As if the global recession wasn't enough... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

As if the global recession wasn't enough... 

A  A  A

In this issue:
» ICICI Bank's balance sheet strategy
» Obama's first 100 days in office
» Tata Steel suffers a setback
» The latest strategy of real estate players
» ...and more!

As if witnessing the worst global economic crisis since the Great Depression was not enough, the world is on the verge of the first influenza pandemic since 1968 with swine flu rearing its ugly head in Mexico, the US and seven other countries. As reported on Bloomberg, the World Health Organization (WHO) has raised its six-tier alert to 5, the second-highest, and has said a pandemic declaration may come soon. A pandemic is an unexpected outbreak of a new contagious disease that spreads from person to person across multiple borders.

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Major vaccine makers namely Sanofi-Aventis and GSK Plc are in talks with world health authorities on how to produce a vaccine. This is not likely to happen anytime soon and should take one year at least given the difficulty in developing vaccines that can fight the ever-changing strains of new viruses in a short time. Meanwhile, the only steps that nations can take are to issue travel warnings and ensure that the likelihood of human to human infection is kept under tight control. The first step is already being carried out. It remains to be seen whether the second step is yielding any results or none at all.

It's back to basics for India's biggest private lender. In what could be called a volte face on its earlier business growth strategy, ICICI Bank is planning to go slow in growing its balance sheet over the next year. "In times like these, you have to conserve capital, you have to maintain liquidity and you have to contain risk," says the bank's first employee and now its chief Chanda Kochhar.

Interestingly, ICICI Bank's plan to reign over credit comes at a time when the RBI has urged bankers to boost the flow of credit to help revive the Indian economy. Contrast this with the aggressiveness that the bank had shown in extending credit to one and all when the central bank had asked all bankers to tone down their lending a couple of years back!

After comments from the incoming chief of ICICI Bank, here is what the outgoing finance secretary of India has to say on the economy's recovery plan. In an interview with Mint, Mr. Arun Ramanathan has indicated that India has not yet done with its stimulus plans to revive the ailing economy, though he sees signs of recovery, especially given the revival seen in sectors like steel, cement, and automobiles. According to him, the new government will have headroom of about 1% of India's GDP to offer as fiscal stimulus to prop the economy.

Given the country's finances, which are already in a dire state, we will rather appreciate the new government spelling its revenue streams that will help it in spending to revive the economy.

US President Barack Obama completed his first 100 days at the helm of the world's most powerful nation yesterday and to be fair to him, had far more issues that required his urgent attention than he could handle. None more so important than the task of bringing the massively derailed US economy back on track. Although the work done by his administration had already started to bear fruit, even by his own admission, plenty of economic problems still stared the nation in its face. This confession was made amidst a lot of other things in a prime time news conference yesterday, President Obama's third in as many months.

On being probed about his administration's meddling with the banking and auto industries, Obama opined that he had no intention of running private companies and once he gets them back on their feet, he will leave them alone. He also talked about investing in education and worker training and creating renewable energy jobs. Although this is not the forum to discuss his performance on other fronts, if the reaction from outside the US is to be believed, he has not had a bad start at all. Even amongst the worst critics of the US, there was a sense of cautious optimism.

Tata Steel, which as per a leading daily, has debt obligations worth US$ 645 m for FY10, might receive a big jolt if an Italy based company decides to pull out of a deal to acquire one of the assets of Corus. Marcegaglia, the Italian company led the four member consortium that had earlier agreed to acquire a majority stake in Teesside Cast Products and two aluminium smelters owned by Corus for US$ 480 m. Apparently, the company is of the opinion that it would be better off opting out of the agreement and paying a penalty rather than committing funds at a time when the steel industry is in the dumps and could suffer from overcapacity for few more years to come. If the deal does indeed fail, Tata Steel could have to look elsewhere for fund raising as steel prices are still at levels where it would be difficult for the company to generate sizeable cash flows to repay the debt.

In 2007, India had announced US$ 500 bn in infrastructure improvement over 5 years. 33% of this amount was supposed to come from the private sector. Wall Street heavyweights promptly set up infrastructure funds. Since then, very little has actually happened. Recently, the National Highways Authority of India (NHAI) sought private participation in 60 new roads. 38 of those did not receive a single bid. The global financial meltdown and the debt heavy nature of infrastructure funding have scared private players.

We believe building infrastructure is critical to India's future. And we have to display a sense of urgency about it. For example, precious time has been lost in drafting a so-called 'model concession agreement'. Care must also be taken to come up with well-conceived, viable projects. It's high time we got our act together.

There are some good news and some bad news for the US. The bad news is that the American economy is contracting at its steepest pace in 50 years, which does not augur well for the global economy too. The good news is that there has been an unanticipated rise in consumer spending since January which has raised hopes that the worst of the recession might have passed.

As reported in the New York Times, the last six months have especially been vicious for the American economy. GDP fell at a 6.1% in the first quarter of 2009 (January-March) after falling at a rate of 6.3% in the fourth quarter of 2008. What's more, the Commerce department in the US is of the opinion that if that pace were to continue, nearly US$ 1 trillion would be wiped out this year from the nation's economic output of US$ 14.2 trillion last year. The silver lining in an otherwise dark cloud was that consumer spending rose by 2.2% during the first quarter. That said, rising unemployment continues to haunt the US economy and the Americans must be fervently hoping that the gargantuan fiscal packages announced by the Obama administration starts making its positive impact felt on the beleaguered economy.

Image Source: The New York Times

It is a well documented fact that real estate players in India have been among the worst hit in the current economic slowdown. As a result, they have been compelled to think of various strategies to come out from this slump. The latest strategy that they have hit upon is to invest in the 'recession proof' education sector. As reported in the Economic Times, in the last one month itself, four real estate developers have announced plans of setting up business schools across the country with the combined investment exceeding Rs 5 bn.

The rationale for this move is driven by the waning demand for housing, cash constraints and developers having land banks available with them. Whether this diversification improves the fortunes of the realtors remains to be seen especially since similar initiatives bit the dust in China.

The Indian markets remained closed today on account of Parliamentary elections. These will also be closed tomorrow on account of Labour Day. As far as the global markets are concerned, while the Asian indices closed firm, the European indices are also trading in the positive currently. As reported on Bloomberg, crude oil prices rose by 2% to US$ 51.9 a barrel as a rally in equity markets increased optimism that the global economy and fuel demand will recover soon.

04:49  Today's investing mantra
"Stop trying to predict the direction of the stock market, the economy, interest rates, or elections." - Warren Buffett
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