Sharpest fall in 14 years - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Sharpest fall in 14 years 

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In this issue:
» Exports see sharpest fall since April 1995
» Foreign investors continue betting money on India
» Charlie Munger speaks up
» Markets seem immune to swine flu
» ...and more!

Any hopes that one had that the Indian economy is recovering would be certainly dashed if the export numbers are anything to go by. Exports, which contribute around 16% to India's GDP, fell by 33.3% in March to US$ 11.5 bn, the sharpest fall since April 1995. For the whole of FY09, exports touched US$ 168.7 bn, recording a 3.4% growth in dollar terms and falling short of the government's revised target of US$ 170 bn. The fall in exports has obviously been due to the ongoing recession in the US, Europe and Japan. Imports have not been spared either. Non-oil imports in March contracted 18.9% to US$ 11.7 bn while oil imports shrank 58.1% to US$ 3.8 bn. Waning imports in the areas of machinery, equipment and project goods is likely to be an area of concern as it signals a slowdown in industrial production. While there are expectations that the recovery would start manifesting in July itself, others are of the opinion that the export growth will be subdued in FY10 as well. What is clear is that unless some sparks of revival are witnessed in the developed economies, India's export growth till such time will most likely remain muted.

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However, few seem to be gloomy about dismal export numbers. The global financial crisis in the past one year had compelled foreign investors to pull out huge sums of money from the emerging markets causing the indices in these regions including India to plunge. But it appears that the appetite of these foreign investors for emerging markets seems to be on the rise again and India in this regard seems to be pulling ahead. As reported in a leading business daily, while India has pulled in US$ 1.8 bn of foreign money, other emerging markets such as Indonesia, Philippines, Taiwan and South Korea have bagged US$ 18 m, US$ 531 m, US$ 632 m and US$ 7 respectively. The perception is that global liquidity is improving and that there are not likely to be any major reversals in these flows immediately unless the risk perception about emerging market equities heightens again. Also, those foreign investors who have been sitting on huge piles of cash are now taking the opportunity to invest in emerging markets including India where valuations are very attractive currently.

Yesterday was witness to the failure of another three banks in the US, taking the total number of failures up to 32 in 2009. Silverton Bank (Atlanta), Citizens Community Bank (New Jersey) and America West Bank (Utah) were the ones that shut shop. Local banks in the US have been shutting down in droves as the recession has made it harder for customers and businesses to pay their loans. As per a CNN Money report, nearly every Friday so far this year, at least one bank has failed. Last week too, 4 regional banks saw their shutters go down. Despite the US government's desperate attempts at infusing liquidity, the pace of bank failures has accelerated; in all of 2008, 25 banks failed, compared with 2009's 32 banks.

Charles Munger, Warren Buffett's pal and business partner, has no qualms in explicitly expressing his contempt for banks that are simply 'too big to fail'. He continues to warn about the dangers of this deadly species of banks that almost succeeded in bringing the whole world's financial system down like a pack of cards. In a recent interview with Bloomberg, he has warned that banks will use their "enormous political power" to prevent changes to the industry that would benefit society. Further, he feels that these are an enormously influential group of people, and 90% of that influence is being spent to gain powers and practices that the world would be better off without. And thus, it will be very hard to accomplish the kind of surgery that would be desirable for the greater good of people at large.

So what is the solution? Munger feels that policy makers should seek to impose limits on banks that are deemed "too big to fail. Says Munger, "We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed. If they are too big to fail, they are too big to be allowed to be as gamey and venal as they've been -- and as stupid as they've been." He couldn't have said it better.

Of the several unusual things about Warren Buffett, perhaps the most significant is how well attended Berkshire Hathaway's annual general meetings (AGMs) are. After all, the AGMs of most companies worldwide, tend to be dull and hardly garner any interest. Contrast this with the expected attendance of nearly 35,000 at Berkshire's AGM for FY09 this weekend. No wonder it has become such a major media event.

Shareholders will be eager to know Buffett's take on the economy, investment opportunities, and Berkshire's ratings downgrade. And one can, as always, expect veritably honest and insightful answers. In fact, it is his reputation for honesty and clarity, besides his unparalleled track record, that attracts such massive crowds. We will update you with the key takeaways from the meeting in the coming week.

And even as Buffett will once again see to it that the interest of his shareholders is well taken care of, imagine the plight of minority shareholders in a company which has just seen a 93% drop in quarterly profits, is part of a sector worst hit by the slowdown, has an overwhelming US$ 3 bn mountain of debt and has receivables of US$ 1 bn due from a group company debtor that is apparently in no position to pay its bills anytime soon. The company is DLF, and its infamous debtor - 'DLF Assets' (DAL), a closely held related company owned by DLF's founders and primary shareholders. Lenders too are just wanting to keep their hands away from such a messy situation, making things worse for DLF. A WSJ report highlights this precarious situation for DLF, wherein minority shareholders are likely to get the short end of the stick given the potential conflicts of interest. Another concern seems to be that DLF may decide to buy out DAL and in the process saddle itself with a debtor which has pitiable cash flows to say the least.

It is generally thought that the in-house brands of organised retailers compete well in the 'value' category such as rice, sugar and salt, but do not fare well in the 'premium' category. However, recent evidence points to the contrary. As per a leading business daily, the private food label 'Feasters' at Aditya Birla's retail arm More, outsells iconic instant noodles brand Maggie in many regions. The in-house brands of Future Group are also said to be doing well in categories like potato chips, namkeen and diapers.

A spokesman for the World Health Organisation has said that the swine flu virus was spreading quickly in Mexico and the southern US and has the potential to become a pandemic and a global threat. But the global stockmarkets seem to have taken risks like these in their stride given the turmoil they have seen over the past 15 months or so. This week, for instance, markets around the world did not seem to panic even when reports of swine flu spreading around the world flooded the media. Investors now seem to be more cheery about what looks like an economic recovery around the world. As seen from the performance of the western and Asian markets this week, a flu pandemic did not seem such a worry given that investors took heart from signs of improvement in their respective economies.

Source: Yahoo Finance Source: Yahoo Finance

Coming to the performance of Indian markets during this holiday shortened 3-day week (markets were closed on April 30th and May 1st on account of Parliamentary Elections and Labour Day respectively), the benchmark BSE-Sensex clocked a marginal 0.7% gain. However, these gains were not without their share of volatility given that the Sensex rose 400 points on the last trading day (Wednesday) after dropping by 370 points the previous day.

Along with the equity markets, oil prices too have been steadily marching upwards. Crude oil rose by over US$ 2 a barrel on Friday, which incidentally is a four week high for the commodity. This is said to be on the back of support from improved US consumer confidence and further evidence of record levels of compliance by OPEC with its agreed output cuts.

04:54  Weekend investing mantra
"For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up" - Warren Buffett
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