»5 Minute Wrap Up by Equitymaster

On This Day - 3 DECEMBER 2010
India growth story miles away from here

In this issue:
» Another scam? SEBI bars 4 firms for rigging prices
» Government IPOs are not all as good as they sound?
» US to face double dip recession: United Nations
» 'Don't fight ECB': Trichet warns of the strength of EU
» ...and more!!

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There is a scam here. There is a scam there. There is a scam everywhere. First it was the Adarsh Housing scam, then the infamous telecom scam, then the bribery scam and now the price rigging scam. India is no stranger to scams.

But even worse than this is the economic divide that is plaguing the country. While some people are filling up their pockets with the fruits of these scams, others are starving for even a meal a day. We are referring to the huge population of the country that is still residing in the slums. As per the government's own estimates, the number of people living in the slums is likely to cross 93 m by 2011. This is a whopping increase of 23% since 2001.

The main reason that has been cited behind this 'spectacular growth' is the large influx of people in cities without commensurate job opportunities as well as the lack of housing and basic amenities. The cities are fraught with higher cost of living as well as higher cost of housing, transport and education. Add to this lack of adequate housing land and also infrastructure and one knows why there is a spike in the slum population of the country.

The government now plans to work with the state governments to provide adequate housing facilities to slum dwellers. But we ask, why were these provisions not made earlier? Was it really more necessary to sell land for luxury homes at exorbitant prices? It must be remembered that these land sales are what led to the birth of so many of the current scams.

It is a matter of pride for us when we are counted amongst the top growing nations in the world. But it would do the government good to remember that the country would grow only if its people do. And the people include even the poor, not just a handful of the elite few.

Do you think the government has done enough for the poor segment of the society? Share your views.

 Chart of the day
The crisis that has hit the western world has shifted the spotlight on the emerging economies. Their growing economies have put them ahead of their western counterparts. As a result, it would be no surprise to know that the cities with the fastest growth in income are predominantly in the emerging countries. Today's chart of the day shows that of the five cities that had the fastest growth in income (from 2009 to 2010), at least four were from the emerging markets. The lone city from the developed world to have made it to the top five is Singapore.

Data source: The Economist

The season of scams and scandals doesn't seem to be going away anytime soon. Forget politicians, even Indian companies are seeing skeletons fall out of their cupboards. We are talking about the latest issue that SEBI has raised. The stock market regulator has barred four listed companies for rigging their stock prices. These are Murli Industries, Ackruti City, Welspun Corporation and Brushman India. While these are no big names in the corporate world, their misdoings are still indicative of the disrespect that some company promoters have for ethical standards of operations.

First Coal India and now Manganese Ore India Ltd. The investor response to these two IPOs has been nothing short of breathtaking. And why not? Not only do these companies have strong competitive advantages and come equipped with rock solid balance sheets, but their pricing was also done at some very attractive levels. Little wonder, both FIIs as well as domestic investors queued up to get more than their fill of these companies.

Fortunately for investors, the IPO pipeline for the Government of India is choc a bloc this fiscal. And many more issues are lined up. But do all of them come equipped with the same quality as say Coal India or MOIL? We have our fair share of doubts. Take for e.g. the impending FPOs of ONGC and IOC. There is no doubt that both these companies are also titans in their respective fields. But it is the Government's repeated interference in their business affairs that makes predicting their future a difficult task. Thus, these issues are a pointer to the fact that investing in Government IPOs is not a one way ticket to riches. Picking and choosing would indeed yield better results than investing just blindly in the so called Public Sector Undertakings.

The United Nations has quite a bleak outlook on the US. It opines that the US may suffer a double-dip recession and see unemployment rise to 10% next year unless the Obama administration gets its act together. Interestingly, the UN believes that the way to come out of this hole is through more stimuli: something that most economists around the world are averse to.

We beg to differ. More stimulus will only lead to more printing of paper money and hence, a fall in the value of currencies. The UN believes that the key to recovery is an international agreement for a coordinated stimulus. But because there has been a lack of the same, the organization has been compelled to lower projections for US and global growth in 2011. The world economy is expected to grow by 3.6% this year and slow to 3.1% in 2011, according to the UN. Similarly, US projections for 2010 and 2011 were revised downward to 2.6% this year and 2.2% for 2011. Europe is also in a precarious state as debt issues have loomed large. Indeed, it will be a while before any full fledged recovery emanates either from the US or Europe.

China's gold import increased fivefold this year. The size of the imports for the first 10 months of the year stood at 209 tonnes as against 45 tonnes last year. This has turned the largest bullion miner into a major overseas buyer for the first time in recent memory. The surge in demand for the yellow metal has come as Chinese investors look for insurance against rising inflation and currency appreciation. Also, gold seems to be a better and safer option compared to equity and property markets. This puts the dragon economy on track to overtake India as the world's largest consumer of gold and a significant force in global gold prices.

The rise in Chinese demand could further inflate gold prices. Bullion hit a nominal all-time high of $1,424.10 a troy ounce last month. But adjusted for inflation, prices are still far off from the 1980 peak price. Chinese total gold demand rose last year to nearly 450 tonnes, up from about 200 tonnes a decade ago. Analysts anticipate a further leap this year, putting the country within striking distance of India's total gold demand of 612 tonnes in 2009.

The Euro zone has been facing the possibilities of contagion triggered by the debt problems in its member countries. The market traders and experts have been sighting possibility of a collapse of the single currency zone. However ECB President Mr. Trichet has warned the traders of underestimating the governments of the zone. He has hinted on a possibility of quantitative easing through issue of bonds in order to combat the crisis that the zone is faced with. Member countries, especially Germany, have been quite vocal of not being keen on a major bond issue in the zone. Whether any such plan would actually be carried out or if it is just a threat hoping to revive confidence in the financial system is something that remains to be seen. However, it is important to note that a bond issue would definitely help to stem the growing crisis in major countries like Spain and Portugal

In the meanwhile, the Indian markets were hovering around yesterday's closing levels during the post noon trading session. At the time of writing, the BSE-Sensex was trading lower by about 34 points or down by 0.2%. Stocks from the real estate and metal spaces were witnessing selling pressure at the time, while those from the IT and auto spaces were amongst the top performers. Other Asian markets ended the day on a mixed note. While Japan and Hong Kong ended on a firm note, China ended marginally lower.

 Today's investing mantra
"The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase." - Benjamin Graham

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