|»5 Minute Wrap Up by Equitymaster|
On This Day - 15 NOVEMBER 2010
Bubbles likely in emerging markets
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Faber was speaking to a leading business channel late last week. He said that the US central bank's easy money policy had led to the dotcom, housing and commodity bubbles in the past. And thus he is very skeptical about the success of QE1 and QE2 (QE stands for quantitative easing). He believes that QE2 has the potential to create yet another bubble in commodities as well as precious metals. He also fears that capital markets of emerging nations would see bubbles.
We second Faber's opinions. Too much of cheap dollars printed by the Fed can create massive bubbles in emerging markets, India included. And when those bubbles will burst, we'll have another problem on our hands the way we had with the previous bubbles created by this very flood of dollars.
Now, it is difficult to get the timing right on when a bubble will burst. As such, the key for investors is to stick with low debt companies, with simple business models and ethical managements. Their stocks might still fall under the weight of a worldwide crisis. But investors in such stocks will still be better off than those who speculate and expect their stocks to be fast money making machines.
Overall, as Time writes, "For India, there is still the old business of nation-building, and for that there is no substitute."
As per an article in the Wall Street Journal, banks claim that the current liquidity shortage is around Rs 810 bn (US$ 18 bn), and that could go up to Rs 1.3 trillion (US$ 31 bn) by December 2010. This means that short-term working capital loans for corporate India are expected to be priced very steeply. The higher base rates have, as it is, made short-term borrowing reasonably expensive. In such a scenario, we may see more companies wanting to dilute equity. This will enable them to maintain cash reserves rather than access expensive leverage.
With the US playing a spoilsport for outsourcing and Europe reeling under crisis, the Indian opportunity comes as a fresh breather for the industry. While the companies cannot do much about the problems in the international markets, focus on the domestic front will definitely help boost their growth.
This optimism with respect to sustained economic growth is what is the fearful part here! A large part of the current recovery in emerging markets like India is a result is due to our connection to the western world. Central banks there are printing money like there's no tomorrow. And, in search for higher yields, that money is flowing straight to emerging markets like India, spurring growth here.
The fear is - what happens when this tap of easy money supply runs dry? India is growing, and growing fast as of now. But then, how much of this growth is real and how much is stimulated? We're not sure what the answer to this is.
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