India: Appealing or junk?
(Feb 24, 2009)
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In this issue:
Worried that despite valuations being attractive in India, FIIs are not making a beeline? Is the India growth story dead and buried for perhaps the most influential set of investors? Well, we would like to talk about something that will allay your fears to a great extent. Thomson-Reuters Corp, a provider of financial data and information polled around 32 money managers, which collectively manage about US$ 1 trillion - to put things in perspective, this is just about the size of India's GDP - on the most appealing amongst the nine Asian regions currently including Singapore, Japan, Thailand, Turkey and Korea.
» S&P downgrades India's sovereign rating
» Indian companies willing to hire more Americans
» A brilliant cue to profitable stock picking
» Another stimulus package props up markets
» ...and more!
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China, of course, emerged on top with nearly half of those polled favoring the dragon nation, courtesy the 'non-inflationary' fiscal resources it has at its disposal to keep the economic growth chugging along. However, one fourth of these investment managers were of the opinion that India has more investment appeal than the other Asian regions. This is in sharp contrast to the FII investments in the country in recent times, wherein as per Mint, some US$ 6.5 bn has been pulled out since mid-September.
So, while interest in India as a top investment decision has undergone a resurgence, foreign money seems to be biding its time. It is perhaps waiting for the near term clouds that have gathered in the horizon to clear up.
While fund managers raise hopes, credit rating agencies are washing them out. Standard & Poor's (S&P) has downgraded India's long-term sovereign credit rating from stable to negative today, citing the rationale that the country's fiscal situation has deteriorated to unsustainable levels. We wonder if this will continue to hold India's appeal in the eyes of the foreign investors.
US President Obama has some daunting tasks ahead of him. In addition, he has set for himself a target of reducing US's fiscal deficit to half by 2013. Interestingly, even if he manages to do so, the deficit will still be higher than what it was 2008 (US$ 455 bn). This is because estimates have pegged the deficit to soar to US$ 1 trillion plus for each of the several next years assuming that nothing changes. As reported on CNN Money, US' total debt currently stands at US$ 10.8 trillion which does not take into account any tax changes and the newly passed US$ 787 bn economic stimulus package.
This means that the Obama administration will have to do a lot in terms of curbing expenses some with a heavy price attached to them. The problem is that nobody has any clue as to when the crisis will end and the possibility of a further deepening of the crisis cannot be entirely ruled out. Thus, while Obama's pledge at the moment does carry some hope, execution of the same will be the most tricky and difficult part.
Seized by the wave of anti-offshoring sentiment in the US, the Obama government may have passed a legislation restricting the issue of H1-B visas, which allow US companies to temporarily hire foreign workers in a specialty field, particularly technology. However, the same is not dissuading the Indian offshoring giants - Infosys and Wipro - from seeking to deliver services in Uncle Sam's land. Even if that means hiring more Americans!
As per the Wall Street Journal, Infosys had received 4,559 H1-B work visas while Wipro was granted 2,678 by September 2008 (last data available), making them the largest recipients of the same in the world. The Indian technology giants that have been long derided by some US politicians for taking US jobs away are now laying the groundwork to boost the number of jobs they create onshore. This is largely to make sure they can still do business if the US government's legislation restricts their ability to send Indians to the US to work.
Just like Warren Buffett, this man is not worried if the stock market is closed for five years. His investing style does not really depend on how the stock market does. As he says, "If I'm right, these very undervalued companies will be taken over, liquidated or refinanced, and that's where you make your money."
Well, removing the veil, we are talking about the legendary investor and fund manager, Marty Whitman, who is also the founder of the Third Avenue Value Fund (TAVF). From inception in November 1990 through October 2007, this fund has returned an annualised average of 16.8%. This when compared to the S&P 500 returns of 12.3% is fairly good.
In his first quarter 2009 letter to investors, Marty Whitman explains where his TAVF is finding the best buys "in what he calls 'net-nets'. The concept of 'net-nets' was introduced by the pioneers of value investing "Benjamin Graham and David Dodd in their 1962 masterpiece, Security Analysis. Simply put, 'net-nets' are companies where the market value of the current assets (an estimate of liquidation value), exceeds the market value of the company's equity (market capitalisation) minus all liabilities. As reported, such stocks currently make up around 75% of Whitman's common stock portfolio.
Coming from Whitman, this really is a brilliant cue to profitable stock picking.
Bharti Airtel, which was ranked India's sixth most admired corporate in a recent poll we conducted on our website, believes that India is ready for a big revolution in the telecom space. This was outlined by the company's CEO and joint-MD Mr. Manoj Kohli in an interview with Mint. He was talking about the 3G (third generation) services, where he expects the roll-outs to be faster than what 2G has seen.
Mr. Kohli says, "The biggest revolution, which I believe India will have, is instead of laptops, people will use handsets. I think India is already seeing big leaps and in the next few years 3G will help us take the big leap."
While we agree with these statements given the leap that India has already seen in the telecom space over the past few years, we continue to doubt the government's intentions as it has been slow in releasing the spectrum required for launching the 3G service.
The term anti-nationalisation probably got most popularity during the era of late British Prime Minister Margaret Thatcher. Despite being under the British rule for more than a century, we Indians accepted the nationalisation of our banks pretty amicably in the 1970s. However, our American friends seem to be rather confused with regard to the terminology for the government bail out of their banks.
In an article in Mint, American economist Paul Krugman has sought to bring in more clarity to the debate. According to him, the case for nationalisation stands undisputed since the banks in question would have gone bust long back without government support. He further states, that while banks must be rescued, the US government cannot afford, fiscally or politically, to bestow huge gifts on bank shareholders.
Finally, the economist gets tongue-in-check by calling nationalisation as American as the apple pie! Any more doubts?
Thanks to the announcement of the third stimulus package by the Finance Minister, in the final hour, the India markets managed to recover from the steep lows witnessed for most part of the trading session today. In line with other Asian indices, the benchmark BSE-Sensex closed with losses of 22 points (0.2%), incidentally being the lowest loser in the region. The European markets have opened largely in the negative. The stimulus package that has offered rate cuts on excise duty and service tax is expected to further pressurise the government's finances.
"Risk is a part of God's game, alike for men and nations." - Warren Buffett
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