Govt. prefers votes over reforms, again - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Govt. prefers votes over reforms, again 

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In this issue:
» Municipal bonds catch Berkshire's eye
» BRIC nations are making news
» Is China recovering?
» Employment is starting to stabilise
» ...and more!

Cold water has been poured yet another time on the government's plan of deregulating the oil sector and freeing up the oil prices. And this time around, there has been more than just one culprit. First is the fuel price itself. When the talk of de-regulation first started doing the rounds, oil prices were perched quite comfortably. However, with the same inching up and touching the government threshold mark of US$ 67 per barrel, politicians seemed to have developed cold feet. For they do not want to greet the public with a fuel price hike, which at the current crude oil price would have become imperative. Secondly, with elections staring in the face in one of the states and also with one of the government's biggest allies eyeing elections at its home state, price revision could prove counterproductive. The oil ministry however is unwilling to admit that its hands are tied and instead, giving out assurances that although the decontrol of oil prices is definitely on its agenda, its implementation will have to wait. That's what we have been doing all these years, haven't we?

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We know of Warren Buffett buying US stocks in the middle of last year for his account as also on behalf of his company Berkshire Hathaway given his belief that stocks held tremendous value. Now, as reported by Bloomberg, Buffett's Berkshire has been gobbling up municipal bonds. In fact, over the past nine months, Berkshire has doubled its municipal bond holdings to US$ 4 bn. As reported, Berkshire has bought these bonds while scaling back stock purchases and as its cash position fell to the lowest level in five years. The attractive return from these bonds is what must have captured Berkshire's attention. As a matter of fact, yields on the highest quality 10-year tax-exempt municipal debt soared to a record two times the rate of comparable-maturity US Treasuries in December 2008.

As Buffett had written in his annual letter to shareholders in February, "The investment world has gone from underpricing risk to overpricing it. A few years ago, it would have seemed unthinkable that yields like today's could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds."

The BRIC countries - Brazil, Russia, India, and China - have once again garnered attention as they have increased foreign reserves by more than US$ 60 bn in May to limit currency gains as the first global recession since World War II restricts exports.

Obviously, given that exports of many of these countries have received a hammering, they are not keen on seeing their respective currencies appreciate against the dollar as that would further restrict the gains that exporters would enjoy.

However, given that the BRIC economies are in a much better shape than the developed world, renewed interest has been generated in these emerging countries as investors are seeking higher yielding alternatives to the US dollar. Further, while there is a lot of noise that is emanating from China, Brazil and Russia questioning the dollar's reign as the world's reserve currency and suggesting de-substituting the currency, we believe that implementing the same is easier said than done.

For then the question arises, which other currency would be better fitted to assume that role. The US currently maybe in the doldrums but so is Europe and Japan and hence it could be a while before the US dollar gets toppled as the currency of choice.

Given the rising clout of China in the global economy, any economic developments taking place there definitely sparks interest in both the developed and the developing world. So how has China been faring of late? Its government is leaving no stone unturned in bolstering the economy of the country which has been adversely impacted by the global financial crisis. It has now stepped up its spending on roads, power grids and property, which is believed to have accelerated for the fourth month now. Obviously, the gargantuan stimulus package of US$ 585 bn is making a difference in terms of boosting manufacturing activity. However, not all is hunky dory and exports still continue to remain a cause for concern. Employment outlook is also bleak. All in all, while some signs of revival are evident, it will definitely be a while before things get back on track again.

Amongst all the positives slowly making their way to newspaper headlines, here's another. A forward looking measure of hiring expectations, introduced by global staffing services company Manpower Inc., held steady in the US and other large economies, a sign that employment is starting to stabilise. More specifically, the US net employment outlook remained at a 'minus-2' for the third quarter, unchanged from the second quarter. Though the same measure read plus-12 a year ago, what's reassuring is that it has stopped falling indicating that the unemployment rate might have finally broken out of its downward spiral. Even employers in other large countries like the UK, Japan and China also indicated stable hiring outlooks, while those in Mexico, Taiwan, Singapore and Australia said prospects are better than in the second quarter according to the survey conducted by Manpower Inc.

The recession has changed the way companies are thinking in terms of opening captive centers in India. Many global companies, especially those in the West, that had opened centers in India to perform back end tasks at a cheaper rate are now selling off these centers or shutting them down as the need to scale down costs has assumed paramount importance.

In the past, companies calculated that building their own offshore offices could save them from paying the 15% to 20% margin that outsourcers typically charge. But that view seems to have changed and many of these companies no longer feel that the benefits of managing their own centers are that considerable.

Given that employee churn at offshore offices is typically high and workers in India often receive annual raises, the cost structure of such centers can escalate rapidly. Also, as reported in the Wall Street Journal, it costs about 25% more to operate a captive center than to have an outside company provide the same services. Of course, despite Obama's recent remarks on outsourcing which do not bode well for India, the advantage that the country offers is too good to ignore and if global companies decide not to open their own centers in the country but instead go in for third party service providers, then this could be beneficial to Indian IT firms who would see more business coming their way.

They were one of the worst hit by the global financial crisis but hedge funds seem to have made a strong comeback in May to turn it into one of the best performing months in history. As reported in New York Times, hedge funds on an average climbed 5.23% last month, leaving them up 9.43% this year. The rally in the stockmarkets and positive signals emitted of a likely recovery in the global economy seem to have rubbed off favourably. However, while there are reasons to smile, an element of caution still remains and many of these funds are still vary of putting new money in risky strategies. Hedge funds have learnt a hard lesson and if as a result they stick to employing a long term strategy without any undue risk, it would be a lesson well learnt.

The Indian markets closed higher by 3% today led by gains in the BSE IT (up 5%) and BSE Metal (up 4%) indices. On the global front, while the Asian indices closed mixed, the European indices are also witnessing a mixed trend currently.

04:55  Today's investing mantra
"Someone's sitting in the shade today because someone planted a tree a long time ago" - Warren Buffett
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2 Responses to "Govt. prefers votes over reforms, again"

Swapnil Thakur

Jun 9, 2009

If MNC's do not operate Captive centres and outsource them, it might mean business for Desi firms, but will be bad for employee cause the outsourcing company pays a hell lot less than an MNC and the culture is so desi including the food and amenities. Oh boy -- I wonder if I can afford buying a luxury car and will that make Maruti or Toyota uncomfy?


anil kumar sharma

Jun 9, 2009

Any thing related to reforms must not be compromised.
Please go ahead with the reforms and let INDIA shine
more than any country in the world.

Let INDIA Flourish.


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