|»5 Minute Wrap Up by Equitymaster|
On This Day - 21 APRIL 2012
Will the best stocks belong to these sectors?
In this issue:
----------------------- "An excellent analysis and narration on the present situation" -----------------------
Coming to present scenario, the focus of governments around the world is to correct what has gone wrong. Environment degradation, loss of jobs, poor quality education, expensive healthcare and monopolistic pricing are issues being addressed. The outcome being the popularity of green energy, educational ventures, generic drugs and online retailing amongst entrepreneurs. Not just the developed world, but even emerging economies have their eyes set on these potential sunrise sectors. Meanwhile it is time for growth in the software and financial behemoths to tread back to the mean. In fact as per an article in Ritholtz, sectors like print media, hardware manufacturing, apparel manufacturing etc have completely lost flavor in the US. Thus it will not be long before investors too look for more lucrative options in sectors that have far better growth prospects.
According to us, investors should always look for businesses that have a strong and sustainable economic moat. The same again depends on demographic and socio economic needs. Clean energy is a must have. Thus the earliest players in this segment can have huge advantages. Quality education has commanded the attention of not just President Obama but also policy makers in India. Investments in this sector are therefore bound to get government support. India already has an edge in low cost generic drug manufacturing. Strong tie ups with MNC pharma can ensure better R&D and exhaustive marketing in developed economies. The demand for affordable healthcare too is no longer restricted to the developing world. But austerity measures have forced government and pharma companies to look for low cost drugs. Finally, the manufacturing of commodities like apparels and hardware will keep shifting to the destinations offering cheapest labour. India and China are set to lose their status as back office and factories of the world respectively. Hence the focus will shift to value addition and online retailing. For this is where the margin upside would be higher. Companies effectively and profitably catering to these niche segments are ones to watch out for! They are likely to enjoy the biggest economic moats in the near future. Undoubtedly investors can hope to find some of their best performing stocks amongst these sectors.
The issue has once again brought into sharp focus the conflict of interest faced by the Government. In other words, should the commercial interests be allowed to take precedence over the public interest? Quite certainly we believe. After all, minority shareholders invest their hard earned money into the public sector units. All in the hope of getting their share of rewards. Thus, the Government has no right to snatch the same from them and use it to further their own political interests. The faster they realize this the better it will be. Else, just like their oil marketing counterparts, most of the PSUs could start trading at rock bottom valuations.
As reported in an international daily this sense of duty left its reporters dumbstruck. They could not understand that people can be committed to work just out of their sense of duty. Even on the part of the employers. Rather than looking at the highest compensation techniques, they instead adopt the best fit strategy for retaining employees. This means that they provide employees with meaningful and challenging jobs. This best fit strategy has worked well for decades. True, that Indian companies do suffer from lower governance standards when compared to their global counterparts. But the dedication and commitment that they get from their employees is a point of envy for the entire world.
It's been two long decades since we saw the first major reforms. There is increasing economic and geo-political turmoil in the global arena. India's own future growth prospects seem uncertain now. Add to that India's worsening fiscal and current account deficits. Again, the need of the hour is some solid reforms. But the political landscape of the country has been disturbed by a slew of corruption scandals, political logjams, etc. As a result, several important reforms are waiting to see the light of day. Are we going to wait until we are pushed to a 1991- crisis like situation? Given that mankind seldom learns from history, we're afraid that could be true. The incumbent government is too weak to do anything radical. Even Mr Kaushik Basu, the country's top economic adviser is of the opinion that India won't see any major reforms before the 2014 general elections.
Time and again, the use of complex financial products that thrive on heavy leveraging have proved costly. The Indian capital market regulator - Securities and Exchange Board of India (SEBI) seems to be too aware of that. The last thing it wants is to let the history repeat in India. Hence, SEBI has released stringent norms for hedge funds that plan to invest in the country. All the hedge funds that want to invest will need to get registered or obtain a license first. The norms intend to put a control on the fund's debt exposures and redemptions. Since hedge funds have exposure in stock markets, they have huge implications for the liquidity levels in a country. To some, these regulations may seem to be discouraging and against the inherent spirit of such funds. However, we think otherwise. No doubt the hedge funds bring more efficiency in the markets. However, their entry needs to be balanced with some intervention as the entire market stability is at stake.
The Indian stock markets closed the week 2% higher post the repo rate cut of 0.5% by the Reserve Bank of India (RBI) during the week. The RBI move aimed at stimulating the economy was a surprise for investors who were expecting a 25% basis point cut at the most. Auto stocks led the pack of gainers in the past week. Barring Japan (down by 0.8%), all other world stock markets too had a positive end to the week. Germany (up by 2.5%) and UK (up by 2.1%) led the list of gainers.
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