person needs to dip into his savings to meet some unexpected expenditure, he will certainly come to the market and sell his gold holdings. And this saving and spending pattern of his will remain the same regardless of the asset class that he invests in. Does this make gold unproductive and dissimilar to other assets? We certainly don't think so.

May be the CEO knows something that we don't? But as far as we are concerned there is nothing wrong in gold being part of one's savings. Infact, the fact that gold is still so misunderstood by even the most well read people is the reason one should buy more of it as it shows that the gold bull run still has a long way to go. Having said that, gold should be reasonable part of one's long term portfolio and one should not go overboard. No matter how good the outlook.

Do you think the bank's CEO is wrong about gold? Share your views with us or you can also comment on our Facebook page / Google+ page.

01:23
 Chart of the day
 
There's bad news for investors in India. As per The Economist, if a fresh crisis were to strike the global economy in the near future, India has the least monetary and fiscal flexibility amongst all the BRIC nations to weather the storm. In contrast, as today's chart of the day shows, China still has a lot of room left to make up for the slackening of its economy in the event of a crisis. In other words, China's GDP could suffer a lot less than India's GDP in the near term.

Source: The Economist

01:51
 
While The Economist seems all gung ho about China, other publications do not seem as optimistic. Infact, they have started to question the authenticity of the growth that is taking place in China currently. Because although the Chinese GDP growth rate is healthy, other economic indicators point out to a much poorer picture meaning that there is a big disconnect between the two.

Let's look at some of these indicators. China's imports from Japan have declined by 16.2% in December. The Shanghai Container Freight Index and the Baltic Dry Index has seen a substantial fall in freight rates, the latter especially on account of a weak Chinese demand for iron ore. Chinese electricity use has dipped from a YoY growth rate of 8.9% in September to 7.7% in December. Also, residential investment has been contracting. So the only factor that explains the high GDP growth is too much credit. This has gone beyond the limits of safety; an increase of 100% of GDP in five years, or twice US credit growth from 2002-2007 and will not be sustainable beyond a point.

Also, the notion that China's high savings rate and low consumption will come to its rescue is a false one. China's consumption rate is low because wages are low as the economy has focused so much on investment that a distortion has been created. Indeed, this then proves that GDP numbers emanating from the country have to be looked hard at and taken with a pinch of salt.

02:38
 
The much awaited event in the world of IPOs (Initial Public Offers) is finally just round the corner. We are referring to the IPO of the popular social networking site Facebook. The company plans to file for its offer sometime next week. The IPO is estimated to be anywhere between US$ 75 bn to US$ 100 bn. It had revenues to the tune of US$ 4 bn in 2011. This means that the company would try and look at a valuation of nearly 25 times its revenues. If it actually manages to get the valuations it seeks, it would be one of the highest premium IPOs. However, the question would still haunt the minds of all value investors. Does any company that does not have a long track record of delivering superior results deserve such high valuations? Is it just another phase like the dotcom bubble wherein all popular sites get ridiculously high valuations just because they are in the field of social networking? Isn't it also equally important to be profitable and value accretive?

03:11
 
The biggest hurdle facing the India growth story can be summed up in one word 'land'. Given that agricultural productivity is low in India, one can presume that the returns to agriculture are quite low. Therefore, land should be used where there are higher returns. This view was also echoed by the ITC Ltd chairman at the World Economic Forum (WEF) in Davos. The company has lined up investments worth Rs 250 bn for India but is unable to execute it. The reason is land and unless India raises agricultural productivity and releases surplus land for industrial use, there is going to be a major problem. So if India wants to achieve a consistent growth rate of 8% to 9%, it must address the problem of land acquisition and find new and innovative ways to increase agricultural productivity very quickly.

03:37
 
Many of the world's largest manufacturers source equipments from Caterpillar, the global capital goods giant. As such, it would be worth perusing through its 2012 guidance and the outlook for the global economy. For instance, it expects rising global demand to push commodity prices higher. Surprisingly, the company has painted quite a rosy picture for the developed markets. It says that businesses in the developed economies will continue to invest heavily in capital equipment. It expects the US housing market to recover and it expects improvement in the Eurozone in the latter half of 2012. And while many economists and analysts the world over are fearing a real estate bubble bust in China, Caterpillar expects the construction growth to be strong in the dragon economy.

Though we appreciate Caterpillar's optimistic spirit, their global outlook for 2012 seems more like a wishlist. On second thoughts it isn't so surprising. We often tend to view the world in a way that would serve our own purpose. Many a big financial and economic disasters could have been averted if only people learnt to see things as they were instead of seeing just what they want to see.

04:13
 
Meanwhile, the world stock markets were a mixed bag of positive and unfavorable news during the week. There was optimism in Europe on the possibility of Greece's debt swap deal with its private creditors. However, the US GDP grew at an annualized rate of 2.8% last year but still fell short of the economists' expectations. This could mean that the US needs more help from the Federal Reserve.

The Indian stock markets were up by 3% during the week. This was largely due to the CRR cut by the central bank during the week. The investors are hopeful that this rate cut would help revive the Indian economy. Also, encouraging results by a few corporates despite the gloomy economic scenario helped the markets register gains for the fourth straight week. Amongst the other world markets, all ended the week in the green except for France (down by 0.1%) and US (down by 0.5%).

Data Source: yahoo finance, kitco, CNNfn

04:50
 Weekend Investing Mantra
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffett

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