|»5 Minute Wrap Up by Equitymaster|
On This Day - 7 JULY 2011
Is this asset class ripe enough to crash?
In this issue:
It's never too late to get rid of 'bad stocks'.
After all, you never know how bad a market crash could get.
But what are these 'bad stocks'? How do you identify them?
For answers to these questions, and more,click here to read on...
But the sustainability of this strong run in commodities is now being questioned. In this regard, investor and author Gary Shilling is of the view that commodities are not only about to end their bull run but are going to come crashing down. And one of the main reasons for this has been attributed to the likely slowdown in China. Indeed, the Chinese economy is battling inflation and its government has been raising interest rates to tackle the same. This is bound to have some negative impact on demand as well as profitability of companies. At the end of the day, there is only so much that China can consume. And as its economy enters the cooling phase, it will no longer needs as much oil, base metals and other commodities.
For India, meltdown in commodity prices would certainly be a big boon for India Inc. India, too is grappling with high inflation. The central bank's rate hiking measures have begun to weigh heavy on the profitability of companies. In such a scenario, high input prices have further compounded woes and a softening on this front will certainly be a welcome relief for companies. But while it seems that a fall in global commodity prices is inevitable, when that will happen is anybody's guess.
Now, while Indians trust their friendly neighborhood bankers, are mutual fund managers to be trusted? What strikes us as a surprising fact is that while one needs a certification by SEBI to 'distribute' mutual funds, no qualification per-say is needed in order to 'manage' one. So how important is a fund manager in the scheme of things? Most big mutual funds have various processes in place in terms of an army of analysts, and researchers. Some passive funds, just benchmark their investments to a certain index or benchmark. These are thus more dependent on IT and software systems. But, there are funds which are actively managed, and where your hard earned money lies at the mercy of the fund manager. He can decide his allocation to various sectors, when to buy and sell stocks, and what kind of stocks to invest in. Stock picking does require certain skills and qualities. Maybe some guidelines like minimum experience in the money management field, or some certified training will help ensure that your money is in safe hands.
Hence, we will not be surprised to see another round of price hikes for fuels. However, this will only raise inflation and hurt growth rate of the economy. But the other option is no good. Leaving fuel prices unchanged will shoot India's fiscal budget deficit well beyond the targeted 4.6% and lead to higher debt. A higher fiscal deficit will push inflation anyhow.
So, is there a way out of this catch 22 situation? While the main culprit, crude oil prices, remain beyond India's control, we believe the best that the Indian Government can do is to be realistic about the subsidy grants. While uncertainty in the oil prices will stay, it can at least announce a clear subsidy sharing mechanism so that the stakeholders can plan accordingly. This will only help the Government in its alternative disinvestment plan to control the deficit.
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