Bonuses are back! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Bonuses are back! 

A  A  A

In this issue:
» Analysts turn overweight on India
» More countries may default on debt
» BHEL keen on protecting its turf
» Bharti Airtel announces maiden dividend
» ...and more!

Old habits die hard. Even though much of Wall Street was annihilated in the carnage last year and some are barely hanging on for survival on the US taxpayers' money, bankers simply feel entitled to bonuses. As per the Wall Street Journal, Citigroup is asking the US Treasury for permission to pay special bonuses to key employees. Especially those who work for some of the profitable units. Citi believes they might be poached by rival firms. It may be noted that there has been a public outrage over the issue of bonuses, with even President Obama going on record with his displeasure. In this context, this news shows how strongly Wall Street believes it is entitled to bonuses - recession or not.

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With the stock markets rising handsomely over the past few weeks, brokerages in India are also waking up and smelling the coffee. As per a leading daily, in the past five days, quite a few analysts have come out with reports stating that the worst indeed seems to be over for the economy and recovery should start taking place by as early as this June. Surprisingly, this observation is in stark contrast to that of the Indian central bank who in its economic review last week had said that worst is still not over yet. Perhaps, as pointed out by the paper, it has to do with the differences in their approach. While brokerages look at lead indicators such as money supply, foreign exchange reserves and fund inflows, the RBI is concerned with what is actually happening in the real economy like the consumption and investment patterns. However, it is observed that what usually drive the stock markets are the lead indicators and hence, waiting for the real economy to show signs of picking up may not be a very good approach to have. It should be noted that even during the plunge, stock markets declined much before than things started worsening in the real economy.

'The capital well is running dry and some economies will wither', screams one of the articles in the UK daily, Telegraph. It argues that over the next few months, a mammoth US$ 6 trillion would be needed to fill the gaping hole in government deficits across the world and undertake fiscal stimuli. Obviously, the world has not seen borrowing of such a magnitude take place in such a synchronized manner with the end result being there may not be enough lenders after all.

Ultimately, it will be left upon the central banks to step in and print money to buy back the debt that cannot be borrowed. However, there are some countries like Ireland that are not in a position to print money simply because either their currencies have become worthless or they have already borrowed so much that any further borrowing might cause a run on their currencies as well. And this is where the danger of a nation or an institution defaulting on its debt is the maximum. The article is thus asking people to brace themselves for a fresh round of defaults. Europe is particularly vulnerable, mentions the article, as banks here have written down only 17% of their losses as compared to the US banks where write downs have already been to the tune of 50%.

Fed chief Ben Bernanke who has had a tough job at hand even since he took over the reins of the US central bank, may finally heave a sigh of relief. After its promises to fuel growth by financing the purchase of US$ 1 trillion in asset-backed securities, US$ 300 bn in long-term Treasuries and as much as US$ 1.5 trillion in mortgage debt, the Fed is finally seeing some signs of economic recovery.

Based on its assessment of the degree of recovery and the extent to which it can unclog the financial markets, the Fed may also be thinking of holding off the purchase of US Treasuries. The waning turmoil in credit markets has been particularly noticeable in the firming auto sales, home sales and consumer sentiment numbers. Consumer spending, which has shown recent signs of gaining, accounts for 70% of the US economy.

The fact that India will fare much better than the rest of the world was endorsed by the World Steel Association, who in its outlook for the global steel sector predicts India's steel demand to grow by 2% in the current calendar year. While this may not sound sweet enough, it has to be borne in mind that the association expects global demand to fall a significant 15% and hence, by that yardstick, India is indeed in a lot better position.

The association expects global demand to stabilise during the second half of 2009 and lead to a mild recovery in 2010. "The improvement in steel consumption for the second half of 2009 will depend on the effects of government packages, the continued stabilisation of financial systems and a return of some consumer confidence," is how the association chairman chose to put it across.

There was a time when PSUs were known for their lackadaisical approach to business and their indifference to customers. With the opening up of the Indian economy and the competition from the private sector, PSUs began to buck up and realise that they must either get rid of their flaws, or lose out to the burgeoning competition. Even though most of them, including PSU banks have made major progress on this front in the last few years, there still remains ample room for improvement.

A current example is BHEL, who has been facing a barrage of attempts from Chinese power equipment manufacturers to woo Indian power generation companies with their low cost imported machines. In a bid to thwart these attempts, BHEL has said that it will now work on improving quality further and cut down on delivery times, as its longer delivery times seem to be one of the major complaints of its potential and existing customers. Competition indeed brings out the best in people... and companies too!

After seven years of listing, Bharti Airtel, India's largest telecom company today announced its first ever equity dividend (of Rs 2 per share). While the reason for not paying dividends all these years, as attributed by its management, was Bharti's huge capital expenditure (capex) programme to spread its wings across the entire country, what has made the company announce a dividend this time around? Crossing the peak capex requirement, the management has indicated. We appreciate that these top guys recognise that the Indian telecom market has reached a near-maturity stage after years of rollicking growth. So, how slow will growth happen in the following years? Well, we have to wait and watch! As per Bharti's management, they plan to continue to reach for the sky.

The popularity of government jobs seems to have an inverse relationship with the performance of the financial markets. That would explain why the number of UPSC (Union Public Service Commission Examination) applications has shot up 42% this year. Of course, civil service is also now more attractive due to the hikes under the 6th pay commission. Compare that with salary freezes and pay cuts in the private sector. Moreover, at a time when the private sector is laying off existing employees, civil services have a large number of vacancies. From being the top choice to being looked down upon to now being the sought after again - civil services have indeed come a full circle.

Key Asian markets closed higher today on the back of reports that earnings in the region are beginning to rebound. Indian benchmark, BSE-Sensex emerged as the top performer, edging higher by nearly 4%. Major European indices are also trading in the positive currently.

04:49  Today's investing mantra
"Both our operating and investment experience cause us to conclude that "turnarounds" seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price" - Warren Buffett
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1 Responses to "Bonuses are back!"

Praveen Kapur

Apr 29, 2009

Very informative and well analyzed. Makes excellent reading.

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