The Sensex nonsense & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The Sensex nonsense & more... 

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In this issue:
» Are we seeing a death of equities?
» Barriers to pumping more oil & gas
» Fee's the way to go for PSU banks
» Ways to cope up with food shortages
» ...and more!

 00:00    Are we seeing a death of equities?
There is bad news everywhere. Inflation is on a rise on the back of sharp spike in crude oil and food prices. Interest rates rising as well thus adding to pressure on household expenses and corporate profitability. The domestic economy is said to be entering a 'cyclical' slowdown phase. The global economy is 'actually' facing an acute banking and financial crisis.

And the stock prices are going down the drain, literally! The BSE-Sensex is lower by 35% from its all time high achieved just five months back (and 32% from its last year's closing levels - second worst performance among key markets). Now, this is just the benchmark index. There are innumerable other stocks that are down almost 80% and 90% from their highs.

So, have we entered a stage of 'ice age' for the stock markets, where investors go numb and stocks stop rising at all (and continue to fall)? Have we just seen the 'death of equities'?

  • Also read - The end - or a new beginning?

    Not really! Rather, we are of the belief that these 'testing' times are providing you with investment opportunities of a lifetime - across macro themes like offshoring, infrastructure and consumption. The need of the hour for you, as an investor, is to get ahead of the trends, both existing and those that are yet to unfold. Sometimes, it can be difficult to see beyond current circumstances. Your investing success lies in getting over this very difficulty.

     01:16    In the meanwhile...
    Difficult times for stocks in India continued today as well, as the broader markets declined by 2.5%. This was unlike a mixed trend witnessed in other key Asian markets - while Hong Kong and Singapore closed with marginal gains, losses were seen in Chinese and Japanese stocks. The European markets are currently trading mixed.

    Gold is currently hovering around US$ 933 per ounce, which is US$ 6 above its last Friday's closing levels. A latest report from the global investment bank, Citigroup has indicated that gold is likely to regain US$ 1000 per ounce by end of 2008 and move further up in the following two years. As a matter of fact, gold prices have averaged 34% higher in the April to June 2008 quarter as compared to the corresponding quarter in 2007.

     01:45    The Sensex nonsense!
    At the current juncture, Indian equities, on a broader basis, are trading at almost 14 times one-year forward earnings, which do not really look expensive, compared to the 25+ times they were trading at just a few months back. As for our view on the ubiquitous Sensex is concerned, we never had one in the past, and do not intend to have one in the future as well. How does that matter when one is following a stock-specific approach?

    In fact, we believe that the Sensex needs to lose its relevance for the 'greed and fear' psychosis to ease up for Indian investors in the future. There have been innumerable instances in the past when gullible investors have drowned in the sea of uncertainty just because they jumped on their experts' advise that the "Sensex will touch XYZ,000 in 1 or 2 months time!" It's time you block the noise! Stop listening to the paranoid experts who proclaim to know exactly where the benchmark index is headed! Sleep easy!

     02:19    What to do? Follow our investing mantra for the day
    "A great IQ is not needed to do well as an investor, just the ability to detach yourself from the crowd." - Warren Buffett

     02:33    "Barriers to pumping more oil & gas...
    ...are above ground, not below it", says the chief of BP, one of the world's largest energy companies. He's indicative of the fact that oil companies not only face risks arising out of a volatile commodity, they also face the risk arising out of volatile governments. Right from the beginning of the industry, oil nationalism has bothered the major oil producers globally - Exxon Mobil, Shell and BP. They lost most of their oil fields in the Middle East due to the wave of nationalisation after the World War II.

    Another wave of nationalisation has hit them hard in a year when they should have been enjoying the windfall gains from producing a commodity that has scaled all time highs. Venezuela drove Exxon out of the Orinoco Belt, South America's largest oil fields. Russia took over the US$ 22 bn Sakhalin-2 venture from Shell. BP is likely to lose its gas deposit in Siberia to Russia too.

    Crude oil prices have doubled in the past year, reaching a record last week, partly on concern that production will fail to keep pace with surging demand in countries such as China and India. And given how disruptive these (high crude prices) can be for the global economy, we wonder how long a few countries can play mischief at the expense of the rest of the world.

     03:18    Fee is the way to go!
    We are not quoting this from any foreign or private sector banker's speech! It is indeed surprising, but the largest public sector banking entity in India, a group that had satiated itself over the past so many decades through lending and investing businesses alone, is talking of fees.

    The Chairman of SBI, Mr. O.P. Bhatt, believes that while the net interest margins (NIMs) of the banking sector are to shrink, bankers need to concentrate more on generating fee income, through cross selling of products. Most public sector banks having had it easy with high gains on their investment portfolio and high growth rate in advances over the past few years are now seeing red with both their investment and advance books not yielding sufficient returns. The desire to not let the sector's slowdown impact their profitability had yielded the desire to build a reliable source of non-fund based income stream, in line with the foreign and private sector banks. This will stand in good stead for the public sector banks as they already have strong networks and employee strength and will generate more sustainable net margins going forward.

  • Also read - How to identify a banking stock?

     03.57    Coping with food shortage
    Soaring energy and food prices have largely been responsible for stoking inflation in countries around the world. The rise in the latter has largely been a result of shortages, which has resulted in some countries resorting to steps such as banning exports. For instance, with the exception of basmati, which is at the higher end of value chain, India has banned the export of other types of rice. Vietnam, China and 11 other countries have followed suit.

    The International Herald Tribune reports that due to the increasing perceptions of shortages, the restrictions have led to hoarding around the world - by farmers, traders and consumers. This has also been responsible for spiking food prices. Natural disasters such as floods and famine and man made problems such as strikes and disruptions have not made matters any easier.

    And the other major problem that the world faces today is the lack of free trade when it comes to food. Countries of the developed world have resorted to subsidies to protect their farmers and in the process have provided stiff competition to the manufacturers in countries importing this produce. A rule imposed by the WTO to notify it when there is a restriction in exports has gone unheeded. While economists state that the world benefits most if every country specialises in growing what it can most efficiently and trading for the rest, the current scenario shows that the going may not be that easy. Food for thought, indeed!

  • Also read - Food's growing worries

     04.35    Siemens to downsize worldwide
    The International Herald Tribune has reported that Siemens AG, the German engineering and electronics company is planning to cut 17,200 (largely white-collar) jobs as it seeks to reduce its cost base. As reported, the payroll cuts will include 6,400 jobs in Germany, and are aimed to bring costs under control at the company as part of a restructuring. It's not really clear whether the impact will be seen on Siemens' Indian operations, which are being rather seen as playing an increasing role in the parent's regional and global operations and are currently recognised as one of the latter's key growth engines.
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