»5 Minute Wrap Up by Equitymaster

On This Day - 4 OCTOBER 2012
'The Sensex may not make a new high this year'

In this issue:
» China turns to automation as labour shortage looms
» What will the second wave of reforms bring?
» What's driving the turnaround in hotel stocks
» RBI gives a thumbs up to multi brand retail
» ...and more!

--------------------------------------- BSE Sensex headed for a massive rally? ---------------------------------------

Recently we wrote to you about all the excitement surrounding Sensex 23,000.

In connection with that, here's a warning -

If you do not pick your stocks well, no matter how well the Sensex does, you may not make money at all. In fact, you could even lose money.

You see, in the long term all that matters is the quality of stocks you own.

And that's precisely why you should see this short video right now...

In it we reveal details of what in our view are the Top 5 Stocks to own in current times.

Interested? View this video here...


'The Sensex may not make a new high this year'. With the overall mood so buoyant, we are sorry to act like party poopers and give a statement like that. To be fair to us though, the statement is not ours. It has been given by none other than Marc Faber, one of the most respected big picture guys in the world. The comment was made in response to a question put forward by a leading business daily that was keen to know whether the current rally on Dalal Street will ultimately culminate into the Sensex making a new high this year. As highlighted, Faber was not that optimistic.

Faber's pessimism though had less to do with policies adopted by India and more with the global economic environment. He was very critical of central banks in the US and Europe that are pursuing expansionary policies in terms of monetary and fiscal stimulation. And this has led to not real economic growth but asset price inflation across the globe. What more, these policies are also causing the cost of living to rise in many countries, including India. And when this happens, savings take a beating which in turn impacts investments and ultimately, the long term economic growth.

All of this does not mean that India as an economy will stop growing. It certainly will but thanks to the spectre of imported inflation and also of the domestic kind, brought about by policies of the Government, the growth may slow down a bit. Thus, it is imperative for investors to keep their expectations well grounded. Especially in current times when sentiments are quite buoyant all around.

Having said that, the golden rules of investing should not be ditched. Invest in fundamentally strong companies run by capable management team and ensure that you have a margin of safety in valuations. And irrespective of whether Sensex makes a new high this year or not, your long term performance will certainly shine through we believe.

Do you think the Sensex will make a new high this year? Let us know yourcomments or post them on our Facebook page / Google+ page

 Chart of the day
22.1%. That's how much the Indian benchmark index has returned so far this year. Impressive performance whichever way you look at it. Infact, as highlighted by today's chart of the day, India is the world's second best performing market amongst the major stock markets of the world in 2012 so far. With gains of around 10%, US indices rank somewhere in the middle. Another interesting stat is the negative 5% return given by the Chinese market despite the dragon nation being one of the fastest growing countries in the world. Something is certainly amiss somewhere in China. With QE3 in full swing, we won't be surprised if the markets go still higher in the remaining few months of the year.

Source: DNA money

The debate on FDI in retail may continue for a prolonged period. For the political heads that are participants in the debate have their own agenda. Hardly anyone has researched enough on the implication of the big ticket foreign money coming into the country. Or whether the entry of players like Walmart will mean bringing more efficiency in food sourcing and distribution. But every politician has an opinion that can put the opposing party members to shame. However, when someone from the Reserve Bank of India (RBI) offers an opinion on the matter, we might as well sit up and take notice. For this is an organization that has its hands on the pulse of India's inflation problem. Therefore an opinion from the RBI on FDI in retailing is not just well thought out but also a well researched one.

So, what does the central bank have to say on the issue? Well, the RBI deputy governor Dr Gokarn recently voiced his support for FDI in retail. And the logic behind his affirmation to the foreign direct investment is sound enough. Dr Gokarn explained the vicious cycle of food inflation. If food prices keep growing it impacts wages. Higher wages impacts expectations and in turn feeds into the inflationary process. Thus, nipping the problem in its bud through more efficient logistics is the only long term solution. The RBI has been trying its best to rein in inflation for more than two years now. Several rounds of interest rate tightening were effected to help curb liquidity. Until growth and capital investment took a big hit and forced the RBI to go easy on liquidity management. Having said that, the central bank continues to watch inflation, particularly that of food from close quarters.

Experiments are part and parcel of the enterprising nature of man. And it is through the process of trial and error that real breakthroughs are achieved. But does that mean all experiments are welcome? Not really!

Let us explain. The US Fed's open ended bond buying program, popularly known as QE3, is nothing but a colossal experiment. What is the basis of this financial experiment? By buying securities from the open market, the Fed aims to suppress mortgage rates. With interest rates near zero, investors would be forced to buy riskier financial assets. This in turn would push prices of houses and equities higher. No wonder the US stock markets alone gained about US$ 400 bn following the announcement of QE3. The Fed hopes that this will revive sentiment and boost consumption and investments. And this will probably translate into higher growth and higher employment.

On the flipside, if this experiment worth billions of dollars fails, it is going to have massive long term repercussions. It would push inflation higher. Income inequality would rise sharply. The standard of living would decline. The repercussions of the failed experiments would have to be borne by future generations. In our view, this experiment is way too risky and the chances that it succeeds are poor.

One of the major factors that made China such a manufacturing powerhouse has been availability of cheap labour. But the dynamics are now changing. More and more Chinese factories in recent times have increasingly gone in for automation. There are several reasons for this. The three-decade-old one-child policy has led to a shortage of labour. Moreover, competition for workers is so fierce that employers have had to dole out raises in the high teens annually to retain them. Plus, most of the young population now increasingly prefers working in China's restaurants and stores to the tedium of working in factories. Further, repetitive and tedious tasks have only built up frustration in workers, in some cases leading to riots. All of which has made the case for automation very compelling indeed. The only question now is how long China will take to adjust to this new industrial revolution. Automation would mean the development of sophisticated robots equipped to carry out various tasks. For this, China would need to make investments. Hence, the overall process is likely to be gradual given that automation did not have much of a role in the dragon country in the past.

The government gave the world a pleasant surprise by introducing reforms albeit in small proportions. Now it plans to announce yet another wave of reforms. This time the proposals on the table include FDI in insurance, FDI in pensions and the setting up of the National Investment Board. But despite the government's new found commitment to reforms, it is doubtful that any of these reforms would actually go through. The thing is that in order to pass some of these, it needs the majority in the parliamentary houses. In the absence of its one time supporter Ms Mamta Banerjee, it would need support from the opposition political parties.

But the opposition does not share the enthusiasm of the ruling party. As a result, one could expect the parliament houses to just go into yet another adjourned session. To avoid this, the government has tried to get India Inc to try and persuade the opposition leaders to agree on the reforms. Given that India Inc has been pro-reforms for quite some time, they may play along to help the government. It remains to be seen as to who wins at the end. Would it be the victory of reforms? Or another uproar in the Parliament?

The medium term prospects of the hotel industry do not look too bright. The overall slowdown in global economies is a major reason for the same. With the slowdown in tourism impacting the sector, it has led to the key industry parameters such as average room rates and occupancy rates not heading in the desired direction. While these parameters are concerned with revenues, high interest costs have been impacting the financial performance of companies at the bottom line level for quite some time. And the same has been happening on account of the companies' expansion plans - leading them to take on high levels of debt.

The overall industry supply and demand gap is expected to widen given that a handful of foreign hotel majors are setting up or expanding their properties in the country. Given this scenario, hotel stocks have underperformed the broader markets substantially over the last year. However, companies have been taking steps to keep their debt levels under control. Some of which include selling their stake in properties and restructuring repayment plans. In fact, hotel stocks saw a sharp spurt in the past few days as companies announced plans of raising stake (including conversion of warrants) as well as rights issue by associates.

Meanwhile, indices in the equity market in india were trading strong right from the beginning today with the Sensex higher by around 215 points at the time of writing. Realty and banking stocks were attracting the maximum interest. Asian stock closed strong today with Europe too opening on a positive note.

 Today's Investing Mantra
"To thrive as a value investor, you have to risk being called a dummy from time to time" - Christopher Browne

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