'Decade low growth' a warning sign for investors? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

'Decade low growth' a warning sign for investors? 

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In this issue:
» RBI becomes strict on managing bad loans
» OPEC keeps oil supply unchanged
» Unemployment in Europe continues to rise
» Mr. Narayana Murthy makes a comeback to Infosys
» ...and more!

India was the envy of the world when it grew at an impressive rate of 9% plus for three consecutive years before the global financial crisis. Even through the crisis did slow down things quite a bit in FY09, the lure for investing in India did not diminish as it was able to stage a remarkable recovery and post healthy growth rates in the next two fiscals. It was only in FY12 that things began to go awry. And continuing with this trend FY13 has turned out to be quite a terrible year for the Indian economy.

Indeed, GDP for the fiscal ended March 31 rose by 5% YoY (growth of 6.2% in FY12) and this has been labeled as its slowest annual rate in a decade. There have been many reasons cited for this poor show. The main among them is the ineffectiveness of the current UPA government. Plagued by rampant corruption and political infighting, the current government was rendered helpless as it failed to undertake any meaningful reforms. Added to this are the problems of inflation and a widening fiscal deficit. While a roadmap has been laid for the deficit to come down, so far the government has not been able to stick to its targets. And it seems like it will be quite some time before it comes within the 3% comfort range of the government. This has then hardly left any headroom for the government to spend on areas such as healthcare, education and infrastructure, when a large portion of its expenditure remains unproductive.

The 5% GDP growth rate when compared to that of the developed world is not so bad. But it does not spell good news for an economy which will have to grow faster if jobs have to be created to accommodate an increasing young workforce.

The past few months has seen the government break the stasis and introduce some reforms. These included greater investment in sectors such as retail, broadcasting and aviation as well as lowering expensive state subsidies on fuel and raising taxes to curb gold imports. But the implementation of these so far leaves a lot to be desired.

The next few years would be crucial for the economy. In the near term, a turnaround may take some time and therefore the first half of the current fiscal is bound to still see some weakness across industries. One can hope that the scenario improves thereon. From a longer term perspective, the growth drivers for India are very much present. But it all depends on what structural measures the government undertakes to take growth to the next level. Or will it be content with just sitting back and letting India chug at a 5-6% growth rate?

We do not think investors should read too much into the GDP numbers or take it as a warning signal. We believe in bottom up investing and that the same can be practiced fairly successfully even without near term macro economic projections. For those invested in Indian stocks for the long term, such economic stumbling blocks should be opportunities to buy safe and solid stocks.

Do you think that after recording the lowest GDP growth in a decade, the Indian economy will recover from here on? Please share your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
What kind of stocks should one invest in? Should it be in largecaps stocks which comprise of blue chip companies with a proven track record? Or should one go in for small caps where the risks are certainly higher than that in large caps but the growth rate faster? We put forth this question in Equitymaster's Investor Survey and the results were largely encouraging. An overwhelming 51% do not believe in investing in one or the other but would rather prefer having a basket of shares across all market caps. This is broadly in line with Equitymaster's views on asset allocation where we also believe that investors should decide their exposure to equities, which is only one part of the overall investment portfolio, after they have kept aside some cash.

Data Source: Equitymaster Investor Survey 2013

The menace of restructured loans has hit Indian banks really hard. Also the onset of the asset quality problems could not have been more ill timed. Economic slowdown has already taken a toll on the demand for credit. Sustaining net interest margins (NIMs) is also a trait of a few players in the sector. During such times, having to write-off restructured loans is a direct threat on the profitability of banks. The central bank (RBI) is wary of the fact that too much restructuring could pose a serious systemic risk to the asset quality of Indian banking sector.

The RBI therefore has sought to keep banks' restructuring policies in tight leash. While banks have increasingly sought to restructure troubled corporate loans, the RBI is not in favour of liberal policies. It does not want banks to declare potential non-performing laons (NPAs) as 'restructured' ones. Hence under the RBI's new mandate, banks will have to seek personal guarantee from promoters before restructuring loans. This will ensure that there is no willful default in the case of restructured loans. Plus banks themselves have to set aside provisioning of 5% of the value of a newly restructured loan. This was 2% earlier. It seems the Kingfisher Airlines case has taught the central bank some tough lessons.

What is the most distinguishing trait of a cartel? It is the consensus between members to regulate the output and hence prices of a commodity over which they have a major control. OPEC, over years has functioned as one such cartel thus controlling the oil markets. However, going by the recent developments, it seems unlikely that it will command the same authority as it did in the past. The reasons for this dent in its supremacy are both external and internal. For one, with huge shale oil discoveries in US, OPEC's control over supply and pricing is slipping. Infact, it is expected that US will start exporting oil by the end of this decade. Besides, with internal rifts among OPEC's member nations, it will be difficult to reach a consensus on supply and price levels.

So will this lead to a sobering in oil prices? Well, the answer to this is not that simple. This is because there are other variables that enter oil price equation. For one, there are geopolitical issues in Iran and Syria that likely to keep prices up. Further, oil prices will be governed by the state of global economy. As of now, OPEC members are happy to see crude oil levels above US$ 100 per barrel and hence have kept supply unchanged in the recent meeting. But with so many faultlines to deal with, we wonder if all member nations will stick to self imposed supply limits.

Unemployment rates in European Union continue to rise. As per Eurostat - the seventeen country union's statistics office - reported that the unemployment rate rose to 12.2% in the month of April this year. This is up by 0.1% as compared to the preceding month. With this, the total has risen to 19.38 m. In October last year, this figure stood at 18 m. If the present pace continues, it's a matter of time before the count hits the 20 m mark. While this may be the total count of the EU, the country wise stats show how bad the situation is in certain countries. For instance, in Greece and Spain, unemployment rates stand at a high 25%. Digging deeper into the data, the situation is even worse. Nearly half the youth (aged 18 to 25) in Spain and Greece are unemployed. The same stat for Italy stands at 40%. Given these figures, country leaders have been sounding alarm bells over taking measures to improve the situation. But with interest rates close to zero, not leading to higher investments by corporate - given the slowing growth rates and uncertain future - decline in unemployment seems to be a very difficult task.

Whom does a child turn to when it is beset with a slew of problems and needs help? His father of course. And a similar situation seems to be unfolding at IT bellwether Infosys as well.

It is an indisputable fact that Infosys' might and reputation in the Indian IT industry today has largely been a product of the exemplary leadership of its founder Mr. Narayana Murthy. Besides changing the landscape of the Indian IT industry, the company has also been noted for putting in place a robust succession plan and training its people to become leaders. And as part of this process, Mr. Murthy retired from the company in 2011. But past few years have seen considerable headwinds for the company. Notwithstanding the challenging environment that the IT industry as a whole is operating in, Infosys has also been suffering for recording growth rate below that of its peers TCS, HCL Technologies and Cognizant.

Thus, burdened with many problems, Infosys has turned to its founder to revive the fortunes of the company. Indeed, Mr. Murthy will be returning to the company as an Executive Chairman from today, replacing Mr K.V Kamath. And he will be joined by his son Rohan Murthy, who will assist him in this role. Will Mr. Murthy's comeback turn Infosys into the blue eyed IT boy it once was? One will have to wait and see.

Most of the major global indices ended the week and the month in the red. However, markets in Germany, China and India managed to clock marginal gains. Japan registered the steepest correction of 5.7%. Rising concerns about the effectiveness of efforts by Prime Minister Shinzo Abe to pull the country out of the decade-long inflation triggered the sell-off. Singapore and Hong Kong are the other Asian indices that declined by 2.4% and 1%, respectively.

The US markets remained volatile after mixed signals on the pick-up in economic activity added to speculation that the US Federal Reserve may ease its monetary stimulus measures. The Dow index was down by 1.2% for the week. Even the Brazil market fell by a steep 5% for the week. Fears of winding up in the quantitative easing program by US unnerved markets in UK that fell by 1.1%.

The Indian equity markets witnessed a major sell-off with the Sensex falling by a steep 2.3% on Friday. A host of factors such as weak economic growth, sliding rupee, dampening hopes of a rate cut as well as subdued global cues resulted in the huge correction. However, the Sensex ended marginally higher for the week.

Data source: Yahoo finance

04:56  Weekend investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch
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