»5 Minute Wrap Up by Equitymaster

On This Day - 9 OCTOBER 2010
Why Indian stock markets could go higher...

In this issue:
» No need to curb foreign inflows, says Finance Minster
» China, India contain risks for the world economy
» The race for new banks
» M&A activity on the rise in India
» ...and more!!

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The stock market rally of the last few weeks has been breathtaking to say the least. And the most reasonable explanation is the influx of money from foreign institutional investors (FIIs). Its basic economics that when increasing amounts of money chases a limited commodity, its price rises. Whether the fundamentals warrant such a chase, then becomes irrelevant. This applies to the share market as well.

History has shown that the FIIs are a fickle lot. At the first sign of trouble in their home markets, they will reverse this flow. And share prices will dutifully reflect that. Given these facts, one would expect India's Finance Minister to be a little weary of the dollars rushing into India. But that doesn't seem to be the case. As per a leading daily, Mr. Pranab Mukherjee does not see the need to restrict foreign institutional investment. "That situation has not arisen in the Indian economy today" he says. Referring to the stock markets, he adds, "I don't think it is going to be too volatile". He believes the inflow "has not distorted market sentiment and, therefore, there is no question of putting any curbs."

Unfortunately, we are not as confident. More FII inflow will lead to stock markets going up further. At a time when we already feel stocks are rather richly valued. If and when FIIs flows change direction, it will rock the boat. We would strongly advice that you pay particular attention to valuations at this juncture while creating your portfolios.

 Chart of the day

Source: Credit Suisse
Note: Wealth denotes the sum total of the wealth of all citizens in respective countries

Despite all the bad economic news coming out of the developed world, the fact remains that they are way ahead of the emerging nations. The chart of the day shows the wealthiest nations in terms of a share in world wealth. As expected, the US and Western European nations lead the pack. However, the rate of growth in wealth is much higher in emerging nations, especially China. Ten years ago, the dragon nation was on the seventh place on the list. Today, it occupies the third spot. By 2015, it is expected to dislodge Japan at the second spot. India's wealth has also grown fast. It has tripled over the last decade and is expected to grow another 80% by 2015. But it still pales in comparison to the dragon nation. China is nearly five times as wealthy as India.

Speaking of inflow of foreign money into Indian stock markets. It is all driven by foreign institutions. Not individuals. At present, foreign investors with a net worth of over US$ 50 m can register as sub-accounts of a foreign institutional investor and buy Indian stocks. Alternatively, they can come through India-focused funds. That could change. The finance ministry is looking into a proposal that would allow overseas retail investors to invest directly in Indian equity markets. Such a move would also require the approval of RBI and SEBI. We are not big fans of FIIs, given their herd mentality. While it remains to be seen how foreign retail investors behave, we do expect them to be a more stable investor class. The question is, will their investment amount to a sum where it makes any difference at all?

International economic bodies like the IMF have much to deliberate on, with regard to the future of the global economy. There is consensus on emerging economies like India and China driving global growth. However, there are few risks associated with these economies too that cannot be sidelined. IMF Director Strauss-Kahn believes that since both India and China are now an integral part of the global economy, how they curtail their domestic risks will have an impact on a much larger scale. The core of this discussion lies in India's high public debt and China's undervalued currency problems. IMF believes that given the onus of setting the pace of global growth, both India and China need to address the concerns of their respective economies diligently. While we do agree with Mr. Kahn's views, for the time being its China's currency that is threatening the world economy much more than India's public debt.

The Mint Street seems to be having quite a few visitors these days. Banks that have managed to garner a large share of deposits in the aftermath of the global crisis are getting insecure. In order to retain their market share, the larger players need to keep competition away. However, with the RBI planning to issue more bank licenses, the banks' ambitions could be short lived. The RBI's proposals to offer more leeway to foreign players as well as give licenses to NBFCs clearly threaten the supremacy of the incumbent players. With banking being an extremely fragmented sector, every new competitor could be a drag on the margins of the existing players. Hence, the dissent of the bigger players to RBI's moves does not come as a surprise. But as always, the Indian banking regulator is keen to have its way.

Buoyed by vibrant equity markets, transactions across the private equity (PE) and mergers and acquisitions (M&A) space are on a rise. So far, deals worth US$ 52 bn have been announced in PE and M&A spaces this year. Majority of the M&A deals were cross border transactions indicating the amount of liquidity waiting on the sidelines ready to enter Indian markets, if the price is right. Big ticket deals were the flavor of the season with energy and health-care finding huge interest from investors. However, we believe India Inc. should not get snared into this number game and take into consideration the most important factor while undertaking any acquisition - price. In the last few years promoters have ended up paying more for targets than its worth, in an urge to take the company global. Thus, even if the inorganic growth strategy via M&A enables the company to grow faster, one needs to take a closer look at the valuations.

The week gone by turned out to be particularly good for key global markets barring India. China was the biggest gainer for the second week in a row up 3.1% while India was the biggest loser down 1%. US was up by 1.6% inspite of weak unemployment data for September. The reason for this was that the weak data was camouflaged by speculations of another round of stimulus.

Among the European markets, France was up 1.9% while Germany and UK were up by 1.3% and 1.2% respectively. Japan closed the week up 2% while Hong Kong was up 1.4% and Singapore was up 0.7%.

Source: Kitco, CNN Money, Yahoo Finance

 Weekend investing mantra
"We both (He and Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life." - Charles Munger

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