|»5 Minute Wrap Up by Equitymaster|
On This Day - 23 MARCH 2010
'We are advising our clients to buy India long-term'
In this issue:
As Bill further notes, there is no difference between what a labourer does in US and what he does in India. Yet, the same person earns many times more there than here. The only reason the person in the US has an advantage is because countries like US and UK got a headstart over India. They benefited from the industrial revolution and hence built up a huge capital base. However, now the advantage is eroding and wage differentials are getting corrected. Thus, over the next few years, while real wages in developed countries could come down, those in emerging nations like India would go up and so would overall prosperity. Hence, India does like a very good long term bet to Bonner.
Hmm, a unique perspective you would say. However, this was not the only one. Bonner went to great lengths to simplify concepts like quantitative easing and velocity of money and really made those present in the summit see some light.
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This is an extremely rare occurrence in the history of bond markets. It is a telling indicator of the toll the financial crisis has taken on the world's premier economy. The US government is currently struggling to control its mounting funding gap (fiscal deficit) even as it needs to keep its stimulus package in place. So at least for the time being, lending to Warren Buffett is safer than lending to Uncle Sam.
To handle this, and to make their shares more 'affordable' for small investors, numerous companies are now announcing stock-splits. For example, some are splitting their one Rs 10 face value share to five shares of Rs 2 face value each (5:1 spilt). The impact on the stock's price is similar. A 5:1 split would bring a share's price down from say Rs 100 to Rs 20.
So that's now an affordable price. Right? Wrong!
While it is right that a post-split price would let you buy more shares with the same amount of money, it does nothing to the underlying value of the business. This is because, as the stock price get's divided by 5 (as per the above example), so does its earnings per share and book value per share. So the stock remains as expensive or as cheap after a stock-spilt as it was before one. As such, if someone entices you to buy 'that' stock as it has come down in price due to a stock-spilt, you know what to tell him.
Not surprisingly, the unanimous view was that the central bank is not done with tweaking the borrowing rates. Although bankers are of the view that liquidity scenario is comfortable and rates are nowhere near their historical highs, the RBI had so far been reluctant to pull the trigger. However, the recent unexpected tightening suggests that the central bank is no more comfortable with the price levels. Economists therefore believe that the upcoming monetary policy review will have some more indicators. It goes without saying that investors need to once again get wary of companies with high debt levels.
As per a Business Standard report, there are also other preferences in the Bill for domestic companies in the US, which will again cause impediments for Indian pharma companies. Nonetheless, considering that the overall objective of the Bill is to lower health care costs, all low-cost generics manufacturers, which includes Indian companies, should benefit over the longer term. For now, 'wait and watch' seems to be the buzzword.
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