»5 Minute Wrap Up by Equitymaster

On This Day - 18 AUGUST 2009
These economies continue to march ahead...

In this issue:
» India and China are a cut above the rest
» China is snapping oil fields
» Changes in patent law beneficial to Indian pharma
» Indian IT sees potential in Japan
» ...and more!!

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If the strong growth reported by the Asian economies is anything to go by, it looks like these economies are set to make a comeback while their developed counterparts of the US and Europe still struggling to keep head above water. As reported in the Economist, Asia's emerging economies probably grew at an average annualised rate of over 10% in the second quarter, while America's GDP fell by 1%. In some sense this is surprising since the myth of Asia being decoupled from the rich world was shattered as exports plunged on the back of the global economic slowdown. And yet, Asian economies have rebounded despite the fact that exports still remain muted as America and Europe battle to shrug off the ill effects of recession.

Various factors seem to have caused this rebound. One is that the slowdown in the Asian economies was only partly caused by the slump in America despite the former's dependence on exports, as higher food and oil prices and tighter monetary policies also took their toll. The second is that massive stimulus measures have vitalised domestic demand as Asians are not as indebted as Americans and Europeans. Plus, most of these Asian countries have comfortable finances, barring India whose fiscal deficit has soared. The willingness of banks in Asia to lend more since they have not been as badly crippled as those in the West as well as the necessity to invest in infrastructure has also helped Asia.

However, all is not hunky dory. Stockmarkets in Asian economies including India have skyrocketed meaning that a bubble is already forming there. Other problems are more chronic in nature such as wasteful investment, inadequate bank regulation and rampant corruption.

We believe the key question really is whether this growth is sustainable going forward. One thing is clear. Even if Asia cannot replicate the scorching growth that it had logged prior to the global meltdown, its tapered down growth is still miles ahead of what the rich world will be able to achieve. In that case, despite its various shortcomings, Asian economies will remain a force to reckon with in the future.

 Chart of the day
China and India are way ahead of the US and Europe and even its BRIC peers Russia and Brazil in terms of expected growth in GDP in 2009 and 2010 as today's chart clearly shows. 2009 is expected to be a challenging year with most of the economies likely to report a fall in GDP as the ill effects of the recession refuse to abate quickly. Also, while India and China are notable exceptions, the growth in these economies is still slower in 2009. In India's case, what has toned down GDP expectations this year are the weak monsoons, which have impacted agricultural productivity. Nevertheless, a rebound seems in order across economies in 2010 with India and China once again taking the cake.

* forecasted; Data source: The Economist

The rate at which it is moving, one day, it will definitely be in a position to challenge the might of the western oil firms. As reported by CNN, China is on an oil field snapping spree over the past few months, sewing up alignments in countries as varied as Iran, Russia, Argentina and Angola. And it indeed has a few reasons to do so. For starters, it's the demand. As the country grows, it will have to continue to keep feeding its giant factories and power plants with tons of hydrocarbons. As per estimates, China's oil demand is likely to grow 20% over the next six years, and the country already imports more than 50% of the 8 m barrel of oil that it guzzles every day. Hence, tying up long term supply arrangements does make enormous sense. Another reason is China's enormous forex reserves. They are huge alright but are in a currency, which many believe is a ticking time bomb. Moving out of the same and diversifying into hard assets like oil is definitely the shrewd thing to do.

While the dragon nation's oil firms are already the envy of the world in terms of size and market values, their expertise in matters such as deep water drilling and liquefying natural gas still trails that of the western oil firms. But with some more experience under their belt, even that bastion is likely to fall sooner than later. Is the Indian government taking note of this?

It is amazing how change in perceptions can lead to wide swings in things like economic growth. Take the US for instance. During the height of the credit boom, loans were available in plenty even to the most undeserving borrowers and this in turn, boosted economic growth. Switch to the present. The boom has turned into a nasty bust and now, even the most deserving consumers are finding it hard to get loans. This in turn is likely to delay the recovery process, which is such a key in these troubled times. The US Fed published a report recently that said that loans for consumers and businesses remained tough to come by over the past three months. And as expected, for subprime companies and consumers, the lending standards have been tightened and are expected to remain so in the foreseeable future. As far as the economic recovery is concerned, we guess the world will have to wait until the second half of next year as most banks said they expected their lending standards would remain tight till such time.

Official data released recently shows that Japan's GDP grew 0.9% in the April-June quarter. This expansion, which is the first in five quarters, came on the back of a 3.1% contraction in the January- March quarter, and a record 3.5% fall in the December quarter of last year. Though this might technically be taken as the end of a recession if one were to stick to its popularly accepted definition of two consecutive quarters of GDP contraction, economists and commentators continue to remain grim. This is because, like steroids would help an athlete perform better only until its effects last, Japan's climb into positive territory is being described as the direct effect of the huge stimulus packages that have been announced in Japan and the rest of the world. And as its effect wears out over the next quarter or so, Japan's export led economy can very easily slip back into slowdown mode once again.

As a fallout of the current economic crisis, the Indian IT bandwagon noticed the ill-effects of over-exposure to the US financial sector and Japanese firms realized that in order to survive and beat competition, they have to become more international. Consequently, Indian IT majors attempting to diversify see a big market emerging as Japan opens up to outsourcing and even offshoring to India and China.

Japanese firms, which were traditionally quite skeptical about outsourcing their jobs to outsiders, are increasingly doing so partly because of aging population and shortage of adequate computer engineers. Further, Indian IT service providers not only charge less, but are also more experienced in building software than the Japanese. On the flip side, language and the Japanese corporate culture act as big barriers since the Japanese are a tough and perfectionist lot, wanting best quality even if it takes long. This is contrary to the software model that Indian companies and their customers in the West follow. No surprise then that companies like Infosys and Wipro are spending much more on culture and language training for their employees as they aim to ramp up their revenues from the Japanese market.

There is something to cheer about for Indian pharma companies focusing on R&D. As reported in a leading business daily, the government has accepted the recommendations of the Mashelkar committee, which had concluded that limiting the grant of patents for pharmaceutical substances to new chemical entities will be a violation of the TRIPS agreement of the World Trade Organization (WTO). This means that now patents will be granted to molecules even if they are not new chemical entities (NCEs) but have significantly new therapeutic uses. This comes as a relief to Indian pharma companies since their efforts in the R&D space are still in its nascent stages and it will be a challenging task for them to churn out NCEs on a consistent basis like the global innovators.

After a rather volatile start in the morning, the BSE-Sensex surged in subsequent trading sessions and was trading well above the dotted line at the time of writing. Strong gains were seen in capital goods, metal and banking indices. On the global front, while key Asian indices closed mixed, European indices are trading firm currently.

 Today's investing mantra
"Lethargy, bordering on sloth should remain the cornerstone of an investment style." - Warren Buffett

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