»5 Minute Wrap Up by Equitymaster

On This Day - 11 MAY 2011
Are the days of the 'India story' numbered?

In this issue:
» Will China determine global gold prices?
» Why most of the recent IPOs have proven duds?
» Loss making PSUs continue to suck taxpayer money
» The cost of global disasters
» ...and more!

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'Emerging markets' has been the most fancied investing theme amongst global investors. Ever since Goldman Sachs published the famed report on 'BRICs' in 2001, investors do not seem to be getting enough of them. What is more, each of these economies offer some unique characteristics. China has superb execution skills and excellent infrastructure. This makes it an ideal manufacturing hub for MNCs looking to cut costs. India's large base of young and English speaking population offers it an edge in services. Brazil and Russia have it all when it comes to basic resources like food grains and minerals. Hence there was little reason for investors to look beyond these four over the past two decades.

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.

Do you think that the India story is here to stay? Let us know your views or post them on our facebook page.

 Chart of the day
If there is any argument that justifies the RBI's belief that Indian markets are suffering due to the Fed's faulty policies it is this. Over the last one and half years, FIIs (Foreign Institutional Investors) have by far dominated the derivative trades in Indian stock markets. As seen in today's chart FII trades were on an average 88% of total derivative trade on Indian bourses in recent months. What this confirms is that most of the speculative activity here is being funded by cheap money from overseas. And hence there are that much more chances of sharp correction once the FII trades start unwinding.

Data source: RBI

The deadline is drawing closer by the day. In fact, quite a few experts are of the view that it is only a question of 'when' and not 'if' anymore. We are referring to the time when China will overtake the US as the world's largest economy. With this debate more or less settled, let us veer our attention towards another important argument. Will this landmark event have any impact on the future demand for gold and its price? Quite certainly, believes a long time gold specialist. Rising demand from both the official as well as the retail sector in China is going to be extremely bullish for gold prices. No doubt China is one of the world's largest gold producers. But as per the specialist, almost all of that production will go towards satisfying the official demand. This means that the enormous retail demand that will spring up courtesy the rise of the Chinese middle class will have to be largely met from outside. Thus, it is believed that Chinese demand together with Indian demand will completely dominate global retail gold demand by 2020 and as a consequence, also set the price and the trend of the gold markets of the world. An argument with a strong merit indeed.

Legendary investor Warren Buffett couldn't have been more accurate about initial public offerings (IPOs) when he said: "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."

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.

These are two undertakings which have been losing both money as well as market share. State run BSNL and MTNL have seen their business operations deteriorating consistently. And the government wants to gift these two a whopping Rs 30 bn as aid. The Department of Telecommunications (DoT) is expected to soon finalize a subsidy of Rs 25-30 bn to support these ailing PSUs. So essentially these companies would get tax payer money with which they can continue to run their loss making units. Why? Because they are public sector undertakings.

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.

When nature strikes, nothing is spared. Bridges collapse, cars are washed away like toys, and huge buildings crumble. According to the United Nations (UN), damage to schools, hospitals, roads, etc. are rising in many lower income countries. And this is despite improvements in early warning systems for evacuation. Rich countries are also exposed, with disaster striking all geographies. Floods in Australia. Earthquakes in New Zealand and Japan. Even hurricanes in the United States all caused significant damage to life and property.

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.

The benchmark indices in the Indian stock market managed to break into the positive territory after some weakness in early hours. At the time of writing, the BSE Sensex was trading higher by 30 points (0.1%). While the Korean and Indonesian indices are leading the gainers in Asia, the Indian markets lag the pack of gainers. Europe has opened on a mixed note.

 Today's investing mantra
"According to our view, the high prices paid for 'the best common stocks' make these purchases essentially speculative, because they require future growth to justify them." - Benjamin Graham & David Dodd

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