»5 Minute Wrap Up by Equitymaster

On This Day - 27 SEPTEMBER 2014
A striking indicator as to why India today is where China was in 1990

In this issue:
» What is special about China's 'grey hair' industry?
» Huge unfunded liabilities of US pension funds
» What do CEO salaries tell us about the companies?
» Roundup on global markets
» ...and more!

 Chart of the day
"Aren't the markets currently too frothy to invest in? Shouldn't we rather wait for it to correct than invest now?"

These have sort-of become the regular queries that we receive from our subscribers these days. Many even point out to the fact that India has come close to becoming the most expensive amongst emerging markets.

Now, it is really heartening to see that investors are keeping a close eye on valuations rather than being in a buying frenzy, with advice from brokers and pink papers. However, it is important to put India's economic fundamentals and valuations in perspective. For only then can you fairly asses whether Indian markets are too expensive for a global investor looking at emerging markets.

Let us look at the inward flow of foreign direct investment (FDI). Like we have said many times earlier, for a developing economy like India sustained inflow of FDI is extremely critical to achieve high growth rate. Investment from the government and private sector need the boost of foreign capital and intellectual know how so as to help GDP growth rate reach the inflection point. Take the case of China in the early 1990s. One would recall that this was the time when China started investing heavily in its infrastructure and industries. And it relied that much more on FDI. The fact that the economy put in reforms and incentives to attract foreign capital helped it sustain strong FDI inflows for nearly two decades.

India today looks strikingly similar to China in early 1990s. Assuming that India is to embark on a similar investment phase in both infrastructure and industries attracting such FDI is inevitable. Not only will it reduce the pressure banks and financial institutions for long term funding. But also allow companies to focus on their growth plans rather than constantly worry about funding requirements.

The fact that initiatives by the government to bridge deficits and attract foreign capital will also enhance India's sovereign rating will be yet another positive. In fact the S&P has already upgraded India's rating from negative to stable. Going forward such rating upgrades will up India's appeal on the FDI radar.

Thus there are enough reasons why India's growth rate in the the coming decade could look far more appealing than that of other emerging markets. And going by the key signs of the Megatrend that India could be witnessing, several companies here could offer more attractive investment opportunities than in any other markets.

Hence we believe that retail investors should not try to time the markets and wait to invest at the most attractive valuations. Instead they should be very selective in the company they wish to invest in and invest small amounts consistently over a period of time. Besides giving the opportunity to take advantage of valuations whenever there is a temporary hiccup, this will also help ensure that you do not 'miss the bus'!

Will India's net FDI inflows look similar to China's in early 1990s?

Which are the other similarities according to you between India today and China in the 1990s? Let us know your comments or share your views in the Equitymaster Club.

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A lot has been written about China's ageing population and how it is poised to take the fire out of the dragon nation over the longer term. There is one group of Chinese capitalists however that is smiling from ear to ear. China's so called 'silver hair' industry - the market of goods and services for the elderly - is expecting to reach US$ 652 bn in size this year. This would be a whopping 8% of its GDP! To give you a perspective on this, consider that the whole of the manufacturing industry here in India contributes to just about 15% of our GDP.

Further, this Chinese industry centered around the elderly is looking to a bright future indeed. The industry is expected to rise to US$17 trillion by 2050, amounting to a third of the economy by the time. A Bloomberg report indicates that future opportunities in this area will revolve around four main fields - appliances, services, assisted living centers and financial services for the geriatric. With such an industry back home here in India being almost non-existent, Indian entrepreneurs would do well to take a page out of China's book. While the population of India's elderly may not be slated to see a rise as rapid, surely there is enough unmet demand to sustain a thriving industry.

All of us put aside some money for retirement, don't we? However, what if few years down the line we realize that the corpus we are going to get at the end of retirement is going to fall way short? Well, we will have to start setting aside more sum by cutting our current expenses or work more hours. A similar predicament is facing 25 of the largest US public pension systems. If a leading financial portal is to be believed, these pension systems together face unfunded liabilities to the tune of US$ 2 trillion! In other words what the pension systems have set aside for retirement is about US$ 2 trillion less than what they will have to eventually pay out to employees. If this is not bad enough, these liabilities are actually forcing some states to cut down on spending in areas like services, roads and schools. The irony being these are the areas which can allow states to grow more prosperous in the future. Unfortunately there does not seem to be any easy solution in sight as things like raising taxes will make the economic slowdown even worse.

When we analyze a company's management, one of the variables we look at is management compensation. How much is the CEO's salary? How much is it in relation to the company's profits? What has been the trend in the salary increment? How does the CEO's salary compare with industry peers Should shareholders decide CEO salary? - The 5 Minute WrapUp ? These questions can often lead to telling insights about how the management treats the shareholder's money. Is the top management only interested in filling their coffers? Or are they focused on building a rock-solid enterprise and reward all stakeholders? We certainly prefer company managements that belong to the latter category. And yes, one must remember that the annual salary is not the only factor that an investor must look at. In many cases the annual salary figure may not be a big eight-digit figure. But this may often be misleading. So it is important to consider the total compensation that the CEO receives. This would include bonuses, perks, employee stock options, etc.

Global markets ended the week lower on concerns regarding the end of the US Fed's QE program.

Geopolitical concerns in the Middle East also weighed down markets. In the US the benchmark Dow Jones Industrial Average (DJIA) closed the week lower by 1%. However, it must be kept in mind that the US markets haven't corrected in any significant manner since the bull market began in March 2009.

In Europe, the relief surrounding the result of the Scottish independence vote was short lived. European indices like the French CAC, British FTSE and the German DAX ended the week lower by 1.5%, 2.7% and 3.1% respectively. European markets remain concerned over the Eurozone slipping back into recession. Also, European nations have begun to join the US in taking military action in the Middle East and this has created fresh uncertainties in the markets.

Along with global indices, the Indian indices too closed lower this week. The BSE-Sensex was down by 1.7%. The Supreme Court's Coalgate verdict as well as the deferral of the decision on gas prices impacted market sentiment. On a positive note, S&P upgraded India's credit outlook to stable from negative while re-affirming the country's BBB- credit rating.

Performance during the week ended Sep 26th, 2014
Data Source: Yahoo Finance, Kitco

 Weekend investing mantra
"A business or stock is not an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do." - Warren Buffett

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