»5 Minute Wrap Up by Equitymaster

On This Day - 18 NOVEMBER 2009
'India staring at a multi-decade bull market'

In this issue:
» Indian stocks staring at unprecedented growth
» Gold could go down to US$ 900 an ounce
» Small US banks may have Chinese owners
» Infrastructure money lies idle even as India faces huge shortfall
» ...and more!

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A 20-bagger! Yes, that's what the US stock markets returned between 1981 and 1998, believed to be the best period ever for the US stock markets. Similarly, between 1978 and 1989, the Japanese stock market turned out to be a near 8-bagger. Please bear in mind that these were returns from the broader markets and there were many stocks in these countries that turned out to be 30, 40 and even 50 baggers. Clearly, if one could identify a multi decade bull market early, there could be no better place than equities.

So, is there any such bull market taking shape anywhere in the world right now? If one were to listen to Rakesh Jhunjhunwala, one of India's most successful investors, there is a multi decade bull market making its presence felt right here in India. "India is on the verge of unprecedented multi decade growth. Choice of asset class will decide the return. I have allocated 100 per cent of my portfolio to equity asset class", Rakesh opined at a recent seminar. He further added that investors should look for long-term growth prospects and growth-drivers of companies where they invest, rather than getting carried away by short-term apprehensions. Indeed. We couldn't have said it better. While the Indian economy is likely to grow at strong rates well into the future, it is only those companies that constantly churn out products that meet the needs of India's large populace, and also do it profitably will survive. Hence, investors should always be on the lookout for such companies.

 Chart of the day
If today's chart of the day is any indication,it seems well confirmed that we are certainly in the midst of a gold bull market. Since the beginning of the current calendar year, the yellow metal has appreciated against all major currencies. The worst hit has been the US dollar as it now takes 31% more dollars to buy the same amount of gold as it did at the beginning of 2009. Since the Chinese Yuan is pegged to the dollar, it has also seen its value erode at a similar rate as the US dollar. In terms of Indian rupee, the gold has seen a 21% rise so far this year.

Source: Oanda

Carrying on with Gold, CEO of Barrick Gold, the world's biggest gold producer has warned that the metal could fall as far as US$ 900 an ounce. Before this piece of news scares gold investors, we would like to add that he also expects the upward trend to resume and expects gold to stay above US$ 1,000 for an extended period of time. Although gold prices are hitting record highs everyday, adjusted for inflation, it is still below the peak of 1980. If one takes into account the same, then gold currently should be above US$ 2,000 an ounce. Thus, there looks like plenty of room for gold to go up even from the current levels.

If you want to see signs of green shoots emerging in the US and Europe, you will not be required to go there. In fact, they are very much available here in India. As per a leading daily, the who's who of the global retailing industry are once again making a beeline for India in an effort to increase sourcing from the country. "There are more enquiries. We see some movements on orders for deliveries in the January-March quarter", the CEO of the one of the largest apparel manufacturers in India is believed to have said. The mood in a lot of other companies across India is not any different.

However, before one uncorks the bubbly and starts celebrating, there is also a sobering fact. While volumes may show signs of easing up, realizations are likely to remain under pressure. Since there is still a widespread fear amongst consumers in the developed markets, they have resorted to down-trading and hence, cheaper goods are finding more demand as compared to mid-priced and higher priced brands.

Thus, the overall impact on the revenues of a firm exporting from India may not be that significant. And it's not just apparels. Even exotic fruits are finding very few takers with people buying more of bananas, apples and oranges. Looks like the celebrations may to have to wait for some more time.

Life has indeed come a full circle for the Chinese. It was only a few years back that they were snubbed by the US authorities when its home grown oil giant CNOOC made a bold US$ 19 bn bid to acquire the California based US oil giant Unocal. But that was 2005 and this is 2009. While four years may not appear too much, a lot has indeed happened on the global financial landscape. The Empire of debt that was the US has seen its power erode considerably and at the same time, China, the largest holder of its debt has gone from strength to strength.

Also, with voices getting louder in the US to stop forking out any more taxpayers' money to bail out ailing banks, it only makes sense that they get acquired by bigger entities. But since most US financial institutions in the US are not in the best of health themselves, the cash rich Chinese banks obviously seem as one of the best fit. Thus, a pact is being negotiated between the Chinese and US regulators whereby Chinese financial institutions will be given the permission to buy into small and medium sized banks in the United States.

By inviting China, the US authorities are trying to kill two birds with one stone. Helping turnaround the sick banks and at the same time sending out the message to the communists that they are indeed not averse to see a red flag fluttering at the headquarters of few of their financial institutions. After all, now is not the time to peeve one of your biggest lenders.

In another shameful act, US financial behemoth Goldman Sachs has announced a charity spending of US$ 500 m to help 10,000 small businesses recover from recession. This comes as part of an apology from the bank for its past mistakes that led to the financial crisis.

But is US$ 500 m too big a penalty for the crime (fuelling the trillion dollar crisis) that the bank committed along with its peers? We ask.

As the Wall Street Journal reports, "Across Wall Street, banks have regained their profitability, but not their public standing. With big banks minting money while many ordinary Americans are struggling, the financial industry has become the object of derision." Some have in fact gone ahead branding Goldman as the great vampire squid wrapped around the face of humanity.

Picture the US the way it stands now. It has been pretty much responsible for sowing the seeds of the financial crisis, the deficit is ballooning, unemployment is soaring, the dollar is losing its value and the economy is possibly staring at runaway inflation. What is more, a nation which was once fiercely capitalistic has now displayed some socialist tendencies with the government bailing out big banks and financial institutions. So does this mean all is lost for the US? Legendary investor Warren Buffett and Microsoft founder Bill Gates do not think so.

Buffett has said that he never lost confidence in capitalism, even in the darkest hour of the financial crisis and that the US is still the best place in the world to invest money. Gates seconds Buffett's view and opines that while the US' complex financial system has churned mistakes, the fact that the country still relies on innovation, is able to create new companies and that its people are willing to take risk and invest means that there is a lot going on for the country. He probably has a point. Unfortunately for him, the US carried its innovative abilities in finance a bit too far, the consequences of which have had serious repercussions not just on the US but the rest of the world.

Not all of the government's efforts as part of the stimulus packages made it to the market as intended. This is another example of how lacuna between 'plans' and 'effective implementation' remains as wide as ever. As per a report in the Business Standard, as part of the first stimulus package announced in December 2008 the government had allowed IIFCL to raise Rs 100 bn to refinance private partnership projects in highways and ports approved after January 31, 2009. Yes, this country desperately needs core infrastructure like highways and ports. But the irony is that the money is still lying idle and untouched with the state-run lender because it cannot find proposals for refinancing projects approved after this date. The government is now considering a proposal to extend the facility to the railways and the power sector for funding ultra mega power projects.

Meanwhile, Indian indices traded lackluster today and the BSE-Sensex was down around 40 points at the time of writing. Infra and banking stocks were amongst the major losers. While Asian stocks closed mixed, Europe has opened on a positive note today.

 Today's investing mantra
"Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day." - Warren Buffett

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