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Greece might exit the Euro. Should you be worried?

Feb 17, 2015

In this issue:
» Oil could fall to US$ 10 a barrel
» Restructured loans come to haunt Indian banks
» A big event is around the corner for Indian telecom
» ...and more!

00:00
In yesterday's edition of the 5 Minute Wrapup, we talked about how bull runs are never linear upward movements, but that they are always marked by periods of correction.

Why are we bringing up this point again? Because there is a strong likelihood that a correction could well be around the corner. Allow us to explain.

The Indian stock markets have gained around 42% in the past one year. The so called 'Modi magic' certainly has a lot to do with this. But the other factor that has sparked a rally in the Indian indices is a slush of liquidity brought on by the central banks of Europe, US and Japan. Thus, too much money and this very money looking for places with better yields have been the primary drivers of the rally in Indian stock markets. So anything going wrong with either of the two scenarios could see large swathes of capital leaving Indian shores.

The latest crisis that has cropped up is the Greek crisis intensifying. The newly elected government in Greece has refused to confirm to the austerity measures being imposed by the rest of the Eurozone. So if neither of the parties reach a compromise on the bailout deal, Greece may just have to exit the Euro.

For the long term health of global financial markets, perhaps a Greek default is not a bad thing. After all, for how long can errant and highly indebted countries keep getting bailed out? It just postpones the problem without really solving it.

But in the medium term, this could have repercussions on global financial markets including India. Since no country has left the Euro as of now, there remains a huge element of uncertainty with respect to how the situation will pan out. On a broader basis, one can expect more debt defaults, bank runs and large scale capital outflows.

As we have pointed out before, the moment the scale of a crisis deepens anywhere in the world, foreign money finds its way back to its home country in search of a safe haven. So the uncertainty that a Greek exit will pose could see capital outflows from India as well as foreign investors leave the country en masse. We have already seen this happen when the global financial crisis deepened in 2008. It is worthwhile noting that foreign investors pulled out money from India at that time even though the Indian economy was in good health.

So should Indian investors panic should such a scenario materialize. Certainly not. We believe that the recent rally in the stock markets has pushed the valuations of many stocks well beyond the comfort zone. And thus a correction seems likely. The ValuePro team will certainly welcome a sharp correction. Since the ValuePro service is all about finding solid, quality businesses that Warren Buffett would buy at sufficient discount to intrinsic value, a correction will enable the team to add some good quality stocks to either of the two portfolios.

Do you think that Greece leaving the Euro could spark a sharp correction in the Indian indices? Let us know your comments or share your views in the Equitymaster Club.

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02:28
As oil prices keep falling, various predictions are doing the rounds of how low these prices can go. As per the latest estimate published in an article in the Mint, oil prices could go as low as US$ 10 a barrel! Why is that?

For starters, economic growth in the US has not taken off strongly, growth in China is slowing down, in Europe and Japan, there is hardly any growth. This coupled with better fuel efficiency in the US has led to overall weak demand for oil. Then there is of course an oversupply shale oil production in the US.

The other important factor is that the OPEC cartel most notably Saudi Arabia is not cutting production. Major oil exporting countries such as Saudi Arabia have enough financial resources to withstand the impact of lower oil prices. For instance, as reported in the Mint, Saudi Arabia requires a price of more than US$ 90 to fund its budget. But it has US$ 726 bn in foreign currency reserves and is betting it can survive for two years with prices of less than US$ 40 a barrel.

The bigger question is at what price will the oil exporting countries begin to feel the heat? According to IHS Cambridge Energy Research Associates, this is the marginal cost of production, or the additional costs after the wells are drilled and the pipes are laid. In other words, it is the price at which cash flow for an additional barrel falls to zero.

With respect to this, of the total number of oil fields surveyed worldwide, only 1.6% would have negative cash flow at US$ 40 a barrel. This means that oil prices will have to fall further before it can start forcing players out of the market. According to us, predicting where oil will be headed next is a futile exercise, and just as prices have fallen drastically, an uptrend in the same in the future cannot be entirely ruled out.

03:18
  Chart of the day
We have repeatedly highlighted the problem of bad loans in the Indian banking system. By bad loans we don't mean just the willful defaulters. It is no secret that a huge pile of debt has been restructured over the years. These loans have now come back to haunt Indian banks. The euphemism by banks used to describe these loans is 'stressed assets'. In simple terms, it refers to the loans that have been restructured over the last few years but are still turning into NPAs. As per an article in Mint, 20-25% of restructured loans have turned bad and the trend can be expected to continue.

Thus, it is now clear that the lifeline granted by banks to Indian corporates via restructuring has not helped them too much. Bad loans were restructured on the hopes of an economic recovery which has not yet transpired. Thus, we believe that it may be a while before this pain subsides. Investors will do well to keep this mind before joining the rally in banking stocks.

Stressed assets continue to rise


04:12
A big event is around the corner; one that could potentially alter the fundamentals of an important sector. We're talking about the telecom spectrum auctions due next month. Its significance is not just because it will be the biggest sale of spectrum in India's history. The real concern is how the bidding will impact the companies as well as consumers. Out of the eight participating telcos, four have no choice but to buy back spectrum in areas where licenses are up for expiry. With big spending Reliance Jio also in the fray; we have little doubt that the government will achieve its Rs 800 bn auction target from an industry that's already heavily indebted. By pricing the 2G spectrum sky high and providing only a limited amount of 3G spectrum for sale; the government has ensured that the telecom sector will not see 'acche din' in 2015 at least. Before investing in this space, investors should keep in mind that the risks posed by the government or the regulator are unusually high for the telecom sector. We believe, only the companies with the strongest balance sheets will survive in the long run.

04:45
The Indian stock markets remained closed today on account of Mahashivratri. As far as global markets are concerned, while Asian indices were trading mixed at the time of writing, the European indices were trading in the red prompted by the collapse in Greek talks.

04:56
 Today's investing mantra
"The individual investor should act consistently as an investor and not as a speculator." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Radhika Pandit.

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Equitymaster requests your view! Post a comment on "Greece might exit the Euro. Should you be worried?". Click here!

2 Responses to "Greece might exit the Euro. Should you be worried?"

sivaramanenator

Feb 18, 2015

oil prices keep falling, various predictions are doing the rounds of how low these prices can go. As per the latest estimate published in an article in the Mint, oil prices could go as low as US$ 10 a barrel! Why is that? OIL-CARTEL had been fooling the world! The cost of production is $10 and they were charging more than $100! Now New Technology and Recession have broken their vicious hold!

Like 

vijayakumar

Feb 17, 2015

all articles are written with good economic,futurepredict/warning/cautious idea. hats off to you.
best regards



vijayakumar

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