|»5 Minute Wrap Up by Equitymaster|
On This Day - 11 MAY 2011
Are the days of the 'India story' numbered?
In this issue:
Is it better to invest in gold or stocks? ...
'Gold Bug' Bill Bonner, answers these questions for you in the exclusive publication - The Guide to Gold
But a legendary investor who has the reputation of being the 'guru' on emerging market opportunities is now looking elsewhere. After 40 years of managing emerging market funds, Dr Mark Mobius is now being enticed by what he calls 'frontier markets'. Going by Mobius' own definition, they are but a subset of emerging markets. They have lower market capitalization and liquidity than the relatively developed emerging markets. More importantly they are markets that have not yet been 'discovered' by majority of investors. And what makes their case really unique is that they have a long trend of high growth rates ahead of them with very low debt to GDP ratio. Thus in a scenario where both high growth and low debt are hard to come by, these certainly make interesting options. To add icing to the cake, some 'frontier markets' are also well endowed with resources like oil, gas and precious metals. Hence they are well positioned to benefit from the high global demand for these resources. Especially, from their emerging market peers.
Nigeria, Saudi Arabia, Egypt, Vietnam, Kazakhstan, Qatar, Ukraine and Argentina are some of the names that appear in Dr Mobius' watch list. Needless to say that despite a lot going in their favour, social and political unrest assumes a huge proportion of risk in these economies. Not that these are going to stay forever. There may come a time when some of these economies will have investment potential much larger than the BRICs. But we believe that as long as they are deprived of good governance and social stability, no amount of growth rates can be sustainable. Also when it comes to undiscovered long term opportunities, there are plenty in India itself. Hence for the time being, we would avoid this theme even if Dr Mobius or Goldman Sachs don't.
Haven't we always admitted when it comes to IPOs we prefer to be careful than sorry? Just look at the most recent IPOs that hit the secondary markets in the last two months and you will know why. According to yesterday's closing prices, PTC Financial Services, Shilpi Cable Technologies, Paramount Print Packaging and Future Ventures, were all trading 32%, 66%, 26% and 17%, respectively, below their issue prices. Only Muthoot Finance managed to remain a meager 0.8% above its issue price. So effectively, retail investors have suffered heavy losses on these recent issues.
But the story is not way too different if you take all the IPOs that listed during 2010-11. About 52 IPOs came in during the year. You would be surprised to know that 41 of them are trading below their issue price. Even more shockingly, about 23 of them are down over 40%. Most of the times, the pricing is so aggressive that there's hardly anything on the table for retail investors. As a result, they fall prey to the greed of promoters and merchant bankers.
BSNL and MTNL have seen an erosion of market share. The reason is their focus on the fixed line services, which is losing share thanks to the growing mobile telephony in the country. And the two companies have been consistently losing market share in mobile telephony as well. This is due to the aggressive marketing of the private operators which is helping them in garnering a larger share of subscribers. Result being that the two PSUs are not expected to go back in the green anytime soon. Then why give them more money to burn? Would it not be better to restructure them and make them more competitive instead? Apparently the government feels giving subsidies is a much better idea than to improve efficiencies.
Disasters have already caused more than US$ 300 bn in losses so far in 2011. In barely 5 months, there was more damage than all of 2010. This shows us that catastrophic risks need to be anticipated, since they cannot be eradicated. Use of land needs to be improved and infrastructure needs a boost. It's funny, but, a major hindrance to progress is 'probability'.
Most governments are not willing to spend current money on once in a life time or black swan events, which may or may not happen in the future. Or during the elected party's term. Either way governments need to realize that prevention is better than cure. Insurance companies' portfolios are mainly in the developed world, i.e. North America, Japan and Europe. Developing countries like India need to re-evaluate their infra, especially new projects, as well as insure themselves against natural disasters.
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