Is there another currency war in the making? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Is there another currency war in the making? 

A  A  A
In this issue:
» PSUs have destroyed huge shareholder value
» Construction slump may have hit job creation
» Suzuki's behaviour is completely anti-minority shareholder
» Fare cuts to add to airline woes
» and more....


00:00
 
China has been quite often accused by the USA and other western countries of manipulating its currency. China had been artificially keeping its currency value low so that its exports become way cheaper when compared to the exports of other countries which gave it a competitive edge in the market.

In 2010, due to increasing pressure from international community China loosened controls on its exchange rate. The move was widely lauded as a step toward liberalizing the Chinese exchange rate and moving the Yuan toward an internationally traded currency like the US dollar, Yen and Euro.

However, the central bank continues to steer all the currency's movements. Each morning it dictates a daily reference rate, and if necessary, it intervenes heavily in the onshore market to make sure the Yuan strays no further than 1% either side of that rate. This means the Yuan remains neither fully convertible nor freely floating. The Yuan goes where Beijing wants it to, and despite all the talk of market reform, that's not going to change any time soon.

The Chinese Yuan has been one of the best performing currencies over the past couple of years. However since a 2014 peak in mid-January, the currency has lost 1.8%. The 0.9% decline in China's currency last week was its steepest slide since China reformed its currency in 2005. If we compare this fall to the double digit currency devaluation of emerging markets, it might look small, but the importance of it cannot be ignored. And the question that everyone is asking is whether China is deliberately devaluing its currency?

So why does China want to devalue its currency? First - Yuan interest rates may be modest. But returns in the onshore market, especially in the mainland's shadow financial system, are considerably higher than on major currencies like the yen or the dollar in the international markets. With many investors confident of making additional exchange rate gains on the Yuan, hot money has been pouring into the mainland over recent months. The authorities worry that the large inflows could generate inflationary pressure and complicate the central government's effort to revamp China's economy, improve the banking system and eventually free up interest rates.

Second - With the economy slowing down, giving more Yuan into the hands of foreigners to boost exports is a much more appealing option for China given the control it provides the Central bank in both chasing away speculative capital and managing export demand.

Given that the US and Japan are using unconventional methods to devalue their currency and if China reverses on Yuan appreciation and virtually all of the world's largest economies are devaluing in unison, it could lead to devastating global inflation.

For emerging markets like India, a full blown currency war will make controlling inflation that much more difficult and put upward pressure on emerging market currencies, weakening exports and growth. This would further add to the woes of Indian companies.

Will a global currency war further add to India's woes? Share your views in the in the Equitymaster Club. Or post your comments below.

--- Advertisement ---
3 Solid Dividend-Paying Small Caps you could consider Buying Right Away!

Finding out Solid Small Caps is not an easy task...

Finding out Solid Small Caps that pay Regular Dividends too... is in fact "Rare"!

However, my research team has zeroed in on 3 such "Rare" Small Caps which are still selling cheap.

How can you get full information on these 3?

Just click here for full details...
---------------------------


01:20  Chart of the day
 
In the year till date, returns from gold have been good. As today's chart of the day displays, and as reported in the Economic Times, gold is up by a little less than 7% in the year till date. During calendar year 2013, the yellow metal's prices declined by about 6.3%. The doubt in everyone's mind will be whether the bounce back in recent times in the yellow metal's prices could possibly be sustained over the long period.

In our view, the key thing that needs to be gauged is the overall recovery in global economy. Also, the actions of the developed markets' central banks need to be gauged. As long as the money printing will continue - it will indicate that recovery is still under question; and thus the demand for gold as an investment during times of uncertainty will remain high, thereby keeping prices firm. Over the shorter periods, all eyes will be on the Fed's decision on its QE tapering activity. Also, an interesting point noted by the Economic Times is that of the production cost of gold, which remain at levels of US$ 1,200 which can be considered as a rate support level for the metal.

Will gold continue its rally in 2014?
*YTD return till 25th Feb, 2014


02:00
 
Public sector enterprises hardly evoke enough interest amongst investors. Hence the fact that they have destroyed millions of rupees in investor wealth over the past few years isn't surprising anymore. Those looking for valuation upside from deeply discounted PSU stocks have got a rude shock. Instead of fetching an upside in valuations, some PSU stocks have proven to be value traps. Deteriorating fundamentals and the government's zealous attempt to milk efficient and cash rich PSUs have stripped the PSUs of respectable valuations. As per Firstbiz' calculations, the listed PSUs have destroyed investor wealth to the tune of Rs 6.8 trillion over past 3 years. Of this, the government being the largest shareholder has borne losses to the tune of Rs 5.1 trillion.

Of course this is on the basis of fall in share price and does not take into account the money received as dividend from these companies by the government. Now, do all the PSUs deserve to be valued at a significant discount to their private sector peers? We do not think so. In fact the fundamentals and high dividend yields put together do make some PSU very attractive from a long term perspective. But for all PSUs to fetch respectable valuations, the government needs to stop mismanaging them and using them as cash cows.

02:40
 
The winters could be paving way for the summer in most parts of India. The winter of discontent for the current Government is far from over though. As per livemint, the construction sector, India's second largest employer after agriculture, is projected to grow a disappointing 1.4% in the current fiscal. This stands in sharp contrast to the 7.7% growth witnessed during FY12. The development couldn't have come at a worse time for the Government who's already battling decade low GDP growth and that too in an election year.

To be fair, they have themselves to blame for the mess. Things like policy paralysis, rising subsidies and charges of graft have made a big hole in the claim that India is the next big growth story. And to top it, there's very little acknowledgement of the ground realities. When quizzed, the accusation is countered by the facts that average growth during the regime of the current government has been much higher than the previous regime. Besides, the current weak global environment is also blamed. What seems to go unrecognised is the fact that the previous high growth rates were also a result of a strong global environment back then. The formation of a new Government is where all the hopes are now pinned on we reckon.

03:20
 
There is always one risk associated with MNC companies operating in the Indian market either through listed subsidiaries or joint ventures. That they will form another 100% owned unlisted venture and divert profits to that subsidiary thereby robbing minority shareholders of the listed entity. The latest company to face the ire of the investing community is Maruti Suzuki and its plans of setting up of the Gujarat plant. As per the original plan, it was Maruti Suzuki which was to set up the Rs 40 bn plant in Gujarat. But on the day it declared its 3QFY14 results, the management came out with a completely different strategy with respect to how this plant was to be set up.

As per the new plan, the promoters of the company, Suzuki will form a 100% subsidiary in India solely with the aim of setting up the Gujarat manufacturing plant. This means that the funds required to set up the plant will be brought in by Suzuki into the subsidiary. Maruti Suzuki will source cars from this subsidiary to be sold not only in the Indian market but also for exports. The company has assured that the unlisted subsidiary will not make any profits and that Suzuki will benefit only though its stake in the listed entity i.e. Maruti Suzuki. But this so far does not seem to have soothed various investors who claim this to be an act against the interest of minority shareholders. Whether that is actually the case will depend a lot on the fact that the parent company sticks to its word and uses the subsidiary for the objectives that it has stated up front. Do you think Maruti Suzuki's shareholders are being taken for a ride?

04:00
 
The airplane has been one of the greatest boons to the modern man. It has made the world a 'small place' by facilitating efficient and safe connectivity across the globe. This, in turn, has given a fillip to business and trade. But has the airplane been a boon for investors? The answer is an absolute 'no'. Globally, the airline industry has been largely loss-making. The reason for this is the inherent dynamics of the airline industry. The airline industry is intensely competitive with high fixed costs and poor pricing power.

In India, most domestic carriers (except IndiGo), have been incurring huge losses. The recent slew of discount offers may have been great news for fliers. But it is expected to further impact the recovery prospects of loss-making Indian carriers. With costs increasing faster than the growth in revenues, airline operators have a long dark tunnel ahead of them.

04:35
 
After opening weak, the Indian equity markets slipped deeper in red in the post noon trading session. At the time of writing, the benchmark BSE-Sensex was down by 124 points (-0.6%). Pharma, capital goods and power stocks were the biggest losers. Barring China, majority of the Asian indices were trading in the red led by Hong Kong and Japan. Most of the European markets have opened on a negative note.

04:55  Today's investing mantra
"Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd."- Peter Lynch
Today's Premium Edition
Is this the time to invest in Pharma stocks?
Pharma stocks have risen in recent times on the back of a good set of numbers posted by most companies. Does this make them attractive bets for investing?
Read On...Get Access
Recent Articles:
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...
Insider at It Again. This Time Stealing from Buffett and Berkshire
August 12, 2017
What is Equitymaster Insider Ankit Shah stealing from Berkshire's success?
The '26% Secret' to Buffett's First Billion
August 11, 2017
This is what led value investors Mohnish Pabrai and Warren Buffett to their first million and billion.

Equitymaster requests your view! Post a comment on "Is there another currency war in the making?". Click here!

  

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407