|»5 Minute Wrap Up by Equitymaster|
On This Day - 30 MARCH 2011
Cheap money may not find its way into Indian stocks
In this issue:
Trading on the exchange has been suspended.
Television anchors -- the cheerleaders for the rally thus far -- are looking as though they have seen a ghost.
But here's what matters the most- "How have YOU been impacted by the crash?"
If you want to be one among the very few who are geared up for any adversity, then, you need to see this right away!
Hurry... This opportunity will soon disappear forever!
It is not that we are the pioneers of this theory. The central bankers in most emerging economies have been crying hoarse over the futility of cheap forex inflows over a long time. Some have been very proactive in taxing unnecessary inflows from the start. But it seems that our very own RBI is seeing red with the problem only now. The central bank has denied the need for capital controls at more than one occasion in the past. However, the RBI governor has recently advocated such a measure to avert currency risks. What it means is that if the Fed decides to follow up QEII with QEIII, QEIV and so on, it is unlikely that a lot of it will find its way into Indian stocks. Chances are that stocks that were finding favour purely due to excess liquidity will revert back to their fair valuations. Thus liquidity driven bull markets are certainly not here for long. Investors would therefore do well to ensure that their portfolios are based on fundamentally driven stories and not near term speculations.
Of course, a decade long track record cannot be judged on the basis of a couple of months alone. But fundamentals too point towards a rosy picture for silver than gold. Historically, gold to silver price ratio has averaged around 30. Currently though the ratio is 38. Thus, silver will have to rise lot more than gold to bring the ratio more in line with the historical trend. This is not all. While silver like gold can be used as a hedge against inflation, the white metal also has many more industrial applications than the yellow metal. Hence, if economy improves further, silver prices can receive even more impetus. All in all, it does look as if silver investors will continue to have an edge over gold investors in the near to medium term. Longer term though, we prefer gold over silver as we believe the former to be a better insurance policy against any unforeseen economic risk.
If you recall, the Indian government had deregulated petrol prices in June last year. But it had desisted from doing the same with diesel prices. The government has now indicated that diesel prices too could be partially deregulated in the coming fiscal if inflation dropped down to 6%. The government is planning to limit diesel subsidy at a pre-fixed level. It would then allow oil retailers to raise diesel prices if the subsidy does not suffice.
This will definitely be a move in the right direction. However, the total subsidy bill for fuel could still rise above the budget estimate if high oil prices prevail.
The year 2010 saw a bumper harvest of cotton. Yet the cotton prices remained very high as India decided to export 5.5 m bales of cotton to China, which was suffering from a shortage due to the floods in the country. And the reason the government decided to do so was because they 'miscalculated' the cotton production. And 'assumed' that the area under cultivation would increase the next year due to the higher prices.
Unfortunately, the government was wrong on both counts. The domestic demand for cotton was high. As a result the cotton production was not enough to take care of both the domestic needs as well as the export needs. And more so, the area under cultivation cannot be increased as there is a shortage in terms of the seeds. Thanks to the government's mistake the domestic textile industry would continue to see higher cotton prices and just pray that this year is good for cotton harvest. Otherwise they would continue to face the heat of higher prices for some time to come.
Take the case of Japan, where the damage done is being estimated at around US$ 300 bn. This is almost four times the damage that Hurricane Katrina did in the US a few years back. And this number is only going to rise with the length of the ongoing nuclear crisis in that country.
Economists are now wondering if the cost of rebuilding Japan will mean a disaster for the US dollar. One of the ways Japan can fund its rebuilding is by selling a chunk of the US bonds it holds. And Japan holds around 20% of these bonds. So if Japan were to sell large amounts of US bonds to fund its reconstruction, there is a risk of selloff (or even a collapse) in the value of the US dollar as well. Whether it happens or not is still doubtful. But it is a real risk for the dollar.
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