Should the coming market collapse scare you? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should the coming market collapse scare you? 

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In this issue:
» No Indian firm in the top 50 brands in the world
» US' energy potential is huge
» Elections a big risk to India downgrade
» Why is no one looking at sliver
» ...and more!

You know the future is uncertain when opinions of experts are sharply divided. The global economy is facing one such uncertain future we believe. Simply because, experts can't seem to be able to make out which way it is headed. While some are predicting doom, others are expecting markets to scale one new high after another. What we have today is another bearish prediction. And a pretty bold one at that. Mr Porter Stansberry, the man at the center of this prediction, has clearly minced no words at all. He has argued that there is now a 100% chance of a market collapse.

There is certainly a good deal of logic behind Porter's prediction. As per him, junk bonds in the US have never yielded less than 5% annually. However, they do today. This means that in no other time credit was as plentiful as it is today and he's certain that this is all going to end in tears. Infact, when this crash occurs, it will be the largest destruction of wealth in history as per him.

You can't help but worry about what Mr Porter seems to be suggesting. For if there's an earthquake in the US, its tremors are bound to be felt in India as well. At the same time, you simply cannot ignore the bullish predictions coming in from other experts. In short, you are in a Catch-22 situation.

Is there a way out of this dilemma? There certainly is. And it involves something as simple as paying zero attention to what macro experts are saying. Well, we know this works because this is exactly how some of the world's best investors have invested for years and are likely to do so in the coming future.

When the underlying economy is on a long term growth path like that of India currently, a near term collapse hardly matters. In fact, it presents one with an opportunity to pick up good, strong companies at attractive prices. This is exactly what investors like Warren Buffett have been doing year after year, and with a great degree of success. Thus, the idea is to not get scared by a bearish prediction or get carried away by sharply rising asset prices. It is in fact to keep a level head at all times and keep buying quality businesses from a long term perspective when they are available at bargain prices. This, more than anything else, could make you wealthier in the long run.

However, this is not to say that one should get overexposed to equities. Their equity exposure should be decided only after setting aside some cash.

Do you pay attention to dire warnings or cheery forecasts from financial gurus? Please share your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
We all know how Warren Buffett's obsesses toward buying companies with strong brands. For it is a strong brand that helps the company earn returns well above its cost of capital and that too for a long period of time. However, given his aversion to tech stocks, he will not be too happy to read today's chart of the day. For it shows the companies with the most valuable brands but with as many as three tech stocks amongst the top five. What might act as a solace is the presence of Coca-Cola, arguably his most successful investment ever, at number 5. Sadly, there isn't one single Indian company even amongst the world's top 50 brands by market value. This could change soon though as India grows and assumes more prominence on the global stage.


A fall in commodity prices presents a good opportunity to scoop them up at bargain prices. So a 30% fall in the prices of silver should ideally result in buyers making a beeline for the metal. But that does not seem to be happening. Despite the meltdown in silver, there have not been many takers for this precious metal. That is because after a stupendous rally, gold has also seen prices fall in recent times. And given the Indian buyers' preference for the yellow metal, most are capitalising on the opportunity to buy more of gold than silver.

That is not all. One differentiating factor between silver and gold is that the former is also used for industrial purposes, while the latter is largely used as a hedge against inflation. Since industrial activity has been sluggish, demand for silver has been subdued as well. It would certainly be difficult to predict where silver prices will be headed going forward. But a pickup in economic activity will certainly play a role in bolstering the fortunes of this metal.

Energy self sufficiency. This is something the US is aiming at. And it may well achieve this. The country has been successful at harvesting the potential of shale gas. In fact, the US is touted to become the largest energy producer by the end of the decade. As per the head of Eurasia group and his co-author, the potential for shale gas in US is huge. It not just makes the country less dependent on the foreign oil producers. But also creates a huge potential for both job creation as well as economic expansion. As per them the signs of this are already visible in the country.

This may also help the country politically. Currently it tends to take aggressive measures to protect its oil interests. But if it is able to develop a huge energy source back home, then the need for such interventions would come down. The question now is can other countries follow suit? Countries that have shale gas deposits are currently seeing low rates of investment in this sector. The list includes India which has not made much of headroom in the area as of now. Hopefully it would take a chip of US' block and proactively invest in the sector. Given its potential, shale gas can help India become less dependent on the import of oil. This would help in reducing the fiscal burden.

Lower inflation numbers, reforms and lower subsidy on fuel have hardly appeased the rating agencies. On the contrary, they have issued additional warnings about an impending rating downgrade for India. One that will not just push India to the 'junk' status but also keep away foreign investors. Indian corporate hoping to raise cheaper funds abroad will also then have to shell out much more.

As per SEBI, Foreign institutional investors (FIIs) have poured in US$ 18.8 bn into Indian stocks and bonds so far this year. This is nearly 30% higher than last year. What is it then that the rating agencies fear but FIIs do not?

The problem lies in the government's attitude towards addressing India's deficit problems. The economy has been sporting uncomfortably wide fiscal and current account deficits for a while now. The December quarter current account deficit at 6 .7% of GDP was at record levels. Rating agencies suspect that with elections on the cards, the government will dole out sops that will make the deficits wider. Besides, the election spending will also take the government's focus away from reform measures.

Thus, the rating downgrade risk may not be turning away the FIIs yet. But as per an article in Wall Street Journal, the rating agencies believe that it is only a matter of time before the FIIs retreat.

They say that if you want to know what the future of a country will be, look at its younger generation. Because they are going to be running the country! But this theory skips an important element. The younger generation is not going to get a clean slate. The economy that they are handed over would be a product of the older generations.

Talking about the US economy... Looking at the way things are, it seems the younger generation will have to pay for the excesses of their parents and grandparents. Consider these facts... The US reports about US$ 1 trillion in annual deficits. It has a staggering US$ 17 trillion national debt. But if you take into account the unfunded liabilities, the number zooms up to US$ 222 trillion. Who will pay for all these?

Then there is increasing income inequality. All thanks to corrupt politicians whose policies are biased towards rich people and large corporations. Moreover, the reckless monetary policies have eroded the US dollar's purchasing power by about 96%.

In short, the US economy is in a real mess. There is no meaningful focus on solving long term problems. Worse still, the problems are being postponed to a later date. The new generation would eventually inherit all this mess. This is indeed a big worry for the future of the US.

Meanwhile, major weakness in Japanese indices came to haunt Indian equity markets too with the BSE Sensex trading lower by around 300 points at the time of writing. Realty and capital goods stocks were seen facing the maximum brunt. Other Asian indices also traded weak today with Europe too following the same trend.

04:57  Today's investing mantra
"Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share."- Warren Buffett

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    2 Responses to "Should the coming market collapse scare you?"


    May 23, 2013

    The other reason one does not venture in silver is due to restrictions as not available as ETF etc.



    May 23, 2013

    Nice write up!

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