America's still in dumps & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

America's still in dumps & more... 

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In this issue:
» The future of energy
» America's oily deficit
» Why are our pension funds inopportune?
» Japanese banks seek greener pastures
» ...and more

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 00:00    Ready to go green...
The market for energy is huge. As per the Economist, at present, the world's population consumes about 15 terawatts of power (1 terawatt is equal to 1,000 gigawatts, which is equal to 1 m megawatts). That translates into a business worth US$ 6 trillion a year - about a tenth of the world's economic output. And by 2050, power consumption is estimated to rise to 30 terawatts.

The IEA (International Energy Agency) believes that any transition from an economy based on fossil fuels to one based on renewable (green) energy is likely to be slow. The developed world complains that many existing forms of renewable energy rely on subsidies or other forms of special treatment for their viability. Nevertheless, the rapidly developing countries are also taking more interest in renewable energy sources, despite assertions to the contrary by the West.

While it is true that China is building coal-fired power stations at a blazing rate, it also has a large wind-generation capacity, which is expected to grow by two-thirds this year, and is the world's second-largest manufacturer of solar panels. Brazil, meanwhile, has the world's second largest (behind America) and most economically viable biofuel industry, which already provides 40% of the fuel consumed by its cars and should soon supply 15% of its electricity. South Africa is leading the effort to develop a new class of safe and simple nuclear reactors. India has made its contribution in wind energy with companies like Suzlon Energy leading from the front.

Thus while most economies are prepared to look beyond fossil fuels, if renewables and other alternatives can compete on cost, the poor and the rich world alike will adopt them.

  • Also read - India's energy hunt

     01:00    ...but at a calibrated pace
    At the meeting of the G8 (Group of Eight industrial powers), China and India led objections by five developing nations to emission-reduction targets set by the G8 nations, on the context that a clampdown on fossil fuels would suppress economic growth. The G8 encompasses the US, Japan, Germany, Italy, UK, France, Canada and Russia, accounting for about 62% of global economic output and a similar proportion of heat-trapping pollution. The developing economies have rejected the G8's call to share its vision of cutting greenhouse gases at least 50% by 2050. An alliance of five developing countries - China, India, Brazil, Mexico and South Africa has declined to accept the numerical targets.

    Led by China, which is targeting a GDP growth of 9.3% YoY in FY09 and India (targeting 7.9% YoY), every member of the so-called G5 (group of 5 developing economies) will grow faster than the 1.3% growth rate projected by the International Monetary Fund for the advanced economies this year. This is reason enough that the G5 leaders have objected to any steps that might stunt economic growth at a time when major improvements are needed in health care, standards of living and public services.

     01:39    America still has an oily deficit
    Anyone in France dispirited by the loss of purchasing power stemming from high oil and food prices should be revived by a trip across the Atlantic. The exchange rate that would equalise prices in America and the Euro area - the purchasing-power parity, or PPP - is US$ 1.16, according to the OECD. Yet a Euro buys as much as US$ 1.55. With such a discrepancy, a European visitor cannot help but feel flush. On arriving in America, his spending power is instantly boosted by a third.

    The wallets of American travellers are correspondingly thinner. Measured against the currencies of America's trading partners, the dollar has fallen by a quarter from its peak in 2002. Some economists have long argued that such a big drop was necessary. By curbing imports and boosting exports, a cheaper dollar helps shrink America's current-account deficit and wean the economy off its reliance on consumer spending.

    Thanks in part to a weaker dollar, exports have helped prop up the ailing American economy. But the current account deficit has not narrowed by as much as hoped. Figures released in June 2008 revealed that it grew to US$ 176.4 bn (5% of GDP) in 1QCY08. Though down from a peak of 6.6% of GDP in late 2005, this is still a big shortfall. A look at the underlying trade deficit (close to 6% of GDP) shows that the competitiveness of American businesses has improved. The deficit on goods and services other than petroleum has narrowed sharply as a share of GDP. However, the rising oil prices have taken their toll and much of the improvement has been offset by a ballooning deficit on oil, reflecting the rising cost of America's energy dependence.

  • Also read - Health of Indian public finances

     02:40    Why are our pension funds inopportune?
    Despite a world-class financial infrastructure, India's financial backbone is devoid of a healthy corporate debt market. While many of the components for setting up the same are already in place, the cultural and institutional set-up necessary for investments in non-governmental debt securities leaves a lot to be desired. At present, Indian bond market is dominated by government bond issuances. These issuances, resulting from persistently high fiscal deficits, as well as specific regulatory requirements, have underpinned the supply and demand conditions in India's debt capital markets. Nearly 90% of total domestic bonds outstanding currently are government issuances and the initiatives to lift the corporate bond market from its nascent stages have been slow to progress.

    The worst impact of this has been on India's insurance and pension sectors. India's insurance and pension funds are plagued by low market penetration, inefficient mobilisation and allocation of resources, besides inadequate supervision. Further, they together mobilise only 4% of GDP, over 90% of which is invested in either low yielding government securities or bonds of poorly performing public sector companies. Also, the insurance and pension markets cover around 18% of the insurable population and 11% of the working population. As a result of such poor yields and low coverage, the funds fail to generate long term sustainable returns and fail to attract long term domestic and foreign capital.

    While thanks to the skewed interests of political parties, the investments of pension and insurance funds are yet to find a sizeable interest in equities, the evolution of a mature debt capital market itself can make the funds more opportune.

     03:39    In the meanwhile...
    Indian markets closed in the red today, with the benchmark BSE-30 index ending the day 0.5% down. This followed the mixed trend in Asian markets. While stocks in China and Singapore closed in the red, gains were seen in Japanese markets. Key European indices are trading in the red currently.

    As reported on CNN's financial website, the US markets are expected to remain subdued due to the concerns over financial stocks. The shares of US' largest mortgage financing companies Freddie Mac and Fannie Mae plunged by 24% and 13% respectively yesterday while concerns were raised as to whether the government would be willing to bail them out, if these financial behemoths were to fail akin to Bear Stearns. Worries about the health of financial companies in the US continue to cloud investor sentiments globally as rating firms are now leaving no stone unturned in expressing their displeasure with their clients' risk profile.

     04.02    Japanese banks seek greener pastures...
    Almost two decades ago seven of the world's top-ten banks were Japanese and their cheap loans supported Japanese investment. After Japan's property and stockmarket bubbles burst, the banks, buckling under bad debts, retreated home. Nonetheless, more recently, the caution born of that fall from grace spared them the huge subprime-loan losses that have hobbled their American and European peers (top 3 Japanese banks reported only US$ 8 bn of subprime losses against the total US$ 400 bn of losses reported globally). Now their relative financial health has persuaded Japanese banks to venture abroad again.

    Going abroad is naturally attractive for Japanese banks as their domestic market offers meagre returns. With one of the lowest economic growth rates, nearly negligible interest rates and stagnant lending rates, Japanese banks are but compelled to seek better returns. The rationale becomes clearer when its is pointed out that of the US$ 15 trillion of household financial assets in Japan, slightly more than half is tucked away in bank deposits earning almost no interest. Also, around 40% of Japan's listed companies are almost debt-free and are sitting on huge piles of cash.

    As the Japanese banks' horizons have expanded, so has their international share ownership. In 2002, almost 40% of the banks' shares were owned by Japanese companies (a legacy of post-war cross-shareholding), which by 2007 dropped to less than 20%. Meanwhile, the holdings of foreign investors have increased from around 10% in 2002 to 30%-40% in FY08.

  • Also read - Indian interest rates at multi-year highs!

     04.42    Today's investing mantra
    "No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what is called the 'margin of safety' - that is by never overpaying, no matter how exciting an investment seems to be, can you minimize your odds of error." - Benjamin Graham
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