»5 Minute Wrap Up by Equitymaster

On This Day - 11 JUNE 2010
Is it right time to buy property in Mumbai?

In this issue:
» Soros warns of the possibility of another recession
» Indian employers top list of hirers
» On time arrival of monsoons brings relief
» Is the new public shareholding rule executable?
» ...and more!

------------------------------------------ Equitymaster Webinar ------------------------------------------
Thank you for making the latest edition of the Equitymaster Webinar - "Global fears, India cheers?" a huge success! We would like to hear from you on how we can make this initiative more useful for you. Do share your feedback and suggestions with us.
Just in case you missed the Webinar, here are two excerpts from the same -
1. The Sensex could be heading to 31,000
2. Views on Real estate and gold
We look forward to bringing you many more Webinars in future and your active participation in them.

"Koi boond boond ko tarse, lekin sagar par jal barse," goes an old inspirational song. A situation like this seems to be cropping up in India's realty sector. Here, while middle class buyers find it difficult to get a hold on good affordable housing, the rich are facing a plenty of sorts. Take for instance the Mumbai luxury housing market.

Property experts are now talking about an oversupply of premium houses looming large on the island city's skyline. As per some estimates given in today's Business Standard, around 7,000 new luxury apartments are expected to be available in the city within a year. And these houses are priced at over Rs 47 m each! So, while someone is talking about building the largest luxury housing society in the city, there is another who is talking about the tallest!

In such a scenario, what's the way forward for the middle class guys looking to buy their first property in the metropolis? Is it the right time to buy a property in Mumbai?

Well, if one were to go by the views of Ajit Dayal, Director of Quantum Mutual Fund and founder of Equitymaster, "...if you have to live in Mumbai, then the answer is that there is no right time, because it is very difficult to forecast Mumbai property prices, because Mumbai is an island and within the island there are enough things happening that take property out of the ambit of most people who can't afford them. So, if you have to be in Mumbai and you want to own a property, it's never too early, it's never too late. You can't take it as an investment, it's a necessity."

 Chart of the day
The latest quarterly survey from Manpower, a global employment-services company, shows that as far as the employment outlook goes, India tops the world charts. At least relative to the rest of the world, employers in India seem to be quite a bullish lot. This is also a reflection perhaps of the growth prospects that the companies in the country see. After all, companies will only look to hire if the anticipate a higher growth in business going forward.

Data source: The Economist

There are a lot of good, structural reforms currently underway in the Indian capital markets. A case in point being the amendment in the minimum free float rule. The Government wants all the listed companies to have a minimum free float of at least 25%. In other words, the maximum that a promoter can hold in the company is 75%. This is indeed a step in the right direction. Deep and non-manipulable markets do call for diversified and large public shareholdings. But there is one big problem. An article in FT points out that at current valuations, investors may have to shell out in the region of US$ 50 bn to bring public shareholding in all listed companies to 25%.

It should be noted that the most Indian companies managed to raise in a given year so far was US$ 18 bn. Thus, even at this rate, it will take three years for all the companies to comply with the new rule. Furthermore, this fund raising will most likely crowd out companies seeking to raise capital for genuine investments like a new plant or a new project. Clearly, the Government does have a lot of soul searching to do on this.

There are a lot of prophesies circulating about the Chinese bubble popping. But so far, there are no signs of a slowdown in the dragon nation's single biggest driver - exports. As per a leading business daily, China's exports surged 48.5% YoY in May, which is the fastest pace in recent times. Some experts are shocked that Chinese exports are growing even while Europe is gripped by a sovereign debt crisis. Interestingly, more Chinese exports could worsen global balances even further. There is anecdotal evidence that cost-conscious consumers are switching to China. Some others point out that the growth is driven by a surge in steel, copper and zinc exports.

In our view, sooner or later, Chinese exports will feel the pinch of weak economic conditions in both its key markets - Europe and the US. Then there is the controversy over the valuation of Renminbi, wage hikes and labour unrest. Clearly, China's status of the world's factory is not as sure a thing as it once was.

A successful recovery from the financial crisis of 2008-09 is what stock prices seem to be factoring in. But the so called recovery may just have been an interval, and Act-II may still be left. At least if one goes by the opinion of ace investor George Soros. He is recently reported to have said that we have just entered Act-II of the crisis as Europe's fiscal woes worsen. His ominous assertion does not end there. Soros believes that the collapse of the financial system is a real possibility. And the crisis is far from over. That is because governments are under immense pressure to curb budget deficits at a time when the economic recovery is weak. This has the potential to push the global economy right back into recession. With the level of uncertainty prevailing currently, and the complexity of the problems involved, this is surely a possibility that cannot be ruled out.

Inflation has been the key low scorer for the incumbent UPA government. The RBI too has been trying its best to tackle it with little success. Food inflation has been hovering in double digits for quite a while now. But atleast now there is a flicker of hope. Almost in line with the Met department's predictions, the monsoons have checked in early this season. The rainfall predictions were 'normal' for last year as well. But they were proven wrong when India was hit with one of the worst droughts since 1972. The farmers and the government can ill afford yet another year of low rains. A good harvest is necessary to keep prices in check and sustain economic growth.

Normal monsoon would also encourage the government to allow export of foodgrains. The wheat and rice exports, which were banned in recent years because of tight supplies, could be resumed. It is also expected to lower food prices and make it easier for the government to ease controls on fuel prices. We sincerely hope the Met department gets it right this time!

Stockmarkets around the world are enthused about some positive data that has emerged during the week. The buoyancy in the Asian economies in particular is what seems to have made investors upbeat. For instance, the Japanese economy did better than expected and grew 5% in the first quarter of 2010. Exports from China surged in May. Further, there was an upward revision to the growth estimates of Europe for 2010. Despite the ongoing debt crisis in the region, the European Central Bank has revised the estimate from 0.8% to 1% for 2010. More importantly, the central bank also issued a statement saying that austerity plans adopted by several debt-laden euro zone nations were not likely to thwart growth. While growth in Asia is likely to remain buoyant, how the scenario in Europe plays out remains to be seen.

Meanwhile, the benchmark indices shed a significant portion of the gains recorded during the first half of the day in the afternoon session. The BSE-Sensex was trading higher by around 95 points at the time of writing this. Heavyweights like Reliance, HDFC and ICICI Bank were seen driving a major portion of the gains. All the other indices from Asia showed strong positive intent today while a majority of European markets opened in the green as well.

 Today's investing mantra
"Investment ideas, like women, are often more exciting than punctual." - Warren Buffett

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