Sensex to go below 6,000 - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Sensex to go below 6,000 

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In this issue:
» China and India learning wrong lessons from each other
» More and more people in US feeling confident
» The paradox of 'Rural India'
» Sallie Mae moves outsourced jobs back to the US
» ...and more!

The 5 Minute WrapUp: Sensex, if Third Front comes to powe
In our 5 Min. note of April 6th, we had asked you as to what will be the Sensex level if the Third Front comes to power in these general elections. And the results paint a picture similar to the view we had put forth in the write-up accompanying the question. Around 56% of you have voted for the option - less than 6,000. Around 39% believe that the Sensex will remain within a range of 6,000 and 12,000, while there are 5% who believe that even a Third Front government cannot stop the Sensex to rise beyond the 12,000 level.

Going by the majority, if the Left-supported Third Front government does come to power at the Centre this time around, the outcome for the stock markets might be calamitous. We pray not!

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"I think both countries have a lot to learn from each other, but my worry is that they are learning the wrong things from each other". These are the words of Yasheng Huang, a political economist and MIT Sloan School of Management's professor. Mr. Huang was speaking to one of India's leading business dailies. Like other scholars in recent times, he too has studied India's and China's economic models closely and has some interesting insight to offer. According to the Professor, for outsiders, Shanghai's rise could be a miracle. But in reality, it was a massive wealth transfer from the landowners from whom land was forcefully acquired at dirt cheap prices and sold on to domestic and foreign real estate developers.

Hence, India will commit a grave mistake if it tries to ape the Shanghai model of hugely distorted wealth creation. What India could perhaps learn from China, according to Huang, is the dragon nation's social model of the 1970s and 1980s where it spent enormously on education and health care, especially in the rural areas. Similarly, China could do well to follow what Mr. Huang calls 'democracy by discussion', a word that he has borrowed from the Nobel Laureate Amartya Sen. We hope policymakers at both the nations are listening.

Industry body ASSOCHAM (Associated Chambers of Commerce and Industry in India) has released a report titled "The Rise of Rural India". The report speaks about how some companies have managed to grow in a challenging urban environment by increasing their focus on the rural consumer, especially at a time when his pockets have been lined up by the government largesse like farm loan waivers, higher support prices and NREGS (National Rural Employment Guarantee Scheme). FMCG companies and the rural retail market, where the growth potential is even higher have come in for some special mention. Although everything in India is at such an early phase of growth, there are certain segments where penetration in the urban areas is a lot more than the rural areas and hence, going rural is indeed the right way to go.

With the rise in rural income, one would expect the banks to turn more eager to lend to the rural populace. However, the figures seem to be pointing in a different direction. As per the RBI's latest statistics on deposits and credits of all the banks in India, India's banks have actually scaled down their lending to rural India during the month of December 2008 as compared to the year before.

On the other hand, lending to metropolitan India has witnessed a sharp increase of 26% during the month under consideration as against an increase of 22% in December 2007. Even more surprising is the fact that while deposit mobilisation in the metropolitan region has witnessed the lowest growth, the same in the rural and the semi urban India has witnessed a sharp rise. In other words, banks are using deposits from the rural and the semi urban regions to lend more in the metropolitan regions. Thus, while rural India may be cushioning the impact of the slowdown, banks may be of the opinion that it has still not turned as creditworthy as its metropolitan counterpart. Indeed, an interesting paradox.

Stung by high NPA levels in the baskets of uncollateralized assets (credit cards and personal loans), some Indian banks have introduced an offering wherein the customer would have to open a fixed deposit with the bank against the credit card issued. The credit limit on the card is pegged at 85% of the FD amount. This would also help banks enhance their credit card base to card applicants who otherwise do not meet the bank's eligibility criteria. While this arrangement will to a great extent take care of the bank's provisioning requirement, it will also discourage credit card borrowers from slipping on their dues. Whoever said financial innovation is a dangerous thing!

It's not just a handful of experts who are saying that the US economy may well be bottoming out but if the results of a poll by The New York Times are any indication, more number of US citizens is also sharing the same feeling. Just before Obama took office, 54% of those surveyed had felt that economy was getting worse. In the latest poll, only 34% feel so. Secondly, 20% have said that economy is getting better as compared to just 7% before. Obama's Presidency has also won greater approval with every three out of four participants trusting Obama more than the Congressional Republicans. Other related questions also drew out pretty favorable responses, indicating that the veil of gloom surrounding the US politics and economy is slowly beginning to lift. Indeed a good sign for the global markets.

Nascent signs of optimism continue to emerge, this time from the circles of venture capitalists. As per a New York Times report, many venture investors are now of the opinion that this is an ideal time to invest as company valuations are low so investors can get a good deal. Summing it up, executive director of the University of San Francisco Entrepreneurship Program, Mr. Mark Cannice, said about the current status quo, "I wouldn't say we are on a new upward trend yet, but I think we've at least broken the downward spiral. There is some degree of stability in the financial markets and that allows a little bit of optimism that we will get to the other side of this thing, so it's more a matter of 'when' rather than 'if."

Many American firms seem to be at crossroads. Should they continue to outsource jobs to low cost destinations like India especially in recessionary times such as these when pruning costs is of paramount importance? Or should they exhibit patriotism and keep jobs in the US itself where the unemployment rate is mounting even if that is tantamount to protectionism?

Seems to be a tough decision but one American company called Sallie Mae has decided to put its country above all others and is planning to bring 2,000 jobs back to the US. The company, which manages about US$ 180 bn in student loans for some 10 m students, plans to shift its call centre and IT operations from overseas i.e., India, Philippines and Mexico to the US. This is despite the fact that the jobs shift will cost the firm around US$ 35 m a year. Interestingly, a few years back, negligible profits had compelled Sallie Mae to outsource some of its operations. Obviously, the company is of the opinion that gaining political weight will stand it in good stead in the future. And this is probably a warning sign to India that the global recession and the need for cost cutting are not good enough reasons to make a case for outsourcing to the country.

In the meanwhile, despite opening the day deep in the red, stocks in India ended on a strong note as the benchmark BSE-30 Index recorded gains of nearly 210 points. In fact, the Indian markets were the only indices to record gains in the Asian region. Buying activity was witnessed in stocks across sectors led by realty and FMCG. Other Asian markets such as Japan, Hong Kong and China recorded losses of 2.7%, 3% and 3.8% respectively. Stocks in Europe are currently trading weak as well.

04:50  Today's investing mantra
"It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds" - Warren Buffett
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2 Responses to "Sensex to go below 6,000"

yash patel

Apr 18, 2009

certainly sesex to go below 6000


Kedar Paricharak

Apr 9, 2009

Sometime I wonder, what is real difference between CongBJP when it comes to Indian business scenario? We have seen both governments. Both government had some very good ministers. The dream is to combine best of both CongBJP (UPANDA). If no one gets majority, this will be best option. But unfortunately, in politics, this will not work. Either CongBJP will end up supporting Third fornt from outside.

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