Here's a bigger threat to global economy than Greece! - The 5 Minute WrapUp by Equitymaster
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Here's a bigger threat to global economy than Greece! 

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In this issue:
» Will US regain its manufacturing supremacy in 21st century?
» Facebook listing disappoints investors
» Are US treasuries still the safest bet around?
» Dividend or growth what will you choose?


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00:00
 
The global economy is in a pretty fragile state at the moment. And everyone seems to have turned their attention towards Greece. However, a certain Dr Marc Faber believes that there's a more dangerous threat lurking on the horizon. And it answers to the name of China. "I think the biggest risk is actually China because if you look at Greece, it's an insignificant economy," Faber is believed to have said to a business channel.

Faber backs up his thoughts with some hard data. He argues that China is the single largest contributor to global economic growth. Quite certainly so. As per the IMF, the dragon nation's contribution to world's GDP growth during 2010-13 had been to the tune of 31%, up from just 8% in the 1980s. Thus, it can be easily concluded that a slowdown in China will have a significant trickledown effect on world GDP growth.

Things have certainly not deteriorated in China overnight. Its bubble of overinvestment has been building up for quite some time. The very policies that held the dragon nation in good stead in the last decade or so are now coming back to haunt its economy. Chief amongst them would be its tendency to keep exchange rates intact and setting interest rates lower than inflation. What these policies have ended up doing is that they have created massive capacities, most of which are now lying underutilised and even running into huge losses. Obviously, these are proving to be a big drag on its economic growth as evident from the first quarter 2012 GDP growth, its weakest in three years.

Thus, if China doesn't get down to setting things right, it could see a long period of below par GDP growth and would also affect the GDP growth of a large number of nations dependent on it. Another more serious outcome could be a hard landing where a sharp downward spike could make matters even worse for the global economy. Thus, as can be seen, a slowing China is a much bigger threat to the global economy than the problems currently underway in Greece. Investors could do well to keep this factor in mind while making their investment decisions.

Do you think China is a bigger problem than Greece? Share your views with us or you can also comment on our Facebook page / Google+ page.

01:10  Chart of the day
 
The US may be knee deep in debt but that still doesn't stop its Government bonds from being one of the safest havens in the current turbulent times. As today's chart of the day shows, the 10-yr treasury in the US is now trading at its lowest yields of the past few months. What this means is that investors are buying US treasuries in full force, thus letting its price rise and yields to fall down. Clearly, the world's largest economy is still considered to be the safest around.

Source: US Federal Reserve


01:37
 
Quarterly results are but only as much indicative of a company's future as they are of its past. Unfortunately, markets never seem to reconcile with this truth. And even the temporary signs of optimism or pessimism are reacted to. Take the asset quality in the banking sector for instance. Rarely do investors take the pains of evaluating each bank based on its fundamentals. Instead every instance of substantial rise or fall in Non Performing Assets (NPA) takes a toll on the entire sector's valuations. When the economy is in a slowdown phase and chances of slippages are high, the reaction is even bitter. But not every entity may deserve the punishment.

State Bank of India's (SBI) results for the fourth quarter of FY12 was certainly something to cheer about. After all a conservative provisioning policy stood in good stead in difficult times! However there is hardly any reason to believe that SBI's good fortune speaks volumes about the entire sector. Plenty of other PSU and private sector banks continue to be subject to NPA risks. Particularly those emanating from restructured assets. And those that have been lax in provisioning unlike SBI, will have to endure more pain in their bottomline. Hence investors would be better off not assuming SBI's results being indicative of better times for the entire sector.

02:16
 
One of the most talked about IPOs (Initial Public Offer) in recent history hit the markets yesterday. We are of course talking about Facebook - a company whose service is used by a significant portion of the world's population. Browsing through the many articles written about the same, it seems as if the market is disappointed with Facebook's debut performance on the bourses. Naturally, solid listing gains were anticipated. Its stock closed at US$ 38.23, a mere 23 cents higher than the issue price.

Facebook is now valued at US$ 105 bn. This makes it more valuable then well established companies such as Amazon, McDonald's and Hewlett-Packard and Cisco. A lot of comparisons are also being made to other technology companies, whose stocks have not performed well, after hitting the markets in recent times.

As you would know, stock prices, at the end of the day, follow the company's financial performance. So naturally, all focus would be on Facebook's numbers going forward. In simple valuation terms, Facebook's stock is trading at 105 times its 2011 earnings. This means that in 2011, the company's profits stood at US$ 1 bn. For any company to justify such valuations, its earnings growth needs to be phenomenally high. How Facebook will capitalise on its 900 m plus user base (and one that is still growing), will definitely be interesting. We cannot wait to see how the stock performs few quarters down.

02:58
 
The US economy has shown all the wrong signs to the world. A mountain of debt, raging unemployment, deteriorating manufacturing activity, GDP slowdown etc. Things just don't seem to be going its way. And then a social media company comes out with its IPO. And it gets valued at US$ 100 bn which basically went on to add to the wealth corpus of its promoters and employees. Then the question that is put into the mind is will this kind of 'social media' hype be the future of America? Well if it is, then the country is looking at a new normal of low GDP growth which will eventually take it the Eurozone way. But the truth is far from this.

As per an article carried by the Wall Street Journal, the US is actually concentrating on developing manufacturing technology. High end technology in the field of healthcare, water, energy, transportation, etc is just some of the areas where it is focusing on. With labour costs going up in the developing countries, outsourcing would most likely be the thing of the past in the 21st century. The key to growth will then be manufacturing. High end technology will be the main driver. And the US is all set to become a leader in the same. Or at least it has the necessary tools for it. If only it utilizes these tools prudently, the country will shock its entire world of critics and emerge as a superpower all over again.

03:43
 
High dividend yield or growth stocks - what would you choose given an option? One might be tempted to say both. Unfortunately, such options are rare at attractive valuations. Given the volatility in these times, we suggest it will pay to hunt for a good dividend paying stock. Such stocks will offer not just a safety net in the current market conditions, but will be like a double bonanza if share prices rise when market recovers.

Picking up a high dividend stock without some checks could be fatal though. For example, high dividend yield could be on account of suppressed prices due to poor growth prospects of a company. Or it could be a reflection of special dividends which might not continue next year. Similarly, one should avoid getting tempted by dividends if the company is cyclical.

To conclude, while it's a good strategy to move towards high dividend paying stocks when volatility rules the stock markets, one should not compromise on the quality of investment.

04:13
 
Meanwhile, it was a disappointing week for world stock markets. All the stock markets ended the week in the red. US stocks succumbed to selling pressure on account of ongoing Eurozone debt crisis and disappointing US economic data despite strong corporate earnings. Also, the downgrade of Spanish banks by Moody's in the latter half of the week added to the woes of investors.

In India, high inflation and global concerns coupled with rupee's fall were major causes of concern during the week. However, the Indian stock markets, though down by 1%, were the best performing markets amongst all. Amongst the other world markets, all were on the losing end. Brazil in particular shed more than 8% followed by UK which was down nearly 6%.

Most of the sectoral indices closed the week in the red with auto and consumer durables stocks losing the maximum. FMCG, pharma and technology could manage some gains.

Source: Yahoo finance, Kitco, cnnfn


04:50  Weekend investing mantra
"It just seems logical that sticking to investing in only a small number of companies that you understand well, rather than moving down the list to your thirtieth or fiftieth favorite pick, would create a much greater potential to earn above-average investment returns." - Joel Greenblatt
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7 Responses to "Here's a bigger threat to global economy than Greece!"

ABP

May 21, 2012

Its quite easy for doomsayers to just add more and more names and events to support their views. From Iceland, Ireland and Greece, to Portugal, Italy and Spain and then the whole Eurozone, while we are yet to come out with any pleasing numbers from the US, with Japan lying low for 2 decades, now talking about China with no comfort on India, with problems of Russia and Brazil..not to forget the docile situation in the middle east caused by revolutions and Iran... where is the place that is safe? Himalayas may be? Alps? Grand Canyon? I believe this economic calamity is much warranted to bring the earth back to basics - there is nothing for the poor to lose, every artificial wealth added by the rich and affluent could perhaps be liquidated. Filthy high salaries/bonuses will not see another dawn, nor will the crazy high prices of houses unattainable for the middle class and poor.
I would leave it to mother nature to set right the wrongs of human beings. The core economy (of producing and consuming necessities) will remain, but the artificiality created by FIs through such things like derivatives will bite the dust. At the end, I would say, no harm done, rather harm gets cured!

Like (2)

LOVEPAREEK

May 20, 2012

THANK GOD, U MENTIONED, "OF COURSE, WE R TALKING BOUT FACEBOOK". BEFORE READING THAT, I WAS TERRIFIED SINCE LOOMED BEFORE MY EYES, THE DUD THAT HAPPENED (AND WAS DEVIOUSLY MANIPULATED AT THE LAST MINUTE TO PROVE IT A SUCCESS...MAY B AN INVESTIGATIVE REPORT WILL B A WELCOME MOVE) CALLED "SPECIALITY RESTAURANTS"

Like (1)

manoharkantak

May 19, 2012

China's economic collapse will make a significant difference to the world GDP, but at the same time some countries will benefit out of it . Recession is cyclic and in a way it controls the world economy. A war is likely outcome in such circumstances.

Like (1)

Arun Draviam

May 19, 2012

Is the US FED not keeping the interest rate artificially low even when it has a large fiscal deficit and external debt (sic. investment by third world nations in US Treasury bonds) running into over trillion dollars and US taxes not matching its subsidized social welfare (healthcare) program?

Like (1)

sunilkumar tejwani

May 19, 2012

Mr. doom, gloom & boom may be right in his perception. But at present the biggest problem on the minds of people is of euro zone. As is well known, Greece is a habitual defaulter, and it's exit from euro may prompt other P I I G S countries to follow suit. The combined effect of such an incident can be a disaster not only for the Euro zone but the contagion effect can impact Global financial markets in a negative way. China has been fudging it's growth figures since many years. China can suffer because of wrong investment policies.
And slowing demand for world over can lead to China itself going into a recession.

Like (1)

Sundar

May 19, 2012

Where is the slowdown in China. From 9%, it has come down to 8.1%. US is not growing for the past 4 years and US is much bigger than China. Pundits always want something to happen which is not happening. Greece exit, people are talking for 2 years and become tired. So, they are talking something new.

Like (2)

Rajesh

May 19, 2012

Very aptly said. Caution and Precaution..need for the Indian investor.

Like (1)
  
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