Are you following the herd again? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are you following the herd again? 

A  A  A

In this issue:
» Soros sees no bull market in sight
» Airlines industry drowning in red ink
» Lot left to be desired in Indian science education
» Money supply set to explode worldwide
» ...and more!

If one were to take a step back and look around carefully, one would notice that there is a considerable amount of positive expectations built into the system off late. The recent surge in the stockmarkets is one of the best indicators of the same. A stable government, a stimulus oriented budget, aggressive reforms, a boost to infrastructure etc. are just some of the factors underlying the nascent optimism and expectations. Infact, a recent survey conducted by All India Management Association (AIMA) of 450 middle-level managers across sectors showed that nearly two-thirds of the managers who took part in the survey were bullish about India's economic growth and believed that India Inc will bounce back with renewed profits.

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But it is at times like these that an investor would do well to step back and view the situation objectively. With such a huge momentum of expectations overflowing in the stockmarkets, there are indeed some stocks that have surged to dangerously high levels. And if reality were to turn out to be any less than those expectations, a crash in stock prices can be a very real consequence of that. As such, it would be best to not let caution out of the window more so when everyone around has only positive things to say.

Renowned investment guru George Soros in a recent interview with CNN Money had some interesting things to say about China's role in the world. He is of the view that China's global influence is set to grow faster than most people expect. This, he says, will be on the back of its relatively swift economic recovery due to its isolation from the problems of the global financial system and its heavy government role in banking. In China, when the government says 'lend', banks lend, which will in turn help the dragon nation recover more swiftly from the recession. "China is going to be a positive force in the world and the market, and as a consequence, its power and influence are likely to grow. Personally, I believe it's going to grow faster than most people currently expect" said Soros.

As far as the recent climb in global stock markets is concerned, he opined that they may have further to go because there is a lot of liquidity and a lot of investors are still on the sidelines. If the market keeps on going up, more of them may decide to join in thus making it difficult to say how far the rally will go. But one thing Soros emphatically expressed is that he certainly doesn't think that we are at the beginning of a big bull market worldwide as the outlook is still fairly uncertain.

The business process outsourcing story has been the toast of India for some years now. Many have marveled and admired the speed at which this industry has mushroomed in our country. A Nasscom Everest study has estimated that this industry has the potential to grow to about US$ 52 bn in the next five years. And so we hope.

Mr. Raman Roy, chairman and MD of Quatrro and a much respected voice in the industry, in a recent interview does a good job of providing a reality check about the preparations that India needs to make for these hopes to become a reality. He estimates that an incremental 2 m jobs can be created over and above the 800,000-odd we currently have if we reach that goal of US$ 52 bn in the next five years. In addition to those direct jobs, it could add 6 m indirect jobs.

But for that we need to answer one very serious question - Where are these 2 m people going to come from? The fact remains that we need to be taking substantial steps to train them today for them to be ready by the time they are needed. For the industry is no more going to be just about labour arbitrage as we move forward. Even though this was the premise on which the industry was built so far, competition from other countries in the increasingly globalised labour market is going to ensure that it is the talent and capabilities that we offer and not just cheap labour that determines the success of this important industry of ours going forward.

Spare a thought for the global airline industry. After the Sept 11 attacks, it took the industry a total of three years to recover from the crisis, which had seen its revenues fall by 7%. This time around though, things are even worse and as rightly said by the President of IATA, the global airline association, "There is no modern precedent for today's economic meltdown. The ground has been shifted. Our industry has been shaken." Indeed if within a couple of months one is compelled to nearly double the forecast for losses for 2009 like the association has done from US$ 4.7 bn to 9 bn, it is nothing but a sorry state of affairs. And airlines across the world are bleeding. The writing is clearly on the wall - be whatever you want - a passenger, an employee or an oil supplier to an airline company, but surely not an investor as the headwinds just never seem to abate for the sector.

For all the talks that have been doing the rounds of a recovery having started across economies including Asia, Adrian Mowat, Chief Asia strategist of JP Morgan Chase has heaped on more positive news. As reported on Bloomberg, he says, "Asian stocks have yet to reflect expectations for a 'powerful, synchronized' recovery in the global economy." Mowat believes that the markets are still bearish about the growth prospects of the emerging economies but that is likely to change soon. Infact, to translate this into numbers, Mowat opines that MSCI's Asian ex-Japan index will rise to 400 by the end of the year, which would signify a 62% annual rally, the best since 1993.

Incidentally, Mark Mobius had also said recently that the money supply is set to 'explode' worldwide and boost emerging-market stocks as central banks pump cash into the financial system to counter the global recession. Thus, while we believe that that the current optimism could sustain the rally in the stockmarkets, in the longer term the threat of inflation due to excess liquidity continues to persist.

Eminent scientist and Nobel Laureate, Sydney Altman, has suggested that the Indian government develop a curriculum with a view to encourage kids towards innovation. According to him, India's focus is too much on scientific research at high level and has been ignoring science education at school level, which would not be good for the scientific health of the country in the long run. "This is something which has to be looked into in great detail by the government. You just can't talk about science and innovation. You got to encourage kids outside of their restrictive curriculum in schools," said Mr. Altman. We couldn't agree more!

The Indian markets began the week on a poor note with the BSE-Sensex ending lower by around 440 points while the NSE-Nifty index ended lower by around 160 points. While stocks from other Asian markets closed on a mixed note, stocks in Europe were trading in the red at the time of writing.

04:54  Today's investing mantra
"A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you don't need to own very many of them." - Warren Buffett
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2 Responses to "Are you following the herd again?"

S.L. Narasimha Rao

Jun 16, 2009

The prospect of more jobs in the IT industry and training more people to meet the requirement is very heart warming. But it also raises a couple of serious questions which have come up in the last 3 to 4 years.

i) The quality of the engineering graduates is very poor due to mushrooming of engineering colleges and politisiation of the field as the education field has become a real estate business in practice.

ii) All the available graduates are opting for the IT field for the lure of higher salaries, leaving no or very poor quality manpower for the manufacturing industry and the remaining service sectors.

iii) The country is entering into a serious shortage of well qualified manpower


Hitendra Dhande

Jun 8, 2009

"Are you following the herd again"
Above mentioned article is very very good, thought provoking, lubricationg my brain.

Thank you.

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