»5 Minute Wrap Up by Equitymaster

On This Day - 21 APRIL 2012
Will the best stocks belong to these sectors?

In this issue:
» Commercial interests to take precedence over public interest?
» Let us introduce you to Dr Aluminum
» Policy paralysis in India?
» Stringent norms for Indian hedge funds
» ...and more!

----------------------- "An excellent analysis and narration on the present situation" -----------------------

Here's what a reader had to say about Bill Bonner's e-letter, The Daily Reckoning:

"THIS IS AN EXCELLENT analysis and narration on the present situation prevailing in developed economies, this does not need any explanation, this itself is an explanation by its own exemplary way of bringing the situations to the viewers. Thank you for your good article."

If authentic global news and views is what you seek, then we strongly recommend that you sign up for The Daily Reckoning.

Authored by Bill Bonner, a three-time New York Times best-selling author, The Daily Reckoning will help you understand the global economy better.

Sign up for the free e-letter and get a free Guide to Gold right away!


Which sectors occupy the maximum newsprint and mindshare amongst analysts and investors? Rewind two to three decades back. The likes of ACC, Reliance, Century Textiles, Grasim and BILT fitted the bill in the 1980s. These manufacturers of commodities were amongst the first to cash in on India's industrial revolution. They were the first to bring in sophisticated technology used for manufacturing processes. However, as competition intensified and there was loss of pricing power, growth subsided. With that even their market caps mellowed down. Software developers and financial institutions led the phoenix- like rise of service sector firms in the 1990s. They not only made processes cheaper and faster but also ensured efficient use of capital. They were the next to be crowned as fastest growing blue chips.

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.

Which sectors do you think will attract maximum investor interest in the coming decade? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Quite a few of us are familiar with Dr Copper. The metal is called so as its widespread use in industry and business makes it a good early indicator of economic growth. Generally, rising copper prices suggest strong copper demand and hence a growing global economy. Similarly, declining copper prices may indicate sluggish demand and an imminent economic slowdown. But this trend has been proven increasingly inaccurate in the recent past. That is because copper prices have been dependant on Chinese demand more than anything else. However, as per data from Businessinsider, it may be a good time to award the Phd to aluminum. This is given the high elasticity shown by the metal to global real GDP.

Data source: Businessinsider

India's oil sector, as we all know, is riddled with problems of Government interference. Here, decisions that quash the interest of minority shareholders are taken virtually every single day. What is worrying though is the fact that this malaise is spreading to other areas of the economy as well. The recent directive given to Coal India is certainly the biggest example of what we are trying to highlight. The Government literally forced the public sector giant to give supply commitment to India's power producers. This was no doubt done under the garb of public interest. But the stakeholders that are likely to end up on the losing side are the company's minority shareholders.

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.

India's deep rooted culture and traditions have been both a source of mystery as well as awe for the western world. But this culture is something that has helped the corporate world too. The sense of 'duty' and commitment that our traditions inspire in us make us the ideal employees. A fact that most of the developed countries have never seen or heard of.

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.

Back in 1991, India stood on the verge of a major crisis. Dr Manmohan Singh, who was then the Finance Minister, initiated a series of radical reforms that heralded India's growth story. Over the years, India has emerged as an important global force to reckon with. However, one must not forget that the reforms were not just the result of the Finance Minister's genius. More than anything else, we simply didn't have any alternative.

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.

Remember the story of Long Term Capital Management (LTCM)? LTCM was an American hedge fund that had assets worth over US$ 100 bn at its peak. Run by financial wizards, the fund delivered over 40% returns on investment for four years. The downside was even steeper. The same fund lost half the worth in a month, jeopardizing the entire American financial system and sending ripples worldwide.

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.

World stock markets displayed positive sentiments during the week. In the US, earnings season so far has been quite good with 81% of S&P 500 companies that have declared results so far beating expectations. However, the Federal Reserve's monetary policy committee meeting scheduled next week will set the pace for the future.

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.

Source: Yahoo Finance, Kitco, Cnfm

 Weekend Investing mantra
"In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw there from." - Benjamin Graham

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407