Foreign investors feeling the jitters? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Foreign investors feeling the jitters? 

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In this issue:
» Fed unlikely to roll back QE?
» Incumbent Tata companies suffer brand erosion
» Budget may leave less room for rate cuts, fears RBI
» Is the gold story over?
» and more....

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We have time and again written about how the government needs to get its act together. The year gone by has had it involved in a number of scams and controversies. Amongst the many repercussions of the same, a key one has been the significant dampening of India's image as a foreign investment destination. As per the World Bank's Ease of Doing Business index, India is ranked at a position of 132. This is lower by about 31 places as compared to China.

The government has been dilly dallying with key policies as well. As a result, a handful of foreign companies have seen their investments turn sour and in the process incurred heavy losses. All these aspects do leave poor impressions. Many foreign companies have expressed their willingness to invest in India. But such developments - which seem to have made the country a difficult market to invest in - have been keeping them way.

In an aim to attract foreign interest into the Indian aviation sector, the government allowed up to 49% FDI a few months ago. With this development, it was expected that investors would be lining up to have a slice of the market. That did not turn out to be the case. Nevertheless, amongst the handful that did form the queue was Etihad Airways. The Etihad-Jet Airways deal would be the first foreign investment in India's aviation industry post the relaxation of the ownership rules last year. While Jet Airways' board seems set to clear the deal, it seems though Etihad is feeling the jitters about going ahead. The company's management feels that the deal should be revised and that it is too early to reveal when the final deal would be struck.

Media reports have been comparing the deal with past instances - that of Kuwait Airways and Gulf Air each investing into Indian companies in the year 1993. Four years later, these carriers had to sell off their stakes due to orders by the aviation ministry. Further, the Etisalat episode - and how firm faced tremendous losses - is also being brought into the picture.

Like any other investor looking to invest, foreign companies too need long term visibility of revenues and profits. Not to mention a reasonable return on investment! Sudden policy changes and dilly dallying on approvals are obstacles. If investors are not provided clarity, they will have no faith that their investments would remain safe. Unfortunately the government does not appear to think so. Backtracking due to political pressure, changing policies when there is a new government are a bit too common in India. If the government is truly committed to getting FDI into the country, it needs to restructure the policy making process. If not, it needs to prepare for little or no interest from foreign investors.

Do you think India's image as an investment destination has been hampered? Share your comments or post them on our Facebook page / Google+ page

01:45  Chart of the day
That India is facing a slowdown is not something anyone can dispute. But despite the slowdown, there is one class of people who still have hefty pay packages. The top ranking executives still carry home quite a moolah. This chart of the day shows the salaries and commissions of India's highest paid executives. Mr. Naveen Jindal, the CMD of Jindal Steel & Power tops the list with a salary of about Rs 734 m, followed by Mr. and Mrs. Maran from Sun TV with a total salary of Rs 1.14 bn (Rs 570.1 m each). The Munjals (Pawan, MD & CEO and Brijmohan Lall, Chairman) of Hero Motocorp raked in the highest combined figure (salaries and commissions) of about Rs 1.3 bn.

The reason we chose to highlight this is to allow readers to compare if the pay of the executives are commensurate with their performance as chief of the corporations they are heading. Since most of the executives are the promoters of the companies that they are heading, should minority shareholders have a say in the compensation they reward themselves with? We think they should.

Source: Business India

Yesterday the global markets got a shocker. This was the confused signal sent out by US with regards to their huge QE program. There were a quite a few number of Fed members who felt that the QE should be paused. These members are scared that the enormous bond buyback program could lead to asset bubbles and high inflation rates. This would eventually hurt the economy rather than helping it. But will the Fed actually cut back its QE program ?

As per the MoneyNews, the answer to this question is a big no. Despite the rising doubts over the efficacy of the QE program, the Fed is unlikely to roll it back. There are several reasons behind this. The foremost is that the US economy is still not out of the woods. Therefore the policymakers still want to pump in cheap money. At the same time, there are heavy costs involved if the program is abruptly stopped or cut back. And the US is not in any position to bear these costs. The bottom line is that despite being aware of the evils, the policy makers will not roll back the program. This is because they are just too used to the cheap flow of money and actually have no other choice. The alternative would be to allow itself to go bankrupt and rebuild everything from scratch. That is an option no politician would be willing to take.

How will you judge the performance of Cyrus Mistry, the newly minted Chairman of the Tata Group few years from now? We will possibly be too lenient on him if his performance is judged on the basis of how the current stars of the group i.e. Tata Consultancy Services (TCS) and Titan fare under him. For these companies are in a sweet spot and do not require radical strategic inputs. However, if the brand value of group companies like Tata Motors and <>Indian Hotels do indeed go up under Mistry's watch, all of us should certainly sit up and take notice. For it is these companies that have been found struggling with their brand values in recent times. Although some of the damage is market inflicted, the management of these firms has also been found wanting. Thus, it would be interesting to see what new thinking does Mr Mistry bring to the table? If he does indeed manage a turnaround, he would have passed his baptism with flying colours we believe.

Gold has had a stupendous run ever since the financial crisis broke out in 2007-09. As economies slumped into recession and unemployment rose, governments and central bankers resorted to reckless money printing. Their rationale was that more money in the hands of people will induce them to spend more and thereby bolster economic growth. They could not have been more wrong. Instead of fueling growth, these quantitative easing programs have only reduced the value of paper currencies. And this is where the precious metal gold stepped in. As a tangible hedge against falling currency values and inflation, gold has been the apple of the investors' eye. But the past few months tell a different story. India, which is the world's largest gold consumer, has seen the yellow metal's prices fall by nearly 10% from the record high in November 2012. This is line with the trend seen in the global markets as well. We believe that the gold story is not over. As long as governments continue to print money, gold will continue to cement its position as a store of value. Gold prices are bound to correct and such times should be looked upon as an opportunity to add a bit more of the metal to one's overall investment portfolio.

The government it seems wants to make a genuine attempt to rein in fiscal deficit. But that is not to be without several hurdles. For cutting public spending tends to have strong multiplier effect on growth. The Reserve Bank of India so far bore the tag of 'growth spoiler'. Its resistance to cut interest rates was seen as the key reason for disappointing GDP numbers. But now tables have turned. The economy is drudging towards an abysmal growth rate of 5% for FY13. And the RBI's eyes are on the upcoming Union Budget for growth cues. It sees a reformist Budget as the sole hope of economic recovery. The RBI's key concern is too much cut in planned expenditure. Public spending on infrastructure is necessary to avoid a downward spiral in the economy. At the same time populist spending on subsidies etc could thwart its inflation control attempts. We would have to wait and watch whether the government delivers on RBI's demands this time.

Meanwhile, indices in the Indian equity markets are trading very close to the dotted line with the Sensex up by around 12 points at the time of writing. Stocks from realty and oil and gas saw the maximum gains. All major Asian stock markets are trading mixed currently.

04:55  Today's investing mantra
"If you can find a company that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you've got a terrific investment." - Peter Lynch
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4 Responses to "Foreign investors feeling the jitters?"

R. Mohan

Feb 25, 2013

We overselves, majority of us, do not have any faith now in our government. What with all the talks by ministers remaining only as talks, and scams etc how FDI will get any confidence of in our Government.



Feb 24, 2013

If I post a comment and if it happens to be not in line with what the local political parties like, I have face their wrath. In a country where the freedom of expression in face book, ends up one behind the bars, how could I expect Walmart, if they open a shop here, would not be vandalised? Here, Law in many cases are delayed, denied or ........ fill in the blanks. I don't have the courage to spell it even.



Feb 22, 2013

sir,i really apreciate the informations given your company.
they are very much useful and many of them are first time
infomations. i therefore thank you for the same



Feb 22, 2013

I was an aspiring entrepreneur now can understand why its got failure even after taking appropriate steps in right direction. Its really shameful to declared 132 ranked in ease of conducting business and how could I proud to be known as Indian which is controlled by helpless mediocre representatives of unconscious/ subconscious public.
I am not against any one particular but its high time now we need charismatic leader no matter at the cost of sacrificing democracy as its better to be controlled by one intelligent than crores of poor minded individuals belonging this nation.

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