Inflation fails to disappoint & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Inflation fails to disappoint & more... 

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In this issue:
» Hedge funds' shoddy performance
» Inflation's surge
» India's realty market not to collapse
» Crude's new high
» ...and more

00:00 Hedgies fall off the cliff
Investment legend Warren Buffett is often heard saying, "Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." A real life proof of this statement could be found in an article that appeared in Asia Money magazine recently. Hedge Fund managers are widely believed to be the epitome of intelligence, what with their ability to crunch numbers and manage assets worth billions of dollars. But even this supposedly intelligent tribe has found it difficult to keep its head above water in the recent meltdown in the Indian and Chinese markets.

As per the magazine, out of 110 China and India funds surveyed, only seven were able to post positive return in the first quarter of 2008. It really makes us wonder whether these people really deserve the hefty fee they charge their customers. These managers are believed to receive a hefty fee of around 2% and on top of that also pocket 20% of the profits they make for investors in performance fees. In a bull market, the fee structure might go unnoticed but in a bear market, it is certain to leave one with very poor returns. No wonder, <>Mr. Buffet along with a lot of others of his ilk is one of the foremost critics of the hedge fund culture.

  • Also read - Lessons from Warren Buffett

    01:21 India's inflation fails to disappoint
    In 'low' times like these, the only index that is rising on a continuous basis is that of inflation and it has once again lived up to its expectations. For the week ended June 21, inflation has risen to 11.63% (a 13-year high), marginally higher than the previous week's annual rise of 11.42%. The rise though is unlikely to spook the markets in a big way, as they more or less seem to have digested the fact that they will have to live with it for some time to come.

    India's finance minister has mentioned recently that he expects headline inflation to stay in double digits for some weeks and begin to moderate in three months. India's central bank, the RBI, too has not shied away from taking some bold steps. Last month, the bank raised its key-lending rate by 0.75% and also hiked banks' reserve requirement by 0.5%, both the steps taken in order to squeeze liquidity from the system and make it tougher for borrowers to borrow.

    01:59 In the meanwhile...
    Setting aside inflation fears, <>Indian stock markets closed in the positive today, with the benchmark indices gaining by around 2% to 2.5%. Today's gains were led by realty and engineering stocks, which have in fact been amongst the biggest losers over the past two months. Some respite on the political front, with a regional party 'signaling' its support to the existing UPA government (in case the Left parties were to pull out), seemingly brought cheers to market participants.

    Stockmarkets in Europe have maintained their losing streak, if current data is something to go by. Gold is trading flat in international markets, with an ounce of the yellow metal costing US$ 930. The US markets shall remain closed today on account of the country's Independence Day. Though celebrations there might be somewhat muted considering that gasoline (petrol) cost has risen to US$ 4.1 a gallon. As per a survey done by CNN's financial website, around 31% of Americans have canceled or shortened their planned holiday weekend vacation because of rising fuel prices.

    02:19 "Realty to fall 5% to 15% but no collapse imminent"
    The above statement comes from Ms Renu Sud Karnad, joint MD of HDFC, one of India's most respected and leading home loan lending institutions. Responding to real estate queries in one of India's leading business dailies, she opined that there could be a marginal reduction in property prices, ranging from 5% to 15% over the next few months and not a collapse as is being expected by many.

    She further added that premium properties might see lowering of prices as developers look to clear inventory. This must be music to the ears of real estate companies, most of whom have seen their fortunes go up in smoke on the bourses in recent times. If you held a real estate stock six months back, chances are that you would have lost anywhere between 60% to 70%. Is there hope? Indeed, for it is not only the lady who feels that a collapse is not imminent, the long-term prospects too appear a lot better as the sector is expected to grow a huge 14 times over the next decade.

    02:53 India ahead than the developed world
    In raising rates, that is. Last month, we saw the RBI undertake a twin hike. Yesterday, its European counterpart followed suit. The ECB (European Central Bank) raised its benchmark interest rate by a quarter of a percentage point, to 4.25%. The decision though is likely to remain the most controversial in the bank's decade long history, says the Economist.

    So far, the ECB's job was simple - raise rates when the economy was overheating and lower them when it was slowing. However, this time around, the inflation and economic growth are moving in the opposite direction thus giving rise to fears that while inflation may be tamed, it could come at the expense of recession. However, since the central bank's main mandate is to contain prices, it has decided to go in for a price hike. The bank however is not alone to face this dilemma and has its other developed counterparts for company. Earlier, it was the developed world that had a major say in the demand for commodities and hence, inducing people to lower demand by raising rates used to work. But in recent years, consumers from emerging nations like China and India have also started exerting significant influence on prices, thereby putting banks in the developed markets in a quandary. Only time will tell how the mystery will unravel.

  • Also read - RBI's move: Playing havoc with banks

    03:37 India's oil sands foray
    After a long wait of two years, India finally seems to be on the verge of something big in their hunt for Canadian oil sands. As per a leading business daily, India may soon sign a multi billion-dollar deal with Canada to search for oil in the oil sands of the country's Alberta province. It has evinced interest in assets worth at least US$ 2 bn to US$ 2.5 bn as too small an acreage may not be a commercially viable venture. Canadian oil sands have shot into prominence on the back of galloping crude prices. It is believed that the current crude prices render the extraction of oil from oil sands attractive and hence the current interest from India and a lot of other countries. India imports more than 70% of its crude oil requirement and with its thirst only likely to get bigger, it is imperative that it enhances supply side security.

    04.21 Crude hits yet another all time high
    Amidst reports that maintenance work in North Sea has squeezed European supplies, crude prices surged yesterday to a new high of US$ 146 per barrel. The surge is also believed to be in response to the ECB rate hike, which in a way weakens the dollar and hence makes oil cheaper for foreign investors. Since the start of 2007, crude has jumped nearly three times and is currently well above inflation adjusted high of 1980 when it hit a peak of nearly US$ 102 per barrel (adjusted for inflation) in the backdrop of Iranian revolution.

    Record high crude prices have sparked protests across countries ranging from Asia to Europe and are threatening to seriously slow down the world economy. Experts too seem to be divided on their opinion on which way the black gold is headed next. However, if the reaction that is pouring out from across the globe is to be believed, they are most likely headed lower than higher in the near future.

    04:45 Today's investing mantra
    "A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest." - Warren Buffett
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