»5 Minute Wrap Up by Equitymaster

On This Day - 5 MAY 2012
Will India ever get this kind of leadership?

In this issue:
» Does this indicate FDI inflows from Mauritius are set to decline?
» India has one 'Greece' in its own backyard
» Your biggest enemy could ruin your investments
» Will RBI's latest measure curb the rupee's fall?
» ...and more!

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Iceland, a tiny European island country of just 3 lakh people seldom appears on the map of the world economy. Back in 2008, the country was embroiled in a deep financial crisis along with the rest of the world. But it did something very radical then. The outcome is that nearly four years after the crisis, the economy is in a much better shape. Compared to the rest of the developed world, its unemployment level is sound at just 6.1%. Moreover, its economy grew at a steady rate of 2.4% last year.

What did it do so differently? What lessons does Iceland have for the rest of the world? We thought the best person to answer these questions would be none other than Mr Olafur Ragnar Grimsson, President of Iceland since 1996. This is what he has to say. As per him, most other developed countries viewed the collapse of banks as just a financial and economic crisis. Iceland looked more broadly and deeply into the matter. It saw that the crisis would have political, social and judicial consequences.

Iceland found itself facing a crucial dilemma. On one side were the interests of the financial market. On the other side was the democratic will of the people. It is obvious now that it chose the latter. It did not pump money into the failed banks with taxpayers' money, the way the US and other European economies did. It treated banks like any private manufacturing or commercial companies that had gone bust. At the same time, it initiated measures on the judicial and economic front to address several aspects of the crisis. Some measures pertained to protecting the lowest income sectors such as elementary social and health services.

As we all know, the US and most economies of Europe have done mostly the opposite of what Iceland did. They salvaged the same big banks and institutions that were the culprits of the crisis. In the process, they have made their debt problem even worse. These economies are now witnessing sluggish economic activity, high unemployment levels and widening income gaps. All this means that even more severe crises are in the offing.

Iceland's model is not very complex and difficult to replicate. It decided to face some short term pain in the larger long term interests of the economy. Why, you may ask, the other countries did not take inspiration from Iceland's model? Were they fools or were they crooks? Unfortunately, our hunch is slanting more towards the latter.

What, according to you, should India learn from Iceland? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Ratings agency Standard and Poor's (S&P) has recently cut India's outlook to negative from stable and issued a threat of potential downgrade, citing high fiscal deficit. As a result, Indian government is facing tremendous pressure to reduce its fiscal deficit. In order to increase revenues for the government, India is planning to review the double-taxation avoidance agreement (DTAA) with Mauritius. The reason behind the review is to prevent misuse of the treaty and track illicit money allegedly stashed in the African island nation. The country was losing more than USD $600 m every year in revenue because of the tax treaty, besides incurring the risk of militant groups using it to route money into India. This announcement had sent a panic wave in the Indian stock markets. It must be noted that Mauritius has the biggest share (39%) of foreign direct investment (FDI) inflows in India.

Data source: Ministry of Commerce and Industry
*April 2000 to February 2012

There is no point criticising the Western economies for faulty economic policies and bailout packages. Especially, when we have plenty of such instances here in India itself. In fact, it is not just the loss making PSUs that are making a beeline for bailouts. Few state governments too are taking a leaf from Greece's debt bailout. Having accumulated tons of debt over the years, Greece's economy seems to be inspiring financially starved state governments.

The Finance Minister of West Bengal in particular finds debt restructuring and interest reliefs the perfect solution to the state's debt problems. Interestingly, there are no signs of remorse in equating West Bengal to Greece! Moreover, the Minister hopes for quick fix debt restructuring. Not that the state has any plans to follow Greece's austerity measures. In fact, government salaries in the state alone are set to rise by nearly 7% this year. But with outstanding debt of Rs 2.2 trillion and debt to GDP ratio of 39%, the state certainly needs some quick action. Meanwhile it is worthy of being called 'India's Greece'.

Who do you think is your biggest enemy when it comes to successful investing? The market? The financial institutions? The much better equipped analysts or the mercurial central bankers and policy makers? If you, like most others, answered any of these, let us tell you that you are completely wrong. At least this is what a certain Mr Barton Biggs believes. And he is not one to be taken lightly. After all, not everyone can boast of the wealth of experience that he has accumulated over the last many decades. Coming back to the question, Biggs believes that one's biggest enemy while investing is one's own self.

Development of a sound investment process is only half the battle won as per Biggs. The other half is struggling with oneself and immunising oneself from the psychological effects of the swings of the markets. Not to forget career risk, pressure of benchmarks, competition and the loneliness of the long distance runner, observed Biggs. So there you have it, another investment veteran outlining the virtues of an unwavering mind in the face of extreme market volatility and a strong belief in oneself. Mr Biggs wouldn't have been more correct we believe. After all, it is not high IQ or some special insight that made Warren Buffett the successful investor that he is or made Peter Lynch one of the most successful fund managers ever. It is indeed their strong mental makeup and the tendency to not follow the crowd that made them stand out. Investors would do well to harness these qualities more than anything else if they are to have a good shot at becoming a successful investor.

Standing helpless against a rapidly depreciating rupee, the Reserve Bank of India (RBI) was forced into action. The central bank has now eased norms to encourage foreign currency inflows. Interest rate ceilings on different maturities of foreign currency non-resident (FCNR) deposits have been relaxed. However, these measures may not help curb the fall of the rupee. Policy issues including the General Anti Avoidance Rules (GAAR) need to be clarified. Oil prices, a huge component of our import bill, also needs to soften. Companies, which took advantage of the cheap credit overseas, need to make repayments in dollar terms. Unless some of these issues get resolved, there will continue to be pressure on the Indian currency.

It was a disappointing week for world stock markets in general and US markets in particular. The US, in fact, saw the worst week of the year on weak economic data, especially pertaining to its services sector. Europe has been the cause of worry for investors the world over due to its severe debt crisis. It now seems braced for change as people in France and Greece go out to vote. Going forward, the European election results are expected to chart out the direction of the world stock markets.

The Indian stock markets closed the week in the red. Rupee continued to fall and there were concerns about General Anti-Avoidance Rule (GAAR) in the Finance Bill too. India is reviewing its Double Taxation Avoidance Treaty with Mauritius as it is largely being misused by global investors. All of this, along with weak sentiments in Europe and the US resulted in the fall in Indian stock markets by 1.8%.

Amongst the other world markets, mostly all ended the week on a sour note. Germany (down by 3.5%) and France (down by 3.2%) were the top losers. However, Asian stock markets except Japan (down by 1.5%) managed to stay in the positive. Amongst these, China was the top performer, gaining by about 2.3%.

Data Source: Yahoo Finance

 Today's Investing mantra
"People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'

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