One number that is scaring most investors today! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

One number that is scaring most investors today! 

A  A  A
In this issue:
» Would interest rates jeopardize Fed plans
» Will India overtake US economy by 2050?
» The skyscraper curse could haunt China this time around
» Former Treasury secretaries support Volcker plan
» ...and more!!

------- FREE Newsletter -------
Straight from the Hip - A Weekly E-Letter
"This weekly stock market column written by me has run for over 19 years on various platforms. I invite you to subscribe today for a fresh and thought-provoking perspective." - J Mulraj
Available exclusively to readers of Equitymaster. Sign-up Now! It's Free!


The biggest problem with the US right now is that it has become an Empire of Debt. Even a conservative estimate puts its debt to GDP ratio at three times to what it was in the 1980s. Hence, unless the US indulges in large scale debt payback, return to business as usual is far from certain.

But the problem with paying back too much debt is that it is a lengthy procedure. The US Fed though is not in a mood to have any of it. It wants prices across all asset classes to go up rather quickly so that some amount of inflation enters the system and economic recovery takes shape. This in turn would ensure that jobs are created, profitability is improved and debt is paid back. But the Fed does not have a magic wand and Bernanke is no magician. All it can do is play its cards well and hope for things to turn out as anticipated.

Thus, an ideal situation would be a slow rise in inflation until some sort of recovery gets underway. A sooner than expected and a huge jump in inflation would once again push the economy down a huge cliff. For it will force the US Fed to raise interest rates and put the recovery at huge risk. Thus, the very medicine that the Fed is trying to revive the patient of economy with will turn into a poison. Back home in India, things are no different. Thanks to Government's efforts of trying to boost asset prices through stimuli, runaway inflation seems to be once again making a comeback. Threatening to eat away at the very recovery that the Government was trying to breathe life into. Thus, it is this inflation number and the interest rates that it would lead to that will hold the key to which way the markets move next.

01:01  Chart of the day
If there is one nation that has powerfully burst onto the global economic scene over the past couple of decades, it is the dragon nation China. Its growth has been nothing short of a miracle. While India has also witnessed very strong growth rates over the same period, it has had to contend with playing second fiddle to its Himalayan neighbour. However, as today's chart of the day shows, if the next few decades are any indication, the Indian growth story could well outpace China. As per the chart, growth in India's economy between 2007 and 2050 is likely to come in at 8.5% CAGR, significantly higher than China's 6.8%. However, this growth may still not be enough to topple China's overall GDP by the time the year 2050 arrives. If there is any solace it is in the fact that both the nations will perhaps have their economic output greater than that of the US at the end of the period. Of course, a lot of things need to go right for India if it were to achieve the projected GDP growth.

Source: LiveMint

The bailout season continues. Now it is time for the government to bail out the FPO of REC that has failed to elicit the desired response from investors. As reported by the Economic Times, the government is likely to approach PSUs like LIC to bail out REC's equity issue, given the poor response the issue is seeing currently. Though almost 96% of the issue has been subscribed as of now (it closed today), it has been largely due to the institutional part being fully subscribed. Otherwise, subscription by high net worth individuals (HNIs) and retail investors has been negligible.

Is the skyscraper curse about to strike again? For the uninitiated, the curse is said to herald the arrival of great economic pain to a country that tries to build an extravagant and a gigantic building. Bloomberg reports that China is building the world's second tallest building in Huaxi, the most prosperous of its villages. This is no doubt emblematic of the enormous progress the dragon nation has made. But some experts do believe that it's not the most productive use of the country's resources. Already, voices that China is staring at a huge real estate bubble are getting louder by the day. The news about the tower being built would certainly add more fuel to the fire.

China has not had its easy ever since the subprime crisis roiled financial markets and flattened developed economies. Its huge export driven economic machinery came to a screeching halt. To bridge the gap, it unveiled one of the world's biggest stimulus programs. It pumped in close to US$ 600 bn dollars. But in an economy where there is already surplus capacity, most of the money got channeled into assets like real estate and encouraged wasteful expenditure. The tower in Huaxi is indeed one such example of its extravagance. While China has taken steps to curb the menace, some feel that the steps are too small and there is a high probability that the Chinese economy could crash in the next year or two. And this would mean another wheel of the global economic engine also coming off. Not a very good sign indeed.

Price is a function of demand and supply. The economic theory is being best played out in the Indian banking sector wherein banks flush with liquidity are resisting to pay a higher price (read interest rate) for deposits. At the same time those short of funds and planning an aggressive growth are willing to pay higher. With the RBI stoking an upward trend in interest rates banks have another reason to entice customers with higher rates on fixed deposits. While some banks have already started upward re-pricing of their fixed deposits others may follow suit, but with a lag. Nevertheless, we believe this differential pricing cannot last for long as the supply of short term low-risk money will be limited.

Finally it appears the Indian IT sector has turned the corner after wrestling with the specter of recession for around a year. Things appear to be on an uptick now. Lately, the sector saw a significant comeback in IT demand across most part of the globe. What's more, multibillion dollar deals are back in vogue. The big 3 of Indian IT (TCS, Infosys and Wipro) inaugurated FY10 with a share in US$ 1.5 bn contract from British Petroleum. Most recently, big businesses in Nordic countries of North Western Europe are planning to award contracts worth US$ 23 bn to Indian IT service providers. In short, the IT honchos appear to have a lot stronger deal pipe-line in 2010 as compared to 2009.

The deals are more broad-based emanating from established as well as emerging areas. In terms of industry segments as well as geographies. We accept that some part of this can be attributed to pent-up demand and vendor consolidation on part of the IT clients. Nevertheless as the businesses round the world aim to cut cost through improving efficiency, they will need to depend more on IT. The case is indeed strong for the Indian IT sector.

How can the next financial crisis be prevented? That is the question facing US lawmakers as they work on a financial regulatory reform bill. There is one person who is clear about what must be done - Paul Volcker, former Federal Reserve Chairman. He says, don't let banks indulge in speculative trading. In his view, this so called proprietary trading is not proper for banks that are bailed out on taxpayer's money if something goes wrong.

In fact, Volcker believes another crisis is inevitable if the practice is not curbed. He says, "I may not live long enough to see the crisis, but my soul is going to come back and haunt you". Interestingly, President Obama agrees. And so do five other former Chairmen of the Federal Reserve. In fact, they are of the view that proprietary trading should be allowed only for hedge funds, private-equity firms etc. These entities will not be bailed out by the government if they fail. Just like other private businesses. We fully agree. Banks often become too big to fail because of the implications on the entire system. Hence, it is only fair that their activities must stay well within conservative boundaries.

Meanwhile, Indian markets are witnessing a fair degree of volatility today with the BSE Sensex trading higher by around 60 points at the time of writing. Banking and metal heavyweights were seen in favor while auto stocks were trading weak. Asian markets closed mixed today whereas Europe has opened largely on a strong note today.

04:57  Today's investing mantra
"A great sign often comes when analysts give up on a company and there are few people making forecasts on the business." - Anthony Bolton
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...

Equitymaster requests your view! Post a comment on "One number that is scaring most investors today!". Click here!

6 Responses to "One number that is scaring most investors today!"

Ranjan Bhaduri

Feb 25, 2010

It really makes me wonder when u write comments on growth story of China and of a bubble going to burst in the near future and India overtaking China in the years to come.I was reading a coloumn where it mentioned that we planned 60000 MW of electricity addition in our 5 year plan, we added only 18000 MW in the five years.Whereas China adds 20000MW every year.Another comparision which pares ourselves way back is that of China having 1300 ports,we having only 13 ports.

These comparision is just to highlight where we stand.I am unable to understand when your coloumn says China's growth is export driven where does the internal growth goes through when we have moreover the same population figures if there is a internal consumption led growth story for India where does this growth go in case of China which has a high GDP and per capita growth in every sector.


Zach Philip

Feb 24, 2010

that was an informative post!



Feb 24, 2010

Making the strong suggestion that India's growth rate is poised to overtake that of China's and that our IT Industries have turned the corner, you have painted a rosy picture of the country's future. There is every chance that this might give room for complacency at a time when there is still a lot more to be done to improve the economic situation. Let us not try to count our chickens before the eggs are hatched.


Vikram singh

Feb 24, 2010

The most unique feature about your columns are they are in the form of edgy comments from experts worldover and not just a secular news type.Its so brief and upto the point that one get lots of relevant information in a very short laps of time.We are very proud and greatful to you


mahesh kothari

Feb 23, 2010

why you want to project for years upto 2050? restrict to reasonable years.many oter factors may intervene during such a long period.'hathelime chand mat dikhao'.


kashinath paul

Feb 23, 2010

U yes and ur team making a great thing day by day.I have started to thing the matters alltogether in a complete different perspective which was beyond my captivity of knowledge.
A warm thanks for u all associated with this column.We are proud of ur endeavour.

Equitymaster requests your view! Post a comment on "One number that is scaring most investors today!". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407