Will dollar remain the currency of choice? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will dollar remain the currency of choice? 

A  A  A

In this issue:
» Stimulus plans are 'insufficient'
» Decision on oil deregulation in six months
» A new competitor for Indian IT companies
» Baltic dry index at eight month high
» ...and more!

Countries across the globe may be a little more upbeat now since there seem to be many small signs of economic recovery. However, World Bank president Robert Zoellick is of a different view. As reported on Bloomberg, Zoellick opines that the fiscal-stimulus plans are insufficient to turn around the 'real economy' and rising joblessness is likely to set off political unrest across the globe. Zoellick says, "While the stimulus has given an impulse, it's like a sugar high unless you eventually get the credit system working." This view is in contrast to that of many economists who believe that revival is taking place and have accordingly raised their growth outlooks for India and China propelled by the stimulus measures. What's more, Zoellick has taken his contrarian view one step further and believes that the dollar will remain the world's main currency for a long time given that investors flocked to the dollar as a haven during the worst parts of the financial crisis. The problem is that the finances of many countries are deteriorating and while the stimulus packages may give a booster dose to revive flagging economies for the time being, in the longer term the threat of inflation looms large.

A dangerously high fiscal deficit, a country crushed under the weight of its own debt and unemployment around decade high levels, we seriously wonder how the dollar can actually live up to its haven status during times of economic and financial turmoil in the years to come.

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The debate on how much has India grown in FY09 seems to have been finally settled. As per the Wall Street Journal, India's economy grew at 5.8% in the fourth quarter as higher government spending and buoyant services sector came into play. This takes the growth for the full year to 6.7%. Although this is way lower than the previous fiscal's growth of 9% and the government's own estimates of 7.1%, it nonetheless is a commendable achievement, especially against the backdrop of the global financial crisis where a large number of economies are struggling to even log in positive growth rates. Now that the growth numbers are out, it has led a lot of experts to speculate that we may have reached the bottom in interest rates with the RBI feeling no need to lower rates further as the current measures are working just fine. What more, even the government might not resort to some heavy duty fiscal spending and only focus on some select sectors. Good news indeed on the fiscal deficit front and the economy as a whole. Little wonder, stock markets welcomed the news with a more than 300 point salute on the Sensex.

There's another good news on the fiscal deficit front and once again from the Wall Street Journal. If the country's oil minister is to be believed, the government is seriously considering deregulating the oil sector. In other words, it will allow prices to be determined by the market and not have a say in it. "This is exactly being discussed", is how the minister chose to put it across, referring to the deregulation. "Now, it will go finally to the cabinet...The Federal Cabinet will take a decision in six weeks," he concluded. It should be noted that subsidies on oil prices in FY09, a year when the crude prices reached record levels, had skyrocketed to US$ 20 bn, putting enormous pressure on the already weak balance sheet of the country. Thus, if the deregulation indeed does happen, it could free up funds that could be invested to augment the long term growth of the country. However, any deregulation is likely to be restricted to auto fuels only and other fuels like kerosene and cooking gas in all likelihood will continue to remain regulated lest the voters be alienated.

Dell, originally a PC manufacturer, which forayed into laptops, workstations, servers and other network devices, is now adding IT infrastructure management to its gamut of offerings. IT infrastructure management, which involves highly specialised services that aid in tracking, managing and optimizing the disparate IT Infrastructure of global organizations, has grown at more than 80% CAGR from US$ 2 bn in 2006 to about US$7 bn in 2008. Nasscom believes that this can be the next largest wave in the off-shoring industry, with revenues doubling to US$ 15 bn by 2013.

With such attractive prospects, Dell has announced that it is going to enter this business in India with a modular launch in the next six months targeted at both the enterprise and small and medium businesses (SMBs). With Dell's entry into the IT infrastructure arena, competition is surely going to increase for Indian IT companies which already provide such services.

After experiencing some extremely rough seas over the last six months, the Indian shipping companies have finally something to cheer. The frontline sea freight index, the Baltic Dry Index, which tracks rates to ship dry commodities, rose to an eight-month high yesterday driven by demand for goods, mainly from China. Analysts have estimated over 80 Capesize ships are waiting off China to load, representing close to 10% of the total Capesize fleet. Further, various stimulus packages announced by the economies have led to some revival of freight demand. While the freight rates are moving up, high capital costs still continue to be a worry for the industry. Although how long the rally will sustain is still doubtful as iron ore stockpiles in China have been rising while demand for steel remains sluggish.

One thing that is conspicuously doing the rounds of the media currently are comments and interviews by various ministers about how they are going to aggressively bring about reforms and upgrades in the ministries they have just taken charge of. Promises are coming in by the dozen, and no one is holding back on being explicit about how they are going to 'tackle' the slowdown. How many deadlines and targets will actually be met may be up for debate, but all this 'positive noise' that is diffusing through the system is surely having its desired effect on the stock markets.

The Indian indices put up another impressive performance last week as they were amongst the top gainers in the world. The country's benchmark index, the BSE-Sensex ended higher by 5% over the previous week. As for other Asian markets, they ended the week on a firm note as well. The pack was led by Hong Kong (up 7%), Singapore (up 4%), Japan (up 3%) and China (up 1%). As for other global markets, Brazil (up 5%), US (up 3%), France (up 2%), UK (up 1%) and Germany (up 0.4%) ended the week on a firm note.

Source: Yahoo Finance Source: Yahoo Finance

The Japanese finally have something to cheer about. As reported in a leading business daily, Japan's industrial output rose the most in 56 years in April led by the revival in exports. Besides production registering a 5.2% growth from March, the yen also gained on speculation that funds will start flowing into Japan. However, all is not hunky dory. The output is still two thirds of what was achieved last year. Further, the unemployment rate has mounted to a five year high of 5%. Obviously stimulus measures announced across the globe have considerably helped matters, but it remains to be seen whether this performance will be sustained in the forthcoming quarters as well.

04:48  Weekend investing mantra
"Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The low-risk, high-uncertainty [situation] gives us our most sought after coin-toss odds. Heads, I win; tails, I don't lose much! " - Mohnish Pabrai
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