Will the Ukraine crisis impact Indian stocks? - The 5 Minute WrapUp by Equitymaster
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Will the Ukraine crisis impact Indian stocks?

Mar 4, 2014

In this issue:
» Billionaires in India rise
» Are minimum wages a good thing?
» Coal India has been told to strike a balance
» SBI pays more than ICICI Bank
» ...and more!

00:00
 
The escalating crisis in Ukraine seems to have all the makings of another Cold War between the US and Russia. But the backdrop against which this is being played has undergone a sea of change. When the Cold War was dominant between the two nations in the 1980s, Russia was more or less isolated from the rest of the world. Now this is not the case. The world is now much more integrated and connected. And with businesses across the world expanding into countries beyond their home turf, such geopolitical tensions will certainly have an impact on the global economy.

Little wonder then that the Ukraine crisis has affected stocks the world over. Many of the global corporations have established a presence in the emerging markets given that growth in these regions has been healthier than in the stagnating developed world. And thus, besides India and China, Russia has also been a favoured destination for investments. So in that sense, stock valuations are likely to come under pressure if the current situation worsens further.

How does this crisis impact Indian stock valuations On a much broader basis, to what extent do global geo-political risks have a bearing on stock prices? India, for instance, is no stranger to events of this kind. We have had our share of problems with many of our neighbouring countries. On one hand, such risks or events cannot be completely ignored. But at the same time it is not an easy task factoring in such risks while we evaluate stocks. What we can say is that despite our history of international tensions in the past, Indian equities have certainly rewarded shareholders in the longer run despite near term hiccups. What is more, investors could view fall in stock prices during these times as potential buying opportunities.

Indeed, as reported on Moneynews, this is what the legendary investor Warren Buffett had to say, "You're going to invest your money in something over time. The one thing you can be quite sure of is if we went into some kind of very major war, the value of money would go down. That's happened in virtually every war I'm aware of. The last thing you'd want to do is hold money during a war. You might want to own a farm, you might want to own an apartment house, you might want to own securities. During World War II the stock market advanced. "

We cannot help but agree with Mr Buffett. We are of the view that investors should not abandon investment in equities completely whenever such geopolitical risks crop up. Unless there is strong evidence to the contrary, depressed stock prices during these periods can actually be looked upon as an opportunity to buy into the stocks of some fundamentally very good companies.

Do you think that the Ukraine crisis will adversely impact stock markets? Will you look upon this event as the perfect opportunity to buy good quality stocks? Share your views in the in the Equitymaster Club. Or post your comments below.

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01:36
 Chart of the day
 
The publication of the billionaires list is something that evinces much interest across the world. But the results generally tend to be not very surprising; Bill Gates being billed as the richest billionaire is nothing new after all. What is interesting is how countries as a whole fare in this regard. According to the 2014 Hurun global rich list that was released recently, the US topped the list, followed by China. The US and China now have half of all billionaires on the planet. India has not done too badly either though it lags both these countries by a wide margin. India was home to 70 billionaires the combined wealth of who was pegged at a massive US$ 390 bn. Ironically, if a list of poorest countries was to be drawn up, we would not be surprised if India featured on that list as well. This only highlights the instance of rising income inequality that India faces. Infact, not just India but this has been a growing concern in the US and China as well. One of the reasons for this has certainly been the loose monetary policies of central bankers in the West which has had the effect of artificially raising asset prices and making rich individuals all the more richer in the process.

Another indicator of rising income inequality?


02:11
 
We no doubt admire Warren Buffett for his views on all things investing. However, when it comes to political view points, we have tended to be not on the same page as him. For a change though we liked what he had to say about the minimum wage hike that the US Government is planning to implement. Buffett was of the view that he would have loved to see the minimum wage double to US$ 15 an hour. But only under the condition that it didn't hurt anything else and that is not the case as per him. He is indeed right we reckon. Come to think of it, the concept of minimum wage is to help create employment and bring more income into the hands of the workers. But what it also does is interferes badly with the market mechanism of fixing wages. And if the minimum wages as per the market mechanism tend to be lower than that mandated by law, employers would rather not hire and extract more work from their current workforce. As a result, the Government determined minimum wage ends up having exactly the opposite effect than intended. It actually increases unemployment on the back of the employers' reluctance to pay higher wages. And we believe it was this negative effect that Buffett was alluding to perhaps. Better approach would be to invest more towards skill building so that the market wages go up as a whole. This will help the nation become more productive in the long run and benefit a larger section of the society we reckon.

02:54
 
In terms of profitability and cash reserves Coal India (CIL) certainly stands apart from most other resource rich PSUs. But that has more to do with its monopolistic pricing power than its production efficiency. The company has particularly made efforts to sell coal through the e-auction route rather than through long term contracts. This too because the pricing power is substantially higher in the case of former. Now this has not gone down well with the government. It has pointed out to the coal mining major that the very purpose of nationalizing the coal sector was to ensure adequate supply of coal to power producers at reasonable prices. However, while the power producers have to import expensive coal, CIL is raking in profits through the e-auction route. As per Business Line, the Standing Committee on Coal and Steel has asked CIL to strike a balance between coal production and pricing. To put in another way, CIL will now have to prove its production efficiency before taking frequent price rises. If it works out, the PSU could also win favour amongst long term investors.

03:23
 
What an irony! While its trouble brewing at PSU banks with respect to bad loans, these banks outnumber their private peers in terms of pay-cheques to their employees. State Bank of India's (SBI) average employee pay is a case in point. The bank's average salary per employee at Rs 10 lakh is 67% higher than Rs 6 lakh paid by ICICI Bank. Surprising, isn't it? Interestingly the better performing private lender has witnessed 22% decline in employee pay over FY11. Whereas SBI has observed 47% rise in average employee salary over the same period! ICICI Bank has been constantly working upon improving its operating cost metrics. But there seems to be no respite for PSU lenders. The steep increase in employee costs for PSU banks can be attributed to the increased compensation levels post FY11. Moreover, SBI's operating costs have trended higher for some time now. That's because the salaries are linked to the inflation indices in the domestic economy. The bank carries the responsibility of preserving the purchasing power of the employee at large.

SBI reported gross non-performing assets at 6% and increased provisioning of 24% YoY during the third quarter of FY14. Higher bad loans and increased provisioning have already marred the profitability of PSU banks. In such a scenario, hike in compensation benefits is definitely a further blow to the PSU banks' earnings.

04:02
 
Excess liquidity creates inflationary pressures in the economy. With central banks across the western world being dovish inflation seems to be a prime economic risk. However, such a loose policy has been followed since the 2008 crisis. Yet, inflation figures from the West have been in low single digits. This seems counter intuitive, isn't it? In fact, deflation and not inflation is the key risk to the western world now. Excess liquidity created by the banks is not finding its way into system for the want of confidence. Businesses are unwilling to invest and consumers are unwilling to spend. This has created deflationary pressures.

Up till now such pressures were not clearly evident because of the Chinese commodity boom which raised metal prices. As highlighted in an article in Money News, such a commodity boom ensured that inflationary pressures continued to persist. However, the commodity super cycle has most likely come to an end. Also, China is now focusing on consumption rather than investment to boost growth. This may bring down commodity inflation and worsen deflationary risks. The situation could turn worse if business and consumer confidence does not return. Thus, it seems that the western world may sink deep into deflation if the Chinese economy remains stifled for growth.

04:45
 
In the meanwhile Indian stock markets have shed their early losses and are trading firm. At the time of writing, the benchmark BSE Sensex was up by 223 points (1.07%). Metal and Banking stocks were the biggest gainers. Most of the Asian stock markets were trading higher led by Hong Kong and Japan. The European markets opened on a positive note.

04:56
 Today's investing mantra
"You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it."- Warren Buffet

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4 Responses to "Will the Ukraine crisis impact Indian stocks?"

xavier

Nov 25, 2014

Hello,

We are master’s french student realizing a thesis about the effects of a politic crisis on the financial markets. That’s why we would want collect an expert’s point of view. More specifically, we want to study the Ukranian crise which we don’t reach to understand all the complexity. Would you be disponible for answer to our questions ? As you prefer, the interview can be by call and only will last few minutes or by mails. We really would be honored to have your point of view.

Thank you,

Best regards,

Elodie KOZAK and Xavier HALBEDEL

Like 

satish S Dabholkar

Mar 5, 2014

I wish to comment on salary paid by Public sector bank's compare to private sector banks
In most of public sector bank's many employees are retiring or on the verge of retirint.Naturally compenstion and funds paid to these employees resulting in excess cost in these years.Unless information is scrutinised by you will give wrong signals to the readers.The rising NPA ib public sector banks is due to no recruitments in last meny years.The comparison to be made with number of emplyees on January 2001,January 2011 and January 2013 for correct results with the business mix during these years.

Like (2)

R S Upadhya

Mar 5, 2014

I find it surprising that you have commented that SBI's salary cost has increased post FY11 due to increase in salaries. i wish to point out that the PSU Banks employees wage negotiations are going on and the same is yet to be finalised. The per employee cost in PSU Banks may be due to the factor that the average age of the employees are around 53 whereas the private banks employee average age will be around 27 to 30. There is also lot of attrition in private banks whereas the same is not the case in PSU banks. Also many of the activities of the private Banks are outsourced whereas it is in house in almost all the PSU banks.

Like (1)

H K Prakash

Mar 4, 2014

Ukraine crises: Russia gifted the Crimea to Ukraine in 1954 but Russians have always considered it a part of Russia (and Ukraine as a part of Russia's sphere of influence)!
Ukraine's crises started with the removal of the pro-Russia president and the tilt to the West and that alarmed a paranoid Putin into PUTting his troops IN! This crises can and will be be solved by a calm assessment of the situation by Ukraine's leaders and possible lease of Crimea to Russia. India has very little trade with Russia that goes thru Ukraine Even otherwise India's trade may not be impacted much by Western restrictions given that we run a pretty unnatural Rupee-Rouble based trade! Possibly the only impact may be due to FIIs panicking and removing $ to take back to the US.

Like (1)
  
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