Did Charlie Munger just turn India's economics upside down?
(May 7, 2015)
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In this issue:
» India's ranking on the market cap front
» An Indian fund manager writes a letter to Jim Rogers
» A round up on markets
» ...and more!
Ask people about India's number one problem on the currency front and most of them are certain to say oil imports. Indeed, our oil imports have been the proverbial Albatross around our necks since time immemorial we believe. And one could be forgiven if one has lost count of the money we've sent abroad to bring the crude oil home.
Therefore while Mother Nature has been kind to us in a lot of ways, her blessings seem to have fallen short on the hydrocarbons front. At least if we go by the current proven reserves that we have. Imagine if we were to meet all our hydrocarbon needs internally?
It would have done absolute wonders to our foreign exchange reserves. We could have easily diverted the billions of dollars that we currently pay out to bring oil and gas home into something far more productive.
For example look at what the whole fracking revolution has done to the US economy. It has completely reduced its dependence on the Middle East oil. Not to forget the tens of millions of new jobs created domestically that has given the economy a huge boost.
Consequently, having huge hydrocarbon reserves close to home and also the technology to tap them at will looks like the best advantage a country can have, isn't it? Especially at a time when the world's thirst for hydrocarbons seems almost unquenchable.
While this does seem the most logical approach to take, apply a little more thought and there are chances you may change your mind. In other words, throw some science and long term thinking into the mix and you get a totally different answer.
Fortunately, a man who answers to the name of Charlie Munger has done the heavy lifting on this one. And he has come to a conclusion that seems shocking at best. As a matter of fact, he has gone to the extent of calling 'Energy Independence' one of the dumbest ideas of our times.
His argument is simple. The importance of hydrocarbons to the survival of today's civilisation cannot be emphasised enough. In other words, running out of hydrocarbons would mean running out of civilisation. All of the things like drugs, fertilisers, fungicides etc that we have come to heavily rely on, all come from hydrocarbons.
And sadly, there's only so much hydrocarbon in the entire world. In the sense that it is not a renewable source of energy. Once used up, it turns into carbon dioxide and water and does not become hydrocarbon again for may be millions of years. Thus, the more of it we can save now and use later, the better it is for us.
Given this background, Munger is strictly of the view that oil and gas are absolutely certain to become incredibly scarce and very high priced. And therefore, a nation's best bet for survival is to be able to preserve its own hydrocarbons within its borders and instead, buy more of someone else's hydrocarbon.
Now this does turn India's economics or at least its calculations on the external balance front upside down, isn't it? For years, we have tried to bring down our energy bill and increase our energy independence by exploring for domestic oil. However, Munger's spin has given a whole new dimension to this issue.
Going by his logic, it doesn't matter even if we keep importing more and more oil. Our focus instead should be to earn more forex by shipping more of our goods and services abroad so that our oil bills are taken care of. Turns out, trying to become energy independent would be a dumb idea if we listen to Munger.
Do you think Munger's idea of depending more on foreign oil makes more sense over the long term?
Let us know your comments or share your views in the Equitymaster Club.
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If Munger's thought on oil independence has left you bewildered, then Rogers' opinion on India will leave you dumbstruck. Recently Jim Rogers, in one of the most scintillating interviews, shared his perspective about India. His tone was a tad negative and he seemed critical of the government and its policies. In response, one Indian fund manager, questioned some of the profound statements made by Jim Rogers.
Herewith, we present what Rogers had to say about India, and how the fund manager critically responded to his views. Later we share our unbiased view on every topic as an important takeaway for our readers.
Statement No 1
Jim Rogers:- I bought India because of the new government.
Indian fund managers' contention:- India should have been a part of your core portfolio anyways.
Our view: As India is one of the fastest growing emerging markets it should be a part of any global investor's portfolio. While government policies do influence stock markets in the long run, it is the earnings that matter the most. In a nut shell, policy making is important but not the only factor while making investment decisions as there many sectors that have little or no government interference.
Statement No 2
Jim Rogers:- Exchange control rules are a hindrance to foreigners investing in India.
Indian fund managers' contention:- More than half of the free float in Indian stocks is owned by foreigners. Also, India still permits investments through P Notes.
Our view: While there are certain restrictions on FII holdings in stocks, there are enough opportunities for foreigners to invest. Though recently the taxation issue related to MAT is a cause of worry, foreign investors cannot run scot free by earning profits in an economy leaving nothing for the exchequer that allowed them to enter it in the first place.
Statement No 3
Jim Rogers: Indian government has been inactive for a year with no results to show.
Indian fund managers' contention:- All the qualitative and quantitative parameters have improved. However, it may take time for actions to deliver result.
Our view: Judging the performance of a government in 1 year which has a 5 year mandate is premature. Nonetheless, if not actual results, at least performance offshoots should be visible in one year. And we reckon that has happened with the Modi government. However, results may take time to show up. Some things just take time - An ordinary man cannot run at the speed of Usain Bolt but that doesn't mean he cannot cross the finishing line!
Statement No 4
Jim Rogers: All central bankers are bad but Rajan is less bad (not good)
Indian fund managers' contention:- It is unfair to compare Rajan with anyone. In fact, central bankers are not comparable as everyone has a different objective to meet. Having different mandates makes comparison futile.
Our view: We reckon Dr Rajan has done a phenomenal job so far. He has been under constant pressure to lower rates to boost the economy but he has not bowed to political or corporate interests ignoring inflation concerns. Plus, we reckon that India's banking system is well regulated. Though PSUs are facing some problems on asset quality front, the overall regulatory oversight in India is much better.
The Indian fund managers' response to Jim Rogers' views brings with it an important lesson for investors. Listen to all but act on your own. Remember, in markets everyone has a perspective. In fact, diverse opinions make markets. But it is for you to decide whether such opinions are just noise or if they can have any serious repercussions on your portfolio.
Not sure whether FIIs have frowned upon India after listening to Jim Rogers, but FII resentment has eroded the market cap of listed companies of India in a serious way. As seen in today's chart, India is placed way at the bottom when it comes to assessing the global market cap rankings.
Where is India placed in global market cap rankings?
And this position could get worse if sentiments continue to remain negative. Of late, foreigners have been exiting India due to concerns pertaining to retrospective taxation, poor earnings performance, valuations etc. Currency is another factor that could impact the ranking of India. Since the market cap is quoted in US dollars, exchange rate movement also plays an important role in the ranking. For instance, a depreciating Rupee can lower the dollar market cap, thereby the ranking and vice versa.
The Indian stock markets were trading in the red at the time of writing. While the BSE Sensex was down by 96 points, NSE Nifty was down by 36 points. All the Asian equity markets were trading in the red at the time of writing. European stock markets also opened in the red today.
"We think any company that has an economist has one employee too many." - Warren Buffett
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|This edition of The 5 Minute WrapUp is authored by Rahul Shah and Jinesh Joshi.
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