Opportunity in adversity & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Opportunity in adversity & more... 

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In this issue:
» Emerging markets need a Volcker
» Wisdom from one of India's best money managers
» Government's partiality towards agri-loan defaulters
» PM off to G-8 with nuclear hopes
» ...and more

00:00 Emerging markets need a Volcker
"Policy makers in emerging economies from Russia to Vietnam may have to start acting less like Ben S. Bernanke and more like Paul Volcker if they want to bring inflation under control," says the International Herald Tribune (IHT).

The newspaper reports that countries having their currencies tied to the US dollar have had to keep their monetary policies linked to the Federal Reserve's. Now, after the Fed has seen its most aggressive easing (interest rate cuts) in two decades, central bankers in these nations (those with currencies pegged to the dollar) find themselves with interest rates too low for their economies. They are in fact facing the worst inflation in several decades. The answer thus lies in the central bankers raising interest rates more aggressively, the way the former chairman of the Federal Reserve Paul Volcker did in the early 1980s.

Faced with inflation that approached 15% in 1980, Volcker pushed interest rates as high as 20% and drove the US into its deepest recession since the 1930's Great Depression. However, this move ended the US' stagflation crisis (something that is talked about these days as well) by limiting the growth of the money supply, abandoning the previous policy of targeting interest rates. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983. Volcker's moves also brought some sanity to the US dollar that had reached the brink where it looked like a worthlessness currency (some say it looks the same these days as well!).

  • Also read - Wise thoughts in unwise times

    Central banks in Taiwan, the Philippines, Chile, Mexico, Egypt, Brazil and Russia all raised interest rates last month. However, the fact that they've already waited too long for inflation to surge like wildfire has increased the risks of these economies moving into a slowdown. Even in case of India, where the RBI has probably waited for too long before taking its actions on the inflation front, talks abound of a slowdown in economic activity over the coming few quarters.

    Probably, a second coming of Volcker could lead to world economies (both developing and developed ones) saving themselves from going 'down the drain'!

    01:25 "Be patient and think long term"...
    ...says one of India's best fund managers. If the volatility in the markets is making your stomachs churn, then a recent note written by Mr. Prashant Jain, one of India's best fund managers, to his clients will definitely help you to calm down. According to him, present times offer a great opportunity for patient long-term investors to create wealth. With the markets down nearly 40% from its highs, the risk-reward ratio seems to have moved favorably towards the latter. Laid out below are some of the excerpts from the note.

    "Like opportunity is at times hidden in adversity, present market conditions seem to offer an exciting opportunity for wealth creation / long term investors. Despite the pessimism in the markets, things are quite reasonable with the Indian economy and specific companies. It is true that the growth rates will moderate somewhat for the short run, but it remains a fact that Indian economy is one of the fastest growing economies in the world and is likely to remain like that for a number of years."

    "Whereas it is hard to be optimistic in these times, things could be very different in a year's time. What if a year from now, oil / steel prices moderate (this is not a very unreasonable assumption given the sharp spike in last few months, which is likely to impact demand, particularly in developed world); inflation / interest rates should then head lower, growth rates should still be very attractive and general elections should be over." To sum up, he is urging investors to be greedy as there is fear all around currently.

  • Also read - Building a local bull

    02:21 In the meanwhile...
    Stocks in India managed to close in the positive, following their peers in other Asian markets that also gained in today's trades. The BSE-30 index closed 0.5% up (though it was 2.5% up at one time), while Chinese and Hong Kong markets closed with gains of 4.6% and 2.3% respectively.

    Gold in India fell today tracking global markets, where the yellow metal has dropped by US$ 13 per ounce (currently trading at US$ 918) following the US dollar's strength (which has been on account of better than expected jobs data released in the US late last week). Some cooling off in crude oil prices (declined by US$ 1.43 per barrel to US$ 143.7 last Thursday) amid expectations of easing of geo-political tensions in the Middle East have also acted as softeners for gold (gold acts as a hedge against inflation).

    02:46 Loan waiver partial to defaulters?
    What was attempted to be the government relief programme for nearly 43 m debt-ridden small and marginal farmers (owning less than 2 hectares of land each) seems to have backfired. Early signs from parts of north India indicate that the worst fears of the bankers dealing with farm loan waivers are coming true.

    A week after putting up the lists of beneficiaries of the waiver scheme, several bank officials in some northern regions have observed that the Union government's populist initiative will distort credit culture by encouraging willful defaults. In fact, farmers who serviced their loans regularly but have not been able to avail the waiver are not only resentful but also think that the best way to avail of such concessions in the future is to default.

    This is because distressed farmers who have made their attempt to pay their loans at least partially have now seen their fellow farmers who happen to be loan defaulters, walk away with the waiver. Bankers have also noticed several instances wherein farmers who had not visited the bank even once in two-three years came in only to check if their names featured in the waiver list.

    While the RBI may want the government-owned banks to increase their agricultural lending, these banks that are already grappling with slippages in their retail loan books with the high interest rates will be 'once-bitten twice shy' in committing the same mistake in agriculture loans.

  • Also read - Subprime hits Indian shores

    03:47 PM off to G-8 with nuclear hopes
    Prime Minister Dr. Manmohan Singh has left for Japan today to press ahead with a civilian nuclear deal with the US. Having clinched a crucial political support to replace his government's communist allies, who have been warning against signing the nuclear deal with the US, he must be a relieved man.

    As a matter of fact, the deal would be one of the most important achievements of the UPA (United Progressive Alliance) government in its four years in office, as it can not only give India access to US nuclear fuel and technology but also move the country's trade and diplomatic relations closer to the West. As reported by a leading business daily, it is potentially worth billions of dollars to US and European nuclear supplier companies and would give India more energy alternatives to drive its economic growth going forward.

    04:14 Oil woes continue...
    Edible oil that is! As reported on the Bloomberg, in order to meet a shortfall in domestic supplies,India is seen increasing its edible oil imports by more than 80% over the next four months.

    It further reports that increased oil imports by India may further deplete global reserves of vegetable oils. This shall lead to sustained high prices of the commodity's variants - palm oil (also used in manufacture of soaps) prices that have climbed 19% this year while soybean oil (also used as biodiesel) has surged 39%. India's average monthly import of cooking oil is expected to total 550,000 tons over the next few months, compared with 300,000 tons bought in April and May. And considering lean period for domestic supplies, there is no option for the country but to import edible oil.

    With a way to easing inflation on account of rising edible oil prices, the Indian government has already scrapped the import duty on crude vegetable oils and asked state-run companies to import and sell 1 m tonnes of the commodity through ration shops at subsidised rates in the current fiscal year.

    04.48 Today's investing mantra
    "The stock market is filled with individuals who know the price of everything, but the value of nothing." - Philip Fisher
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