Is this really a good indicator of a country's progress?

Mar 8, 2014

In this issue:
» Sensex at all-time high: Cheap or expensive?
» The next big crisis in the US...
» Has the QE program benefitted US corporates?
» Why you should worry about India's growing energy needs...
» ...and more!

Say if you were to judge how well a school is doing compared to its peers, what are the parameters you would look at? Would it suffice to consider only the school's top rankers? Would they be good representatives of the school's overall performance? We don't think so. It is pertinent to consider how the majority of the students are performing. That's the thumb rule of statistics. Outlier events mean very little for the overall set. And hence, a comparison between top rankers of different schools is quite a redundant exercise.

This is the reason why we were a bit taken aback by the chorus of cheery media reports about the likely bright future prospects of ultra-high-net-worth individuals (UHNWIs) in India. Please note that UHNWIs are defined as individuals with net assets of US$ 30 million (excluding primary residence). As per the current rupee-dollar exchange rate, that would be over Rs 183 crore. As per Knight Frank Wealth Report 2014, the number of such ultra-rich individuals in India is set to double over the next decade. Currently, India boasts of about 1,576 such individuals. By 2023, this number is expected to jump to 3,130. In no other part of Asia are UNNWIs expected to grow at such a rapid pace.

As far as billionaires are concerned, India had 60 in 2013. This number is set to rise to 119 by 2023. With that, India will have the fourth highest number of billionaires after US, China and Russia.

Let's go back to the point we raised at the start of the discussion. We had said that in any given set, outliers do not represent the larger trend. Extending that same argument in the context of India's ultra-rich individuals, can the future fortunes of a few thousand rich individuals reflect the fortunes of India's over 1.2 billion population? Not at all! In fact, on the contrary, it could hint at a rising rich-poor divide thanks to crony capitalism and the tough business environment for small traders and entrepreneurs. In our view, India would only become truly prosperous when wealth creation can be harnessed for the majority of its population.

Do you think rising number of ultra-rich individuals is a good indicator of economic progress of a country? Share your views in the in the Equitymaster Club. Or post your comments below.

--- Advertisement ---
Investor Alert: Revealing 3 "Rare" Small Caps

Small Caps are risky investments... No one can deny that!

However, if you pick strong businesses and make smart investments, they also hold immense money-making potential over long term.

And these are the kind of investment opportunities we've been picking out for a select group of investors for over 5 years now.

Today, we invite you to join this Select Group of Investors through a Special Invitation...

Plus, as soon as you join, you'll also Get Instant Access to full information on 3 "Rare" Small Caps which hold strong growth potential and they pay regular dividends too!

So, don't miss this opportunity.

Click here for full details...

 Chart of the day
The first time the S&P BSE-Sensex closed near the 21k mark was on January 08, 2008. Since then, the Sensex has crossed that level on four more occasions. Yesterday the Sensex scaled an all-time high and closed just 80 points shy of the 22k mark. Over the last four sessions, the index has gone up by 4.7% on the back of strong foreign institutional investors (FIIs) inflows.

How should an investor view this all-time high Sensex level? Does it mean markets are overvalued? In our view, Sensex highs seen in isolation mean very little. They should be seen in conjunction with the earnings levels. Have a look at the adjoining chart which shows the previous five Sensex highs and the prevailing price to earnings multiple then. As you can see, while the Sensex level has increased over the course of time, the price to earnings multiple (P/E) has fallen from 28.5 in January 2008 to about 18 times in recent times. Investors must take into account the earning levels and not take the Sensex level at face value.

How Expensive is the Sensex at its All-Time High?

After the sub-prime crisis, it seems that the US is on verge of another crisis. And this one could be even worse. We are talking about the ensuing retirement crisis in the US. Ageing population and poor saving habits indicated that funding retirement expenses could be an issue. And that fear has come out to be true. As per Employee Benefits Research Institute, roughly 66% of the American workers have less than US$ 50,000 saved for retirement while 28% have less than US$1,000! Hence, many are at risk of outliving their savings. This poses a great threat to their retirement lifestyle. A cut in social security and medical expenses could make things even worse. Rising unemployment is not helping either. It makes it difficult for Americans to fend for themselves.

In short, the US is on the verge of a big retirement crisis. We believe that poor saving habits are responsible for this. Despite having social security benefits in place it is difficult to believe that most Americans are unable to save enough for their retirement. Reckless spending and living beyond means has resulted in the same. Unless a saving culture is imbibed into the younger generation, even they may face a similar risk in the future.

What has been the impact of the quantitative easing (QE) mechanism of the Fed? This question itself can start a long debate. Has it positively impacted the US economy or has it done nothing to improve the situation? Or, whether it has simply led hot money to spur up asset prices? And then, there are discussions on this hot money finding its way to other parts of the world.

However, when one sees the improvement in corporate profits and the business investment trend - both of which have shown a sharp rise in the recent past - it seems to show a different picture. As pointed out in an article by Pragmatic Capitalism, there has been real underlying fundamental improvement in corporate balance sheets. And as such, an argument that QE is simply the cause for the rally in stocks is not entirely true.

While the above argument may be valid, it must be noted that improving the health of the corporate was one of the many aims of the QE program. With interest rates being very low, it has led investors to pull money out of other asset classes and invest in stocks. While balance sheets and buyback programs seemed to have improved the overall performance of corporate and ergo, their stock prices, we believe these are factors that would impact the markets from a short term perspective. What essentially will drive earnings from a long term perspective would be the drivers of the economy, which include the employment rate, consumption levels, debt levels - factors that have not really improved as much as the Fed has hoped.

The importance of energy sufficiency for any economy to sustain and grow can hardly be overemphasized. If the demand of energy would have been a measure, India might have been a winning candidate in the race to become global growth engine. However, in view of the constrained energy supplies even in the current scenario, we wonder how well the future demand will be catered to.

As per a report issued by British oil giant BP, by 2035, India's growth in energy will be the highest in the world. It is even expected to surpass energy demand growth in China. This implies that India will become even more dependent on imports to meet its energy needs. The issues like country's high reliance on oil imports and constrained gas supplies and coal shortage are unlikely to be resolved. Needless to say, the huge fuel imports will widen the current account deficit further and add pressure on domestic currency. This might further subject the economy to volatile pressures. While we still have some time before things turn really messy on this front, it is time for policymakers to gear up and make policies that will ease the domestic fuel supplies.

The week started with a jolt as Russia-Ukraine tensions rose, sending global stocks plummeting while pushing oil, gold and silver prices higher. Once tensions eased, markets settled down. Stocks recovered from sharp losses. For the week, global stock indices were mixed.

Although economic data generally showed the impact of abnormally harsh winter weather on a sluggish US economy, 175,000 jobs were added in February, many more than the estimated figure of about 150,000. The stronger than expected jobs report makes it more likely that the US Federal Reserve will continue the gradual tapering of monetary stimulus at its meeting on 18 - 19 March. The US markets ended 0.8% up for the week.

The Eurozone's composite purchasing managers' index rose to 53.3 in February from 52.9 in January, the sharpest rise since June 2011. Separately, the European Union's statistics agency reported that the region's monthly retail sales grew in January by the largest amount in more than 12 years. At its regular policy meeting, the European Central Bank responded by deciding not to add any further economic stimulus. Majority of the European shares closed in the red.

The Indian equity market shielded itself from weak economic cues and remained in an uptrend on hopes of a stable government at the centre that will kick start the reform process and revitalize the economy. The Indian equity markets closed 3.8% up for the week.

Performance during the week ended March 7th, 2014
Data source: Yahoo Finance

 Weekend investing mantra
"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices."- Warren Buffett

Today's Premium Edition.

Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Is this really a good indicator of a country's progress?". Click here!

4 Responses to "Is this really a good indicator of a country's progress?"


Mar 16, 2014

When there is no real wealth creation among common population the meaning of ultra rich is nothing but an expanded nature of inequality is constantly growing & perhaps this might be the sign of slowly escalating extremism & awaiting for a bigger chaos to collapse the whole harmony of the nation.!!!


Kirit Naik

Mar 8, 2014

It is a fashion in Indian politics to talk about "Inclusive Growth" but the ground reality is that the policies are oriented towards large corporates. I would like to give an example from the energy sector. Solar Mission has concentrated on utility scale projects which are handed out to corporates while rooftop solar with financing facilities is yet to come which will benefit a much larger mass. Now some states have announced initiatives for rooftop solar. But if you look at the procedures announced, The home owners desiring to install solar panels will be at the mercy of system suppliers and bureaucracy. with respect to energy independence, may be we can draw some lessons from Germany where more than 60% of renewable power capacity is in distributed mode owned by individuals,farmers,entities and municipalities.

Like (1)


Mar 8, 2014

At present 1576 people are rich and by 2023 it will be 3130. This is against 1.20 billion. What will be the total population in 2023? I tell you very strongly, it will exceed 1.5 billion. Indians are masters in production. Do not worry. Poor will remain poor. Each one of us need to advise the people the impact of producing more children. Do not blame the politicians or the government alone. It is our duty.

Like (1)

Kameswara Rao

Mar 8, 2014

Millionaires and billionaires are increasing in India at par with other countries. What is their population and ours. Better the comparison should be made on percentage population basis, not simply by numbers. That will be a good indicator of the country's progress.

Like (1)
Equitymaster requests your view! Post a comment on "Is this really a good indicator of a country's progress?". Click here!