»5 Minute Wrap Up by Equitymaster

On This Day - 11 MARCH 2011
A commodity that is a better indicator than gold...

In this issue:
» First US based ETF to be launched in India soon
» Big companies more optimistic than the small ones: RBI
» PM's group thinks popular dugs are a waste of money
» Inflation strikes Asia at its core
» and more!

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A colossal battery of economists and analysts across the globe put in hours every single day fussing over loads of data and charts. What they all try to do is to figure out the best way to predict the future of the global economy. And they often err.

For once leave them aside and instead and try listening to these two metals: gold and copper. If you heard carefully, they say a lot about the health of the economy. Of course, they both have their own areas of specialty. Gold prices usually gives a prompt diagnosis of monetary disorders and government failures. On the other hand, copper prices are a good barometer of industrial health.

The reason for the same is simple. Copper is widely used in the manufacturing of goods ranging from autos and plumbing pipes to semiconductors and telecom and cable wiring. Hence, a sharp dip in copper prices could mean a slip in industrial demand. Two years ago, when worldwide growth picked up after the crisis, copper had led the rally. And what is happening at the moment? After reaching the peak in mid-February, copper prices have fallen by almost 10%. And guess what? The recently announced US economic data is not really encouraging. And it is not just the US. Surprisingly, China has reported a trade deficit for the month of February. Certainly, this is largely attributable to the Chinese New Year slowdown. However, there are other signs of slowing demand in China as central bankers are nervously trying to combat the rising inflation.

Of course, one should not take metals prices blindly. They cannot be foolproof indicators all the time. There are times when they go to extreme ends. Nonetheless, they can at times predict what humans cannot. Copper especially can be a better indicator than gold because of its early warning signals as compared to the latter.

Do you think metals prices are good indicators of economic health? Share your comments with us or post your views on our facebook page.

 Chart of the day
Popular magazine Fortune has revealed the latest list of billionaires as at end of 2010. Interestingly, BRICs (Brazil, Russia, India and China) collectively have more individuals in the billion dollar club than the entire Europe. And with a tally of 308 individuals, the BRICs are fast closing in on US, which has a tally of 413 as of now. The more interesting part is that in this year, BRICs have added 108 people to the count, which makes it the highest net addition to the billionaire tally. The US and Europe have been hit more severely by the global financial crisis as compared to the BRICs. And this has translated to the erosion of wealth in their hands but an increase in wealth in the hands of the BRICs.

Data source: Fortune 500

Do you swear by Google or Yahoo for your online search needs? Do you use Microsoft Windows in office every day? Is an Apple iPod constantly plugged to your ears? Well, you could soon have these companies as part of your equity portfolio as well. Motilal Oswal's Mutual Fund plans to launch India's first US-equity based ETF. This fund will track the Nasdaq-100 index. The index consists of a hundred of the largest (by market cap) non-financial companies. They generate over 60% of their revenues from USA, Canada, Latin America and South America. Now, Indian investors can diversify into their favorite US equities. But, does this make sense?

Well, Indian stock indices have higher allocation to sectors including financial services, energy, capital goods, utilities etc. The Nasdaq-100 on the other hand is weighted towards pharma, media, retail, technology software and hardware space. As you can tell, profits of these companies are more driven by innovation and automation. So the correlation between the two indices may not be too high. But, one needs to keep in mind that economic growth is still mainly coming from emerging markets. Plus, since the Nasdaq-100 consists of a number of tech companies, constant R&D, and the ability to adapt quickly to changes are the key. Either way, geographic diversification does help reduce portfolio risks.

The RBI recently released the results of its Quarterly Industrial Outlook Survey (for Oct-Dec 2010 quarter). And these suggest that big Indian companies are more optimistic about their business and financial situations than the smaller ones. The reasons for the optimism of bigger companies are improved order book, and return of pricing power.

Another interesting outcome of the survey was that a majority of companies see their profit margins remaining under pressure in the coming quarters. This is largely expected on the back of continued surge in commodity prices. However the good part is that the extent of pessimism has declined compared to preceding quarter.

Some of the most popular drugs consumed in India have been labeled 'a waste of money by the government. These would include Combiflam, Digene, Becosule, Corex, Phensedyl and Liv 52, which garnered cumulative sales of around Rs 5.8 bn. We are not sure as to the premise on which this conclusion has been reached. But it seems that the government believes these medicines to be a waste because of the money that Indians have to shell out of their own pocket for the same. This then brings to fore the larger issue of spending on healthcare. The government would do a lot of good to the public if its steps up public expenditure on healthcare. So far, efforts on this front have left a lot to be desired. And so the burden of providing quality healthcare has fallen on private companies. The government intends to up the level of public spending on health to a minimum of 4% of GDP by 2017. While this is a step in the right direction, execution is what the government will have to seriously focus on.

Higher food prices, steep rise in oil costs and to top it all escalating interest rates. These have toned down the growth stories in Asia over the past few months. Inflation has been a well known demon in the emerging economies here. But it seems that one of the biggest blows could come by way of wage hikes. Despite housing two of the world's most populous economies, the Asian region is expected to witness historic rise in wage rates. The issue of wage hikes in China is already well documented. But others like India and Singapore are also getting adversely affected. An article in the Wall street Journal opines that inflation has hit Asian economies at their core. While we do not completely disagree with this, we believe that there is no reason why the issues cannot be ironed out. Better storage of food crops, training of workforce to make them more employable and reducing dependence on imported commodities may be very long term solutions. But these are the very methods that could help Asian economies emerge on the top.

We came across a very interesting story carried by a leading daily that states that the 'real income for the average salaried Indian has declined for the first time in five years'. The daily went on to describe that this would threaten India's consumption led growth story. The real income growth is basically the actual growth in income minus the inflation rate. Inflation has been spiraling over the past year. And the growth in salaries was lower than the increase in inflation. This resulted in the decline in real salary income. So what does it mean? Does this mean that people will start to consume less? If this were to be true then the entire consumption led story of India would crumble for sure. This is because the salaried class people are the ones in the population pyramid who actually drive consumption. So if they do start to consume less, then overall consumption would decline. But we do not think this would happen. Yes the dynamics of consumption change in the short term as people start allocating more towards the necessities and less towards discretionary. But in the long run, this normalizes. So true that the real salary income may have declined. But this would not be as big a threat to the long term growth story of India as it is made out to be.

In the meanwhile, the Indian stock markets continue to slide. At the time of writing, India's benchmark Index BSE Sensex is trading lower by around 245 points and inching closer towards the day's low. Stocks from metals and technology space continue to extend losses. All stock indices are trading below the dotted line. The Asian stock markets have closed deep in the red. The massive earthquake and resultant tsunami in Japan have sent panic waves across most markets. Even the European stock markets have opened lower.

 Today's investing mantra
"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid." - Warren Buffett

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