These could lead to a meltdown in stock markets - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

These could lead to a meltdown in stock markets 

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In this issue:
» Who will have the higher GDP per person in 2050?
» MNCs want to capitalise on lower stock prices
» Goldman's view on interest rates in India
» No relief in sight from higher food prices
» ...and more!!

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Stocks from the emerging markets, especially India and China have been the apple of the investors' eye since the start of 2009. And why not? These economies have recovered strongly from the global financial crisis and have been posting growth rates that are the envy of the developed world. And the future growth outlook for these countries has not dimmed either. Little wonder, sensing immense potential investors around the globe have lapped up the stocks of both these countries in the hope of generous returns.

But has this buoyancy gone a bit over the top? A top US-based asset management fund Grantham Mayo Van Otterlo (GMO), which manages US$ 104 bn in assets, certainly believes so. GMO is not too enthused about investing in stocks from both India and China. Pricey valuations and rising inflation have been cited as prime reasons for reducing holdings in both these Asian giants.

We could not have agreed more. In India especially, despite strong GDP growth forecasts, there are some serious issues that the country needs to deal with. The government seems to be at its wits end in terms of bringing inflation down. Food prices continue to soar. Higher oil prices are proving to be an additional headache. The government's finances are not in shape and corruption continues to rule the roost. In the meanwhile, stock prices have soared and although there has been some volatility since the start of 2011, valuations are not looking too attractive. Plus, investors will have to bear in mind that profits will come under pressure as commodity prices rise. Indeed, while the Indian growth story still holds, investors would do well to take a long hard look at performance expectations and valuations before they invest in stocks.

Do you think that inflation and expensive valuations could hurt stock markets this year? Let us know your views. You can also comment on our Facebook page.

01:23  Chart of the day
Many believe that by the year 2050, the GDP of emerging economies particularly India and China will be higher than their developed counterparts especially the US. But what does that mean for its people? Does it mean that higher GDP will translate into higher GDP per person by 2050? Not really. As today's chart of the day shows, although the US economy is not expected to grow at the pace that India and China will, its GDP per person by 2050 is still expected to be higher than that in India and China. This is because population in India and China is also rising faster as a result of which the GDP per person in that year for both these countries will be on the lower side.

*purchasing power parity
Data Source: The Economist

The recent correction in stocks has certainly led to a bit of an agony for most investors. But there is a certain section out there who is rubbing its hands with glee. No, we are not referring to short sellers. But rather to the parent companies of many of India's booming MNCs. As per a leading daily, for a typical parent of an MNC, the correction could not have come at a more opportune time. For this will give them the opportunity to buy back shares from minority shareholders at a relatively attractive price. The word has it that most MNCs don't seem to be in the mood to share the spoils of the India growth story with minority investors anymore. If this is indeed true, then one can imagine the kind of difficulty they will encounter when asked to part with some more of their shareholding when the minimum 25% public float rule comes into effect. Hence, in order to avoid such a situation, quite a few of them want to buyout the minority shareholders and even get delisted if required. However, will the Indian investors play ball? We may have to wait and see.

'To do or not to do' is not a quandary that the Indian central bank is facing currently. The RBI has a firm resolve to use monetary policy measures in its efforts to curb price rises. Thus when it comes to interest rate hikes in India, the question to be asked is not 'if' but 'how much'. Most long term investors in India see the rate hikes as a necessary evil for India's long term financial well being. Goldman Sachs seems to think so too. It believes that RBI will have to raise interest rates by 1% in 2011 given that inflationary pressures still exist. This might impact India's growth a wee bit in the near term. But what India needs to do is recognize certain deteriorating macro-economic factors and address them if it wants to maintain healthy growth in the future too. Even if that means raising rates in the near term.

Food is one thing that we Indians love the most. From thick spicy curries, aromatic gravies, innumerable snacks to delicious sweatmeats. Most Indians spend at least 50% of their income on food. The rising price of vegetables, especially the ubiquitous onion, has hurt us in the worst way possible. Right in the stomach. Vegetables now cost over 70% more than last year. Well, that's more than the returns you could have got on gold, silver or the stock markets.

Even the recent decrease in food price inflation from 18.3% to 16.9%, in the week upto Jan 1, did not bring much relief. The expected rate hikes by the RBI also may not make too much of a difference. Our government needs to now try harder to find a solution to this food crisis. India wastes over US$ 12.9 bn in food every year due to inadequate warehousing facilities. The government cannot control the weather gods. But it sure can try improving agricultural productivity, storage, and logistical networks.

China and India have witnessed superlative growth rates in 2010. At a time when most of the developed world was struggling to come back on track, the growth of these countries was commendable. But interestingly, the world is still concerned only about China despite the slowdown that is expected in the country. The World Bank estimates that even though China's growth would slow down to 8.5% next year, it would still be the main driver of growth for Asia. India does not feature as a big mover even though it is still expected to grow at a strong rate for some years to come.

Why is that? Some of the concerns that people have are that despite the growth, India still lags far behind China in terms of basic infrastructure. The surging inflation and growing fiscal deficit don't help the situation either. And the growing number of scams is just a cherry on the ice-cream. Unless these issues are dealt with more firmly, it is unlikely that the world would take India's spectacular growth story seriously.

Gold prices have been rising and the rate at which it is going, gold is likely to touch US$ 1,600 per ounce mark later this year.The reasons are not hard to find. Developed economies are still grappling with problems of excess debt and high unemployment. As a result of which interest rates have also remained low and returns quite poor. Hence, investors have been flocking to this precious metal not only in the hope of better returns but also as a safe store of value. Since most of the developed economies seem to be throwing more money at their problems, the worth of paper money has become a joke. As a result, gold's tangibility and value has been attracting investors looking for a strong hedge.

Meanwhile, the Indian markets were trading well above the dotted line as buying activity intensified during the post noon trading session. At the time of writing, India's benchmark index, the BSE-Sensex was trading higher by about 230 points or 1.2%. Leading the pack of gainers were stocks from the IT and FMCG spaces, while those from the auto sector were the top underperformers. As for the performance of the other Asian markets today, it was quite mixed with Japan trading lower by about 0.9%, and Hong Kong trading marginally higher.

04:54  Today's investing mantra
"The list of qualities (an investor ought to have) include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic." - Peter Lynch
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10 Responses to "These could lead to a meltdown in stock markets"


Jan 23, 2011

inflation does not affect the stock markets rather it swells
through the high commodity prices. in certain industries margins are stretched but these factors are balanced by commodity price rise. The television analysts are the teachers of gambling.Has any analyst explained fundamentals of companies ever? The anchor questions., what is your game plan Ashwani today, Where do you make a shot.Nothing has happened to the market, we have been shadowed by these analysts. nothing has happened nor will, ultimately., how much the RBI takes a rigid view., Sansarti itee sansara., the markets will go on whether subdued or thrilled all are temporary.The retailers are catching fishes. I am accumulating United Phos. What is you opinion, Sir


Capt Ajit Singh Yadav

Jan 16, 2011

Dow Jones Transport Average Index is the lead indicator of the Dow Jones Industrial Average(DIJA).
Casue the increase or decrease of transportation activity is the lead indicator of the economy in any country of the world or in the world it self.
Thus the lead indicator of the global economy is the Baltic freight Index of shipping & chartering activity globally and also cause this is the index which cannot be manipulated.
If one would take a look at this indicator technically we globally are headed for a double dip.
So Stay underwater and hold on to yr breath (cash).


Capt Ajit Singh Yadav

Jan 16, 2011

Now hold on to cash as an under water swimer holds on to his breath (Dear to Life)



DC Sekhar

Jan 16, 2011

The meltdown in stock prices by another 10-20% in this quarter is good for the health of equity markets in India. It can be considered as the normal correction from where the markets can rally around from the third quarter onwards i.e. July 2011, after having a lull in the second quarter. So Q1 is for correction, Q2 is for bottom side consolidation and Q3/Q4 is for rally and 2012 is for accumulation phase. This is my best guess, but it can be disturbed by the Quantitative Easing from US which is putting the burden of its mistakes cleverly on the economies of emerging countries like India/China.



Jan 15, 2011

Add one more-
An element of luck



Jan 15, 2011

With Ref of 11th Jan 5 Minute wrapup:

I have few question for all...
If free reports/research do not make money why are people/trader still following the same?

If paid reports/research do make money why are people/trader still following free reports?

Almost all free reports have disclaimer attached just as in case of MF/insurance product?

Is there any guarantee a paid report will make money and if so why is there disclaimer still attached?

SEBI intervention really required in this direction or is it required in direction to avail all the true information for investor(Satyam a simple case study)?

Finally nothing is free.... not even so called free reports because you pay for it with losses. However this does not make paid reports better then the free ones.

Do share your views.


Dr HA!

Jan 15, 2011

Even though our economy had withstood the global financial crisis,there are many negative parameters which are working and leading to stock market meltdown. These parameters are inflation,especially food prices rise, scams after scams including 2G and Adarsh scams, corruption from top to bottom at all government offices,boycott of parliament proceedings, delay in implementing infrastructure projects, unethical practices in private sector etc etc. Added to these the FIIs are selling heavily. Many are trying to manipulate the stock markets forgetting that "Market is supreme and those who try to manipulate will be mauled". God save the investors.



Jan 15, 2011

Inflation and high valuations are certainly serious factors. Buffet has repeatedly emphasised in your "Investing mantra" that when you buy at high prices you will need several years to hold for moderate returns even if the company does well.



Jan 14, 2011

I think history shows always January month is critical for Indian mkt's in Jan 10 nifty slipped nearly 650 pts the top for 2008 was also in Jan @6357 also Jan 2004 nifty dipped so my view is nifty had started a bear mkt range which will not end soon .




Kailash chogle

Jan 14, 2011

YES ! I feel 100% Yes, as I am not economist but since the AIR BUBBLE has reched to it's maximum level & has to brake with big Bang . I am not even investor in Share market , as I do not know how to Gamble but the curent portfilo of corruption level of each burocrates , ministers & Big Business Lobby which definetly take India to some disaster mode .

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