»5 Minute Wrap Up by Equitymaster

On This Day - 9 JULY 2010
Are stocks a tough nut? They're about to get tougher...

In this issue:
» The key to Europe's revival
» Monsoons not the only factor affecting high food prices
» China may soon lose its 'ultra' low cost status
» IMF raises India growth forecast
» ...and more!!

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'Globalisation' is indeed a funny term. It's a process that most remain confused whether to welcome or hate. At different times and for different countries, the feelings it evokes vary widely.

Take the US for example. A recent report states that 40% of the profits of the S&P 500 companies in the US come from outside the country. That's great for the US, more so considering that the country is staring at the prospect of years of subpar growth.

But what about India? For our country, we consider the high reliance on domestic demand a huge positive. Yes, an overwhelming majority of Indian companies' profits come from within India itself. Quite in contrast to the US!

That may change in the years to come though. Many large Indian companies have made huge foreign investments in single and swift strokes. This has changed their revenue and earnings profiles forever. JLR, Corus, Novelis, and Zain are just a few examples. And it doesn't look like this trend is about to go away anytime soon. For all the talks of India's domestic potential, the lure of gaining global prominence seems too tempting to resist for many Indian promoters.

And so, in that way, the long term dynamics of Indian companies look set for a sea change. Earnings from external markets may gain levels of importance more than ever before. As for our stock markets, this change will mean a transition from a regular analysis of 'global market sentiment' to 'global earnings forecasts'. Stock market analysis is about to get a whole lot tougher!

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 Chart of the day
Comparisons between India and China are rampant. Amongst the parallels drawn on various counts, perhaps the most striking and fundamental is a historical comparison of the two countries' per capita GDP. While both countries seemed to be on an equal footing until the early 1990's, things changed rather radically for China towards the mid 90's. Will India ever be able to narrow that gap? Only time will tell.

Data Source: Earth Policy Institute

Can anything perk up Europe? The Economist has made an attempt to tackle this all important question in its latest issue. And the magazine does believe that one of the biggest economies in the world can indeed be perked up. It points out that this isn't the first crisis that the Euro zone is facing. It has faced a similar crisis in the 80s. This then led the groundwork for one of the best periods in the history of the European Union. The crisis of the 80s was followed by radical reforms and it is the same set of reforms that the magazine is looking upon for Europe to regain its lost glory. The reforms though are easier said than done. It could lead to strong oppositions from vested interests and put at risk the careers of majority of the politicians.

Still, the need for reforms is bigger now than ever before. Reforms will bring with them strong economic growth which will then make the huge debt burden bearable. In its absence, Europe can easily hurtle towards total collapse. Thus, the magazine believes that the political leaders in Europe should seize the moment and build a coalition for reform. After all, the world does need an economic force as strong as the European Union.

The monsoon season has come as a blessing for India's food woes. The agriculture ministry is expecting food prices to cool down given that a good harvest will bring in greater supply to the market. This is what the general understanding is. But what we saw on our recent trip to Punjab made us wonder if this was really the case. We mean - are monsoons the be all and end all of our food problems?

We do not think so. This is after seeing tonnes and tonnes of grains getting wasted in the open in Punjab's fields. On asking what led to this, we got to know that the off-take from the government last year was poor. This was given that the Food Corporation of India did not have sufficient storage space for a large part of the produce. And it still isn't building more such space at the speed at which it is required.

This is perhaps the most tragic irony for this country. While millions of people struggle to manage one meal a day, tonnes of food grains rot in the open, just because of government apathy! And then they blame the rain gods!

After being type cast for decades as spiritual, exotic or even pathetic, India is now the hottest flavor in town for the West. Not entirely unexpected, given the pessimism in the developed nations about their own state of affairs. So, it doesn't come as a surprise that the International Monetary Fund (IMF) has raised India's growth forecast for 2010 to 9.5%. About 3 months back, its estimate was 8.8%. The IMF has upped its forecast based on positive corporate results and financial conditions. In fact, the IMF has upped global growth projections upwards to 4.5% in 2010 on the basis of strong performance by Asian countries. Whatever doubts remained in the past decade are now gone. The sun is now firmly shining in the East.

China is best known for its cheap goods. But this is changing. Most factory workers in China are second generation workers who are no longer content with the low wages like their parents. They are now demanding higher wages and better working conditions. This may eventually lead to the end of an era of cheap costs and goods. Numerous strikes over the past few months has only increased the burden for the many foreign companies who had come to capitalise on China's low costs to maintain competitiveness. Labor costs have risen by 15% since 2008. This adds to rising land, water, energy, shipping costs and taxes. It appears for now that China is all set to soon lose the low cost advantage that it has enjoyed so far.

The June results season is just around the corner. And the strong earnings growth that was witnessed in FY10 is not expected to get replicated this quarter around. Especially as the easy monetary and fiscal policies come to an end. According to the ET Intelligence group, sales of the Nifty companies are expected to log in a robust growth of 34%. In stark contrast, net profit growth is touted to come much lower at 16%. This will largely be due to soaring input costs, rising interest expenses and depreciation charges. And the sectors that could bear the brunt include cement, telecom and consumer goods and auto. As far as input costs are concerned, rising oil prices, costs of metals and agricultural commodities will weigh heavy on operating profits. Thus, while rising demand will bolster sales, the scenario on the profitability front is likely to be tepid.

In the meanwhile, Indian markets were trading well in the green on positive global cues at the time of writing this. Heavyweights in the telecom sector saw strong positive movement. Realty and metal stocks found investor favour, while those from the FMCG and healthcare space saw some declines. Sentiments were positive in Asia, with the entire pack trading in the green. China and Hong Kong markets saw the most gains.

 Today's investing mantra
"I would like to point out that the last time I made any stock market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter, based on the fact that I had one month's experience in Wall Street. Since then I have given up making predictions." - Benjamin Graham (in 1963)

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