The worst returns in 10 years - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The worst returns in 10 years 

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In this issue:
» US' stimulus package of US$ 838 bn
» India's growth slows down
» Glitches in RCom accounts
» Tata Group pledges shares
» ...and more!

The S&P index has been around for 82 years and in that span of time it has witnessed the Great Depression, various bubbles and busts, bull markets and bear markets. But the prolonged current financial crisis has meant that the returns over the last 10 years through January 2009 have been the worst ever. To put things into perspective, an investor holding stocks in this index and reinvesting dividends would have lost about 5.1% a year after adjusting for inflation. This has eclipsed the previous worst decade which ended September 1974 with a compounded annual decline of 4.3%. The following is highlighted in the chart below.

Source: New York Times

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Meanwhile, dividends for S&P's 500 Index companies are expected to decline by 13% this year, which is the sharpest decline since 1942. As reported on Bloomberg, companies in the 500-stock index are expected to make US$ 214.7 bn in payouts in 2009, compared with US$ 247.9 bn last year. Infact, in 2008 itself, 62 companies cut payouts in 2008, five times the total in 2003 through 2007.

After considerable dilly dallying between the Democrats and the Republicans, the US Senate advanced the stimulus package - of US$ 838 bn - to safeguard their economy from going further downhill. This package would include tax cuts for individuals and businesses, aid to cash-strapped states and billions of dollars in new spending, jobless benefits, food aid for the poor, and road and bridge construction, among other things.

In light of Obama's penchant for change, these compromises might haunt the US in the long term. But given the perilous state of the US economy and with Obama's hands tied, addressing immediate concerns will take precedence over long term reforms. This he made clear in his yesterday's press conference at the White House.

He said, "The plan is not perfect. No plan is. I can't tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis."

On the lack of accountability shown by government officials under the Bush regime, he said, "There have been a lot of bad habits built up here in Washington. All those were designed not simply to get some short-term votes, they were designed to build up trust over time."

As reported on Bloomberg, India is projected to grow by 7.1% in FY09, as the global financial crisis and recession in the developed world takes its toll on the economy. Ever since India opened up its economy in 1991, the country has not been completely insulated from global shocks, though it has fared better than some of its Asian peers. This lower growth could not have come at a worse time for the current UPA government, with elections just round the corner.

Bloomberg reports that India will need 10% growth each year for a 1% increase in employment. That seems like a tall order indeed. That said, while a 7% growth pales in comparison to the 9% growth rate that the Indian economy logged in the past couple of years, it is much better than the economies of the developed world, which are down in the dumps.

China is at the receiving end too. In India, while the current slowdown in its economy increases the possibility of UPA being ousted from power, China faces the prospect of social unrest as plunge in exports and the slowdown have led to 20 m migrant workers losing their jobs.

Telecom major, Reliance Communications (RCom) seems to be in a soup over differences in the revenue figures disclosed to stock exchanges and those sent to the Telecom Regulatory Authority of India (TRAI). The motive apparently is to save the annual licence renewal fee, which is based on a company's revenue. Following is the sequence of events as per

1. An MP files a complaint alleging the company might have attempted to manipulate figures.

2. The Cellular Operators Association of India points out that RCom has underreported its figures to TRAI.

3. The Central Vigilance Commission asks for a report within three months.

4. The Department of Telecommunications appoints auditors to scrutinize RCom's books.

RCom says that the differences arise due to the dissimilar reporting requirements of the regulator and the stock exchanges. We hope this is not another Satyam in the making. That's the last thing India needs right now.

While a rise in job cuts is increasingly doing the rounds around the world, Japanese auto major Nissan intends to axe 20,000 workers, the most aggressive layoffs announced by a Japanese company as yet. In fact, the company joined the infamous ranks of its rivals Toyota, Mazda and Mitsubishi Motors in forecasting a loss for the current financial year which has been pegged at US$ 2.9 bn.

In sharp contrast, Britain's third largest bank by assets, Barclays has reported profits of US$ 3.9 bn during the second half of 2008 (up 49%). This is creditable given that almost all banks globally are being mired by losses and the fact that the state of the UK economy is more perilous than the US. Of course, the bank was aided by the one-time gains resulting from the purchase of the assets of Lehman Brothers and the sale of an insurance unit. But in times like these, when declaring losses has been the order of the day, UK can breathe a sigh of relief, albeit for a brief period, that at least one of its banks is still capable of standing on its own feet.

As per a CNN Money report, one in every four companies in the US has decided to freeze its employees' salaries for 2009. And another 20% may soon follow suit. This is in stark contrast to the results of a similar survey done last year, wherein only 5% of the companies planned to suspend giving their staff a hike in salary.

Had it been in any other time, the managements of these companies would have to face severe criticism from employees for taking such a stern decision. But not in times like these. Companies all around are announcing layoffs by the thousands. President Obama has stepped in to cap executive pay at companies receiving government bailout funding at US$ 500,000. Frugality has become indispensable for survival. As for the employees, 'no raise' is any day better than 'no job'.

Leveraging is considered a good tactic to expand businesses during lucrative times. However, when the tide turns, excessive leverage can come back to haunt even the bluest of the blue-chip companies. Ask the management of Tata Steel, Tata Motors, Hindalco, Ranbaxy and Suzlon. While their business motives and models may be sound, wrong timing as well as pricing of debt has forced them to alter their long term plans. According to a columnist in DNA Money, waiting to raise equity at a premium rather than doing so at a reasonable price has been the basic malaise that each of these corporates were suffering from. The columnist goes on to suggest that the best way to raise money in current market conditions is to make a rights issue to existing shareholders at face value.

This could be perhaps one of the most testing times in the group's 140 year old history. Faced with an acute shortage of cash on account of revenue slowdown and certain ill timed acquisitions, Tata Sons, the parent company of the respected Tata Group has pledged shares in as many as three listed companies. These companies are Tata Steel, Tata Teleservices (Maharashtra) and Tata Power. The percent of equity pledged in Tata Teleservices is as high as 49.7%, whereas it is between 13% -15% for the other two companies.

While this could be a normal thing for Tata Sons, the parent for the 27 listed Tata Group firms, what is worrisome this time around is the massive erosion in the valuation of the group companies, which will in turn hamper the parent's ability to raise cash. As per a leading business daily, the erosion is to the tune of US$ 25 to US$ 30 bn. It is this erosion that earlier prompted one of the ratings companies to reduce the ratings of Tata Steel as it felt that the parent's vastly reduced cash infusion ability has increased the risk profile of Tata Steel. If market conditions don't improve, similar fate could lie in store for other group companies that boast of highly leveraged balance sheets. What could perhaps save the group is its impeccable reputation.

The Indian markets closed higher by 1% today. BSE Capital Goods (up 3%), BSE Bankex and Auto (up 1% each) contributed to the rise. While the Asian markets closed mixed, the European indices are trading in the red currently. As reported on Bloomberg, crude oil remained unchanged at US$ 39.5 a barrel while US crude stockpiles climbed for the 18th time in 20 weeks as demand waned due to recession. Gold, meanwhile, traded at US$ 894 an ounce as concerns regarding the worsening global economy fuelled demand for the yellow metal as a source of investment.

04:56 Today's investing mantra
"In this business (investing) if you're good, you're right six times out of ten. You're never going to be right nine times out of ten" - Peter Lynch
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