Don't listen to these forecasters of doom!
In this issue:
» Sovereign defaults and its after effects
» India has two of the world's biggest car plants
» Bond king no longer favors bonds
» China to grow at 10% in 2010
» ...and more!!
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As per Economist, two major things happen when a country defaults. One, its cost of funds shoots up and second, GDP growth suffers. However, both these effects are rather short lived. The magazine points out that defaults where debts are restructured have no significant impact on interest rates after the second year. Yes, you read that right!
A huge event like a default, which the financial media is hugely cautioning us about, is all but forgotten in two years. Moreover, the impact on GDP growth is also not that sizeable. As the write up highlights, a defaulting country grows by 1.2 percent less per year while its debt is being restructured compared with a country that is not in default. And even this subpar growth lasts for just a year or two after default.
Agreed that things are little serious this time around and the effects could linger a little longer. However, an investor in India need not worry. A sovereign default by some other nation would surely have repercussions on the Indian stock markets. But that could actually turn out to be a very good long-term buying opportunity. So, if historical evidence is any indication, the hype around sovereign defaults should indeed be ignored. And such events should be used to one's advantage for building long-term wealth.
01:06 | Chart of the day |
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The fact that small cars form the bulk of India's auto market is important. Small cars require more units to achieve economies of scale, a key driver of profitability. In fact, most plant on the list make small cars. Another factor for the size is that companies prefer adding capacity at an existing location rather than start from scratch elsewhere. The reason is the proximity to existing component suppliers. Another reason is the poor infrastructure. States often build infrastructure around existing plants. Going elsewhere would mean waiting for the infrastructure to catch up. In our view, given these ground realities and the growth prospects ahead, more auto plants out of India will make it to the top ten list in the years ahead.
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But there are hiccups. Concerns about the Chinese bubble bursting are not without reason. After all, Chinese banks have resorted to indiscriminate lending and a lot of this money has found its way into real estate. This has then led to inflated asset prices. While the reserve requirements have been raised, a lot may still have to be done to ensure that the Chinese growth remains intact. Moreover, if the recession in the developed world persists, it will be interesting to see how China will be able to sustain its growth in exports and thereby its GDP.
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In Gross' own words, "What an investor wants to do, either from a standpoint of stocks or bonds, is go to countries with high real (inflation-adjusted) interest rates." Further, he adds that the typical suspects to invest in include Brazil, China, and India.
With renowned investors from developed countries like the US looking at India in such a positive light, don't be surprised to see foreign money piling onto Indian equities in huge amounts over the next few years.
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But do the higher number of upgrades in one year hint toward anything? A lot of companies that are suddenly being upgraded now are ones that were in dire straits last year. So the question is - are rating agencies again going by the flow? Or are they more interested in giving good ratings only after seeing that the credit quality is sustainable across business cycles? In short, how sacred are these upgrades? We don't know!
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04:53 | Today's investing mantra |
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4 Responses to "Don't listen to these forecasters of doom!"
Vinay Shah
Apr 9, 2010As always, an insightful read. I think the Country Credit rating and Company Credit rating agencies have been wrong too often over the last few years. India is one of the best markets to be over the long term and yet, I am told, that our credit rating is less than Greece even today! I would want Ajit to evaluate & do a larger piece in the single topic....
K.D.Viswanaathan
Apr 8, 2010There is a good lot of substance in the write-up with the title 'Don't listen to these forecasters of doom'. There is absolute truth and seriousness in the firm view that the hype around sovereign defaults should be ignored. I am with those who fully agree with that.
S. Ravindran
Apr 9, 2010Sir,
I read a disturbing report that Chinese auto ancillaries are flooding the India market as they are nearly 45% cheaper compared to Indian made auto components. How this will impact our Auto ancillary stocks? What are the short and long term implications for the investors? Please give a detailed analysis as to whether it is worthwhile holding onto stocks like Munjal Showa, Sundaram fasteners, Sona koyo steering systems, Subros, pricol and the other auto ancillary stocks which may do better despite the Chinese invasion.
Yours faithfully,
S. Ravindran