Unfazed by plunging asset prices - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Unfazed by plunging asset prices 

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In this issue:
» Developed nations become protectionists again
» Inflation falls to 14-month low
» Consolidation gains momentum in Indian pharma industry
» Obama bites the bullet in US housing
» ...and more!

Image source: Wall Street Journal
Business newspapers have very little positive news to report these days. Even a non event like the interim budget becomes a source of pessimism. Economists have been acting as doomsayers for quite some time now. The problem is that few of these journalists and economists are visiting the inaccessible Indian villages. Had they done so, they would have realised that despite the dire economic forecasts and despite the stock market being in doldrums, Indian mobile phone companies are signing millions of new subscribers a month in the rural areas. The new subscriptions in January 2009 reached a record 11 m.

As per the Wall Street Journal, the demand for mobile phones is coming mainly from rural consumers who earn less than US$ 1,000 a year. These buyers have not been affected by plunging stock and real-estate prices or tighter bank lending since they typically neither own land nor borrow. In fact a large majority of them do not have access to regular landline phone networks and the mobile phones have increasingly become a source of connection to the outside world.

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After teaming up with Charlie Munger, Warren Buffett often talked about the importance of an economic moat for companies that he would consider investing in. During the credit boom, some said Warren Buffett had lost his search for economic moats. However, after the promoter of Berkshire Hathaway clinched a sizeable investment in Goldman Sachs in 2008, Wall Street's strongest name then, investors knew what the master had been waiting for. Having clinched several successful deals last year in the financial sector in the midst of a subprime catastrophe that saw the demise of Lehman Brothers, Buffett's Berkshire now seems to be keen to shift its asset allocation to more sustainable businesses.

Although Berkshire Hathaway, which disclosed its December 2008 holdings this week, is not worried about its portfolio size shrinking by 25% in the fourth quarter of 2008, it certainly is adapting to changes. Little wonder then that the firm has reduced its exposure to ratings agency Moody's by 25% and instead bought shares in a diversified electric generation company NRG Energy and a water treatment company Nalco Holding. While the former is a Fortune 500 company with approximately 24,000 megawatts (MW) of power generation capacity, the latter is a global integrated water treatment solution provider. It is certainly not difficult to figure out what kind of 'moats' the legendry investor is looking for in such uncertain times.

"This is the beginning of what could be an irreversible slide into protectionism which happened in 1930." These are the words of Planning Commission Deputy Chairman Montek Singh Ahluwalia, who has come out heavily against the US government's decision to debar US companies from hiring people holding H-1B visas if they take help under the US$ 787 bn economic bailout package. As reported by Mint, Ahluwalia also said, "The decision says that if you have a company that needs assistance it must not hire H-1B visa workers, which really means if you have a company that is weak and you want to assist it you are going to deny it the opportunity to hire cheaper labour. To my mind it is economically irrational."

We second this thought, though it is hard to argue against the American thought process given the mess the US is in!

The fear has now been made obvious. The management of Infosys, India's second largest software services exporter, has indicated that it expects clients to spend less on technology this year. This is given that the clients have been themselves severely hit by the financial crisis. The Wall Street Journal quotes S.D. Shibulal, Infosys' Chief Operating Officer, as saying, "There is a common feeling that the budgets will be down this year, possibly in a range of about 8%, plus or minus, on an average."

Shibulal added, "There is no clarity on when the global economy will rebound. From the time it does, it'll take another two quarters for IT demand to pick up." Dire predictions indeed for an industry that has been one of the lead drivers of India's growth for so many years now!

Despite the news of inflation (measured in terms of WPI) falling to 14-month low of 3.9%, Indian markets closed almost flat today. While other Asian indices closed a mixed bag, the BSE-Sensex gained 27 points (0.3%) and trailed behind the benchmark Chinese and Taiwan indices amongst the pack of gainers. The European markets have opened largely in the positive. Meanwhile, gold prices in India touched a high of Rs 15,800 per 10 grams after poor economic data of Russia and Japan raised concerns of a growing malaise of global recession.

Many experts were taken aback when the recently announced interim budget had little in it in the form of fiscal incentives. Given the massive decline in confidence, some more measures would indeed have been welcome. However, Mr. Suresh Tendulkar, the chairman of the Prime Minister's Economic Advisory Council, is unfazed. In an interview to a leading business daily, Mr. Tendulkar reasoned that the previously announced measures have not been given enough time to show the desired results. Hence, once enough time is given and its outcome assessed, only then further measures would be taken.

He also found the current mood of pessimism rather unjustified and felt that the economy should be able to revive by the second half of 2009. It better do and that too without any further fiscal incentives. This is because the deficit that we have already raked up has not gone down well with the international ratings agencies. One of them has even sounded alarm bells saying that India definitely is one of its top concerns in Asia. We seem to be living in dangerous times.

Consolidation in the pharma space is set to gain momentum. Ranbaxy seems to have set the trend when the Japanese company Daiichi Sankyo picked up 62% stake in the former enabling the latter to have a generics portfolio added to its range of patented drugs. It seems that many global pharma companies too are eyeing the Indian market for potential acquisition targets. Talks are flying thick and fast about GSK Plc possibly acquiring Piramal Healthcare (though both have denied the same) and Merck and Sanofi-Aventis also looking to acquire Indian companies.

While nothing concrete has emerged as yet, the reasons why global pharma companies are evincing interest in the India are manifold. Firstly, given that launching patented drugs is not as easy as it once was, having a portfolio of generic drugs could help to prop up sales. Secondly, given the meltdown in the stock markets and the global credit crunch, valuations of Indian companies have reached a level low enough to make them attractive targets. Plus, given liquidity issues some of them could even be willing to reach a quick deal. The target companies also in some sense stand to gain given the intense competition in the global generics space as they will be able to leverage on the R&D expertise of global pharma.

After signing the near US$ 800 bn economic stimulus package into law, all eyes were fixated on Obama on the thing that he will do next. The cat finally seems to have come out of the bag. The US President is going to target the industry that has been at the epicenter of the current financial tsunami, i.e., the housing market. Foreclosures are rising at a rapid rate, hurting homebuilders' efforts to cut prices and inject life back into the economy.

The US government plans to halt the slide in foreclosures by subsidising mortgage payments and thus making defaulters, both present as well as potential stay in their homes. As much as US$ 50 bn is expected to go towards these efforts. The government intends to reward lenders, who will make life easier for borrowers by reducing the latter's EMI to the extent that it should account for no more than 31% of their income. This is likely to keep EMIs coming in and reduce foreclosures.

04:55  Today's investing mantra
"A mania is a mania, and the experts are caught in it just as the public is." - Marc Faber
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