Don't listen to these forecasters of doom! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Don't listen to these forecasters of doom! 

A  A  A
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!!


------------------ Listen to the sound of money...big money ------------------
If you missed out on The Equitymaster Investment Summit 2010, don't lose heart, or your sleep! We're bringing it to you in a special Limited Edition Investment Summit twin CD pack.

To listen to investment strategies and insights by Ajit Dayal and Bill Bonner on the world economy, India and the biggest risk it faces, the 'must-haves' in your portfolio, ' the 5 categories of investment to build your wealth'....and so much more, click here

--------------------------------------------------------------------------

00:00
 
There are horror stories all around us. The financial world as we know it is coming to an end, say a lot of experts. Governments across the world have piled on too much debt. Soon, there will be a wave of defaults and then, everything will be over. These are scary thoughts indeed. And if you, like most others, are holding back your investment decisions fearing the above mentioned spectacle, we have some good news for you.

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
Indian investors have been subjected to a flood of primary market issues in recent months. Not just the private sector but the public sector also took advantage of the buoyancy prevailing in the Indian stock markets and rolled out one issue after another in quick succession. Little wonder, the year turned out to be one of the biggest in recent times in terms of total amount mopped up by the companies. It did not manage to beat FY08 for the simple reason being that the markets started turning buoyant only during the latter half of the year and hence, the first few months of the year were lost. Rest assured, if the current trends persist, the record of FY08 could well be broken in the current fiscal (FY11). What more, this could also mean increased competition in terms of liquidity for the companies that are already listed.

Source: LiveMint

01:50
 
The Indian auto industry stands out in sharp contrast with its global counterparts. At a time when global car volumes shrunk by 2.4% in 2009, India registered a growth of 12.5%. It is well known that most global auto giants are keen on India and are launching a spate of new models. But the size of India's booming auto market is borne out by another fact. India has two of the world's 10 largest car factories. Maruti Suzuki's Gurgaon factory is at number three, while Hyundai Motor's Chennai unit is at number seven in the top-ten list. Interestingly, some experts believe it is not only the domestic market and auto exports out of India which explain the size.

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.

02:44
 
China is in the limelight again. But this time it is not because of its war with the US over Yuan revaluation or concerns over the Chinese bubble about to burst. A leading daily has reported that China's economy is likely to grow by more than 10% in 2010. What will fuel this growth is a recovery in the country's exports and rising consumption. And if that happens, China will surpass Japan to become the world's second largest economy. All very well indeed!

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.

03:25
 
The world's largest bond fund manager Bill Gross might just be shifting his preferences. In December of last year, his asset management company PIMCO announced for the first time in its history that it will invest in stocks. Many observers are surmising this move to mean that Gross is of the opinion that the 30-year bull market in fixed-income securities is ending. And that a new bull market is emerging in equities. His bearishness on bonds stems from the fact that he expects yields on bonds to move higher in the US, which does not bode well for bond prices. As far as stocks are concerned, his advice to US investors is very categorical.

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.

04:08
 
"Upgrades rise on Corporate St, credit quality strengthening," reads a headline in a leading business daily. It shows how the number of companies being upgraded by credit rating agencies is now higher than the downgrades. This suggests that the economic recovery has helped companies out of the financial crunch they were facing in 2008.

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!

04:38
 
Indian markets appeared in profit booking mode today as the BSE-Sensex headed lower with each passing hour. It is currently trading with a decline of around 200 points. Heavyweights from the banking and energy sectors are exerting the maximum selling pressure on the indices. Stocks across Asia have also closed on a weak note whereas Europe has opened amidst a sea of red.

04:53  Today's investing mantra
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
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.

Equitymaster requests your view! Post a comment on "Don't listen to these forecasters of doom!". Click here!

4 Responses to "Don't listen to these forecasters of doom!"

S. Ravindran

Apr 9, 2010

Sir,
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

Like 

Vinay Shah

Apr 9, 2010

As 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....

Like 

K.D.Viswanaathan

Apr 8, 2010

There 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.

Like 

rajinder wadhwa

Apr 8, 2010

pl tell me about good stocks to invest

Like 
  
Equitymaster requests your view! Post a comment on "Don't listen to these forecasters of doom!". 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