Post poll era will be more worrying than ever - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Post poll era will be more worrying than ever 

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In this issue:
» Why is a cash rich company like Apple raising debt?
» China on the brink of a major crisis
» Labour unrest threatening to throw auto sector out of gear...
» Will realty sales pick up post elections?
» ...and more!


00:00
 
The US' addiction to cheap money is legendary. Successive US Fed chiefs, right from Greenspan to Bernanke to Yellen have supported the cause of cheap money for more than a decade now. And their policies have also found support from their counterparts in China and Japan more recently. China has been injecting larger and larger doses of credit into its economy to keep growth rates high. As a result of this, China's private-sector debt to GDP ratio moved to over 200% in 1QCY14. Important to point out that the ratio has nearly doubled from 125% at the end of 2008.

For Japan, the credit bubble burst in 1989 gave birth to the lost decade. And fearing that the economy may move from the lost decade to a permanent coma, Prime Minister Abe embarked on a spending splurge in 2013. His efforts to kick start the economy with stimuli resulted in Japan's public debt to GDP going to 237%. Thus it is not just the US and Eurozone that are addicted to cheap money. China and Japan are sailing in the same boat. And there is just one unflattering decision that each of these economies need to make. 'When to shut the liquidity tap?' Without this decision, each of the economies risk subjecting themselves to a financial catastrophe.

The US' winding up of the bond purchase program has already threatened to suck the excess liquidity out of the global economies. China and Japan taking the bitter pill could lead to a systemic upheaval in the global financial system. One that will see readjustment in global risk appetite, interest rates, currency strengths and GDP growth. For India, these could mean a massive change in the direction of fund flows which in turn could create problems in financing its current account deficit. The RBI's Monetary Policy decisions going forward too will have to take into account global interest rates and not just domestic inflation. Volatile currency and uncertainty over recovery of the biggest economies could also pose further challenges for India Inc.

Thus the May 16 outcome of the elections will put at rest only one of the moving parts that could shape the destiny of the Indian economy. There are several other far reaching implications of the global economic and geo political flux. Investors looking to grow their wealth over the long term therefore need to be prepared to see Mr Market in a panic mode in the months ahead. While there are certainly reasons to worry, investors with a good asset allocation can certainly be at peace and take advantage of the bargains Mr Market will have to offer. Moreover, it would be wiser to make investments with equal importance to safety of capital and return on capital.

So, how should one position his portfolio after the election verdict? Should one keep a larger exposure to stocks or other asset classes? We know it is questions like these that worry you currently. And that's precisely why we are organizing a WebSummit on 17th May 2014. Yes, the day after the election results... when all the dust has settled and it's time to plan ahead. The ONLY agenda of the WebSummit will be to help you plan your post poll investment strategy. So, block your calendar, and start looking forward to it! Full details of the WebSummit will be released shortly. In the meantime if you have any questions already, please post them here.

Do you think Indian investors have other worries on their mind beyond the outcome of the general elections? Let us know in the Equitymaster Club or share your comments below.

Editors Note: There's more to getting wealthy than investing in stocks... to learn American wealth coach & Daily Reckoning contributor Mark Ford's wealth building strategies check out his 11 Secrets to Building Wealth (free access).

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01:35  Chart of the day
 
The RBI's agony over the deterioration in quality of assets of PSU banks is well understood. Especially when seen in context of the Indian financial sector as a whole. That the government owned banks corner nearly two thirds of the assets in the banking sector is well known. What is not known is the fact that the PSU banks tower over other financial institutions holding public assets and have a larger share of assets than insurance companies, NBFCs and mutual funds put together. In addition they account for 63.2% of the GDP. Thus a systemic NPA crisis in PSU banks threatens to risk the entire financial sector in India. And the RBI should therefore not just curtail asset slippage but also ensure better management of the PSU banks.

Concentration of financial assets in PSU banks


02:05
 
In a normal world, a firm is supposed to make investments where it gets the biggest bang for its buck. In other words, where it has a chance to maximise profits. But the world we inhabit is not normal. It is infested with bizarre tax laws, thus making them the centerpoint for any investment related decisions. Perhaps it is these laws that are making company as drowning in cash as Apple Inc plan a debt issue. Yes, you read that right. A company with a gigantic US$ 150 bn cash pile would actually resort to debt financing in order to implement its share buyback program! Well, the thing is that a lion's share of Apple's accumulated cash is offshore, earned through its foreign subsidiaries. And if Apple tries to bring it back to the US, it will have to incur significant taxes as per the US tax laws. Therefore if the company issues debt in Europe, the proceeds can be used for buyback. Whereas the interest and the principal owed to debt investors would be paid out of its overseas cash pile.

As a matter of fact, Apple is not alone. A lot of US firms that are cash rich and have most of its cash parked outside, are resorting to actions like buyback and overseas acquisitions rather than bring the cash back home. And the US authorities seem to be loving it. For they argue that these actions are adding to the financial stability of these firms and is helping them access innovative technology. Certainly. as long as long term value is being created, no one should have objections to this trend. However, US firms need to guard against the risk of greed setting in and luring them into making expensive looking acquisitions. Or make them take on too much debt for that matter.

02:49
 
Once coveted as the fastest growing nation of the world, China seems to be on the verge of an economic crisis. As per economists, only the magnitude and timing of this event is uncertain. Young population and easy monetary policy had laid the foundation of China's growth story. And now when the Chinese demographics have changed with ageing population, growth is likely to take a backseat. Even the monetary stimulus cannot sustain forever and will have to be withdrawn soon. This will make the matters even worse for the dragon nation. It may be noted that China's growth fell to an 18 month low of 7.4% in the first quarter. There is excess capacity in industrial sector and demand is waning. These are signs that productivity would fall and further hurt growth. In short, both demographics and monetary policies are inept now to uplift growth. Further, China's economy is predominantly export oriented. And with global economy in downturn growth may dwindle further. While 5-6% mark may not be out of sight, if it does happen we can expect a downward spiraling effect on other developing nations as well.

03:17
 
The automobile industry employs about 19 million workers, directly and indirectly. And with the slump in demand, it has led to large scale layoffs over time. As per the Society of Indian Automobile Manufacturers, nearly 150,000 to 200,000 jobs were cut due to lower production. Plus, with rising living expenses, the demand for better pay packages - especially considering the disparity between permanent and temporary workers' wages - has become quite common. All of these factors have caused many incidents of labour unrests in the auto sector.

As pointed out by the Business Standard, four major companies faced labour issues since November 2013. One more was added to this list last weekend: Shriram Piston and Ring Ltd. As per reports, the incident was quite unpleasant; leading to as many as seventy nine workers being hospitalized and many arrests taking place. While better internal processes within companies are one way of handling such situations, the fact is that a remedy is definitely needed to India Inc's labour unrest issues. More so because this phenomenon is not limited to the auto sector only!

03:51
 
The country is currently in the grip of election fever and all hopes are pinned on the new government as various challenges have plagued the economy. Among various group of people the real estate stakeholders (builders, financial institutions and home buyers) too have high hopes from the new government. An article in Firstbiz, has laid down some synopsis of a survey conducted by Federation of Indian chambers of commerce and Industry (FICCI) on the elections and property price. It says, home prices are not going to get cheaper, irrespective of number of project launches made. Experts in the real estate sector expect project launches and sales volume to grow in the coming six months, though the price appreciation will be sluggish.

In our view, it is bit early to take a call on this because major factors that influence prices will remain static until the necessary steps towards rejuvenating the economy. Further, one should note that homes sales have been quite sluggish in the country for the past 12 to 18 months. Over and above, this sector has been afflicted by poor disclosures, lack of corporate governance, opaqueness and builder-politician nexus, Thus property prices have been artificially propped up. Consequently a lot of work needs to be done by the new government to make this sector more transparent. Until then it would be too early to assume that realty sales will take-off immediately after the election outcome is declared.

04:22
 
The Indian stock markets have pared early gains and slipped below the dotted line. At the time of writing, the benchmark BSE-Sensex was down by 67 points (-0.3%). Barring oil and gas and FMCG, all the sectoral indices were trading in the red. Realty and metal stocks were the biggest losers. Majority of the Asian stock markets were trading in the red with Hong Kong and Taiwan being the major losers. Indices in Singapore and China were trading positive. European markets opened the day on a negative note.

04:40  Today's investing mantra
"Value investing is the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realized. The element of a bargain is the key to the process." - Seth Klarman

Editors Note: There will be no issue of The 5 Minute Wrapup on 1st May 2014 on account of Maharashtra Day.
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2 Responses to "Post poll era will be more worrying than ever"

K.B.Goswami

May 1, 2014

It is difficult to predict a jump in share prices pot-poll,as growth of industries overnight is a dream.India's Industrial sector has many ills at present;the first and foremost is that its control is in the hands of a few big guns who rule the financial world.Unless small and cottage industries are given a boost,with the Govt giving them a hand for fast clearance,and reducing Govt control,small and new entrants are not likely to be tempted.Our huge employable manpower in age groups 25-35yrs are to be employed and politics as the means of sustainance and as a profession for the unemployed has to be discouraged substantially.Easy to sermonise but difficult to implement.Needs sincere political will.Future holds the key.Kanan Bihari Goswami

Like (1)

krishnamurthy

Apr 30, 2014

Hope there is no chance, by chance if male(SP) and Female(BSP) bed partners (Living in together)of ruling elite party going to derail the expectations then, you can forget all investment so far made. You will be given begging bowl for the future.

Like (1)
  
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