Can developed market stocks fare better than India's? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Can developed market stocks fare better than India's? 

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In this issue:
» Company promoters are going the PE way to raise funds
» Is America going the Greece way?
» India's manufacturing growth slumps to 9 month low
» More transparency in government offices?
» ...and more!

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00:00
 
The emerging markets acted as the lifeline to the global economy post the 2008 crisis. In times of negative GDP growth and sharp drop in consumption in their developed peers, the emerging ones managed to cushion the overall impact. But if one assumes that nothing could go wrong with the heroes of economic recovery, the risks of being proven wrong are unfortunately terribly high.

It's not just the temperature in India, which are soaring. According to a recent article by the Economist, India features as one of the top 5 over heated economies, in the emerging markets, ranking fourth on the list. Argentina leads the pack, while Brazil features second. China however features lower down the list at number 14.

So, what are the tell tale signs of overheating economies? Just pick up any newspaper, and the headlines will give you a clue. Inflation, GDP growth, interest rates and current account deficit are a few of the important indicators. On most of these accounts, India fares very poorly and features high on risk.

Credit expansion or the increase in lending by banks is one of the most important symptoms of overheating in an economy. It can lead to asset bubbles as well as inflation. In India, bank credit has growth faster than GDP growth, but we believe it is still not yet at warning levels.

On the negative side, headline inflation is close to 9% in India, due to higher food costs. It clocks in much higher than most of its BRICS (Brazil, Russia, India, China, and South Africa) nation peers on this account. Despite, the RBI's monetary tightening; real interest rates in India are still negative, as is the case with almost half of the emerging markets. With demand growing, negative real interest rates fuel higher inflation and credit growth. GDP growth for the last three years has exceeded its long term trend by a fair margin. And last but not least, India's current account deficit balance also does not look too rosy. The almost 4% deficit in the balance, shows that domestic demand is growing much too fast. All these indicators are flashing bright red for Argentina. But, Brazil and India are not too far behind.

If these risks are not addressed in a time bound manner the economy's future prospects could be jeopardized. And stocks not just in India but across emerging markets will not fail to reflect that in the near term. Over the last six months the MSCI Emerging Markets index (down 0.4%) has already underperformed the developed market index (up 4%) by a wide margin.

The Indian government has resolved to reduce the current account deficit, control inflation, and moderate growth for the year. A good monsoon should help moderate inflation; allowing the RBI to get lenient on interest rates. So will India manage to emerge a winner in overcoming the challenges? We are keeping fingers crossed.

Do you think that the developed market stocks could outperform emerging markets in the near term? Share your views with us or post your views on our Facebook page.

01:20  Chart of the day
 
Continuing with our take on emerging markets, it is not surprising that they are performing well in the financial space. Economies are growing, and business is good. But, banks in these countries are beating their developed peers by a huge margin. In 2010, 23 out of the top 25 countries, earning the highest return on equity (ROEs) in the banking sector all come from emerging markets. Only two developed countries, Canada and Australia feature in this list. Today's chart of the day shows that most of the BRICS (Brazil, Russia, India, China, and South Africa) nations are among the world's highest ROE earners in the banking space. So, not only are these banks seeing strong asset growth due to under penetrated markets. But they are also seeing a high return on their capital for their shareholders. And, on the upside, there is still huge scope for them to grow.

Source: The Banker
Note: Numbers indicate rankings

02:05
 
Fund raising in recent times has not been easy for Indian companies. The market for IPOs (Initial Public Offerings) has been rather lukewarm and debt is getting more expensive as interest rates rise. Little wonder then, promoters of companies are exploring other avenues to raise funds. One such option that has caught their fancy is private equity (PE). Deals in this space are gaining momentum and the valuations are also reasonable. And not without reason. Both parties have learnt a hard lesson from the collapse of the pre-recession heydays when high valuations were the order of the day. With the current scenario being completely different, both parties have reasonable expectations and this has resulted in a greater deal flow. For instance, there have been five deals above US$ 200 m in size during the second quarter of the year, compared to just one such deal during the same period last year. Moreover, the increased activity in the second quarter has taken the total number of deals this year to 207 worth US$ 6.6 bn; a rise of 65% over the same period last year. Having said that, whether private equity will continue to retain its flavour with promoters on a sustained basis remains to be seen.

02:40
 
The markets have not yet recovered from the Greece debt crisis, and another blow seems to be on its way as the world's largest economy is on the risk of meeting the same fate. The US debt balance exploded the legal borrowing limit last month. The government has managed to pay its bills using higher revenues and accounting maneuvers in the meanwhile. However, it won't be enough to meet the government's obligations (a debt of 40 cents for every dollar spent) for a long time. If the debt ceiling is not raised, the US government will default. This will undermine its credibility and shoot up interest rates. For an economy that is still trying to get on its feet, this is bound to spell huge trouble. And the victim will not just be America but the rest of the world. With a confirmed deadline of August 2, the world is nervously watching whether or not America's deal to raise the debt ceiling will go through to avoid the disaster.

America can avoid an imminent default if the debt ceiling is raised. But will that really be a solution? We don't think so. Government revenues are clearly not enough to meet its obligations and using more debt to avert the problem is hardly a permanent solution.

03:15
 
As per a recent survey, the growth in India's manufacturing sector slumped to a nine-month low in June. The Purchasing Managers' Index (PMI) dropped over 2%. This is lowest level since September 2010 and the steepest monthly fall since November 2008. One very obvious reason for this is Reserve Bank of India (RBI) interest rate policy. But, the news is not all bad. Certain parts of the economy seem to be doing better than others. Interest rate sensitive sectors are definitely feeling the heat. But, at the same time, rural and semi-urban economies are not as affected.

03:50
 
Going by the looks of it at least it seems that the concepts of corruption and bribery will soon find their way to the graves. Government offices that approve transactions or award projects going into billions of rupees are considered the Mecca of bribery in India. However the recent scam charges and the pending Lokpal bill seem to have made the authorities a little more resolute in tackling corruption. To begin with they have decided to award all civil work and service contracts for government departments through an open electronic auction system. This will not just bring in transparency but also rule out corruption based on the lowest bidder principle. We believe that this is a welcome step in taking India in the direction of a corruption free economy. And with the latest anti-bribery law in the UK too anticipating some positive outcomes from the Lokpal bill, we cannot afford to miss the bus this time.

04:20
 
It was an excellent week for the world stock markets. France led the gains in the developed markets. Amongst the Asian pack, India outperformed its peers. Approval of austerity measures by Greece and jump in the manufacturing data fuelled positive sentiments in the US stock markets. It may be noted that the US stock market registered an increase in all of the last five trading sessions netting gains of about 5.4% for the week. Indian stock markets were also up by 2.9% during the week. Slowing food inflation and increased participation of FIIs fuelled gains in the stock markets. It may be noted that FIIs bought shares (net) worth US$ 1.1 bn in the last five trading sessions alone. Excluding these inflows the total investment so far in 2011 was only US$ 320 m. Hence, excess liquidity chased shares which resulted in gains. Further, despite a series of rate tightening measures undertaken by the RBI, the government assured of higher economic growth targets underpinning positive sentiments.

Source: Yahoo Finance, Kitco


04:50  Weekend investing mantra
"Investing is laying out money today to receive more money tomorrow." - Warren Buffett
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3 Responses to "Can developed market stocks fare better than India's?"

shome suvra

Jul 6, 2011

I wish India's stock market had been liquid enough so that volatility in cash flows of FIIs would not have substantial effect on it. There is definitely ring-fencing of money due to recent uncertain macros in India. In the long term there is immense potential of India to grow and become the 2nd or 3rd greatest economy of the world.

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anupam garg

Jul 2, 2011

beautiful picture in today's chart

Like 

Subhash

Jul 2, 2011

Plese Publish Hindi Version of 5 Minute Wrapup
Thanks
Subhash

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