India first to bounce back - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India first to bounce back 

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In this issue:
» TARP recipients reach the height of absurdity
» Soros impressed with G-20 summit
» China's 45% income tax
» Murdoch for charging to read news online
» ...and more!

George Soros, the hedge fund guru is really impressed with the turn of events at the recently held G20 summit. In an interview with CNBC, Soros admitted that probably for the first time ever, the global leaders have been actually ahead of the curve and have taken some really pro-active rather than reactive decisions. "They managed to get more than I expected. They really pulled a few rabbits out of the hat and I think it was a very impressive communique," Soros said. He further argued that the plan of arming IMF with around US$ 750 bn was bang on and it will help make credit available in countries where banks are just refusing to lend. Soros also made a special mention of the British Prime Minister Gordon Brown who, he believed, was perhaps in his finest hour. Important to add that before the summit started, Soros had expressed concern that the failure of the summit could push the world into a depression. Now that he himself has praised the outcome, his concern might just have vanished into thin air. The master investor also added that the global economy could start recovering by as early as next year with emerging nations like China, Brazil and India among the first to bounce back.

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The 5 Minute WrapUp: Road to nowhere
Image source: The Economist
Japan's economy, in the past 16 years, seems to have gone nowhere. As per an interesting article in the Economist, while the stagnation of its economy in the 1990s was caused by the bursting of the stockmarket and property bubbles, the ongoing global financial crisis will most likely deal a blow harder than the first, effectively meaning that Japan will have to bear the misfortune of two lost decades. Yes, indeed a long time! One of the main reasons attributed to the same has been exports, which have been crippled by the recession in the US and Europe. But the undervaluation of its currency, the yen, has also played a part in accelerating the decline in exports. Major exporters went on a capacity expansion spree under the false notion that the yen would remain weak and the global demand would remain strong. However, they have had to retrace their steps as the global crisis unfolded at a mind boggling pace.

Consider some stark statistics reported in the Economist. Industrial production plunged by 38% in the year to February, to its lowest level since 1983. The OECD forecasts that Japan's GDP will shrink by 6.6% in 2009 as a whole, wiping out all the gains from the previous five years of recovery. Business sentiment has also plunged. Not only are manufacturers cutting investments by 20% this year, but are also slashing jobs and wages. Thus, not only exports, the domestic economy has also taken a beating. Japan, indeed, has its plate full at present and it could take a while before the country gets back on track.

Do you like to get your daily dose of news online? Well, if Rupert Murdoch has his way, you might soon have to reach for your wallet before you get to read anything. News Corporation CEO and a media mogul, Mr. Murdoch is of the opinion that papers should make people pay to read its news on the web. With ad revenues having declined, newspaper companies are finding it very hard to cover the costs. Even the online ad revenues are not sufficient to make profits and hence publishers are being forced to think of whether charging for access is possible, or whether this would affect readership adversely on their website. In India too, publication houses like Jagran Prakashan, Times of India and HT Media are currently offering free online content. While they too are facing lower ad revenues, charging for online content would still be difficult as usage and penetration of internet continues to be relatively lower in India and charging a fee for access would not do much to encourage growth as such.

If ever there was an award for absurdity, it would have been hard to beat this particular story. As per FT, firms like Citigroup, Goldman Sachs and Morgan Stanley, the who's who of TARP funding receivers, are now contemplating participating in the US Treasury's 'bad bank' program as private investors. Well, nothing wrong with that you might say. After all, the more the merrier. However, we are of the opinion that they absolutely have no moral ground to take such a step. First, they mess up their balance sheets by faulty lending and then, after being saved by taxpayers' money, they once again lever themselves up with taxpayers' money to reap mighty profits. Fortunately, not everyone in the US has lost his mind. One of the Republicans is planning to introduce legislation that will stop these firms to participate in the program.

Inequitable distribution of wealth has taken a toll on the states of Punjab and Haryana that were once considered the richest states due to their high agricultural acreage. As per reports in Mint, while in absolute terms Punjab and Haryana feature fourth and fifth respectively on the ranking of rich rural households, in percentage terms the same account for merely 8% of the states' population. Probably this is the reason that the smaller farmers in the state whose financial status has been camouflaged by that of their richer counterparts are finding it difficult to voice their woes.

As per a report in Mint, the states of Punjab and Haryana that are considered very lucrative by NBFCs for commercial vehicle lending have caused huge delinquencies to the financing companies. In fact, the rising default rate coupled with high cost of funds has dealt a severe blow to NBFCs in the northern region. So much so, that almost 50% of them have been forced to shut operations. As per Punjab and Haryana Finance Companies Association (PHFCA) the default rate in NBFCs has risen by five times to 15% against 3% in past 3 to 4 years and the number of NBFCs operating in these states has shrunk from 450 to 200 in this period. Probably the government that is claiming to have relieved the debt burden of farmers needs to have a relook at these numbers.

The noted American inventor Benjamin Franklin had once quipped, "In this world nothing can be said to be certain, except death and taxes." And China has earned the dubious distinction of having the harshest tax regime in the Asia-Pacific region, closely followed on its heels by Japan. As per a survey conducted by Forbes Asia and published in the Economic Times, China levies a 25% tax on corporate income and 45% on personal income among others. Imagine having to give away almost half your income as tax! Furthermore, with the Chinese economy getting hit by the global economic downturn, the government there has imposed higher employer and employee social security taxes. Barring China and Japan, the rest of the Asian region continues to enjoy stable tax rates. Europe in contrast has not been that lucky and as per the survey 8 of the 10 least tax-friendly countries are European with France topping the list.

Engineering major BHEL has announced its provisional results for FY09. While its sales saw a rise of 29% YoY, its net profits rose by a mere 6% YoY. One of the major reasons for this was the provisions it made this year for wage revisions, as also the volatility in raw material prices which dampened its margins. If it were not for the provision for wage revision, the company's net profit would have increased by 25% YoY. It also saw a decent 19% rise in order inflows during the period. Further, the management expects sales to grow by 20% to 25% in the year to March 2010.

The Indian markets continued their upward journey as the BSE-Sensex ended higher by nearly 3% over its last week's closing level. It ended the week at about 10,350 points, which is its highest level in about six months. The other Asian markets such as Hong Kong (up 3%), Japan (up 1.4%) and China (up 1.9%) ended on a positive note as well. It is believed that Asian stocks ended on a positive note on account of the G-20 leaders agreeing on substantial measures to fight the global recession.

Source: Yahoo Finance Source: Yahoo Finance

Other global markets ended the week on a firm note as well. Brazil and Germany led the pack of gainers by recording gains of nearly 5.9% and 4.3% respectively. They were followed by the France, UK and US, which ended higher by 4.2%, 3.4% and 3.1% respectively.

04:55  Weekend's investing mantra
"The standing of an enterprise is in part a matter of fact and part a matter of opinion. During recent years investment opinion has proved extraordinarily volatile and undependable." - Benjamin Graham
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1 Responses to "India first to bounce back"

gopikrishna reddy

Apr 6, 2009

As the decoupled myth is burst, we should understand that IndiaChina will bounce back only if their servicesproducts are sold. There is only one big customer who can do thatit is US. So untilunless US starts buying products from china or buying services from India, they wont bounce back.

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