Markets to rebound - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Markets to rebound 

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In this issue:
» Crude prices break another record
» Commodity bubble
» Indian IT's growth prospects
» Markets will rebound, says fund manager of one of India's biggest fund houses
» India's biggest internal threat and more

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 00:00    Crude prices break record, but of the opposite kind
Policymakers across the globe can breathe easy. Crude prices that were reaching record-breaking highs everyday have not stopped breaking records yet! But this time around, they have been of the kind that will make these people enormously happy. Yes, we are talking about a record fall in crude prices. Light, sweet crude fell a little more than US$ 6 per barrel on the NYMEX yesterday, its second biggest fall in 17 years. The fall came about on the back of reports that more than anticipated demand destruction is taking place in the United States as consumers hurt by rising inflation and reduced purchasing power cut back on usage. Infact, the news even eclipsed a tight supply situation that is currently prevailing in the global markets. Although the US influence on crude prices is waning, it still accounts for close to 1/3rd of total world consumption and hence, cannot be taken lightly. Asian demand, the other big factor influencing global prices has not shown a significant pullback, probably indicating that a prolonged relief may not be around the corner just yet.

 00:33    Commodity bubble: You haven't seen nothing yet
Just as there seems to be no relief to higher crude prices yet, bull run in other commodities like metals and food articles is also unlikely to abate any time soon. So says a story in one of India's leading financial dailies Livemint. Although the S&P GSCI commodities index is up 74% currently on a YoY basis, it could inch higher in the times to come. This is because of the kind of signals that the determinants of prices i.e. demand and supply are giving. Just to put things in perspective, China has agreed for a 90% increase in ore prices, giving ample indications that its appetite has not gone down one bit. On the supply side, depleting reserves of all kinds of commodities, right from oil to metals and coal is now common knowledge. Logically then, a 'strong' demand scenario meeting 'supply side issues' will eventually result in higher prices. Increased speculative activities, fueled by robust future expectations then take prices still higher and into a different orbit altogether. Eventually though, prices reach a point where buyers find it better to walk away, thus hurting demand and consequently bringing down prices. The huge trade surpluses that countries like China and oil rich nations are running currently make it unlikely that a tipping point will be reached anytime soon.

 01:18    Indian IT still the best - Phaneesh Murthy
Until some time back, India too was running a current account surplus and a significant part of it could be attributed to the fast growing Indian IT sector. Hence, if India were to earn hefty foreign exchange in the future, IT sector will have to play an important role. So, what lies in store for the Indian IT sector? This along with a few other questions was on the mind of a reporter from Rediff, who recently interviewed Phaneesh Murthy, ex-Infoscion and currently the head of I-Gate, one of India's fastest growing mid cap Indian IT companies.

Murthy had this to say on the global economic situation, "From a short-term perspective, there are concerns. However, from a long-term perspective, I don't think we should be worried. In 1991-92, I used to talk about the addressable market for Indian services as being about $25 billion. Today, the entire industry is $55 billion and I consider the addressable market as $1.5 trillion."

On competition from China and other emerging economies, Mr Murthy offered the following views. He said, "The market pie for outsourcing is growing. We were almost 100% earlier and as a result there is only one way to go (which is down). Having said that, the work in India itself is going to increase quite dramatically. Other countries like China, Philippines, Vietnam, and Mexico will also get a share of the global pie. More and more countries will participate in this global delivery model, but India will not lose its competitiveness. Even today, with the salaries going up, and over the next 7-8 years, I do believe that if I had a dollar, I will put it on India. Overall maturity in methodology, project and process management, good work ethic and English language proficiency give India a competitive advantage over other low cost countries."

Comforting words indeed in turbulent times such as these.

  • Also read - IT firms: Moving up the value chain

     02:21    Bernanke's bearish undertones
    While the Indian IT sector will benefit from a slowdown in the US economy, more difficulties lie in store for an average American. Atleast this is what can be inferred from the US Fed chief Bernanke's testimony to the congress yesterday. Painting a grim picture of the US economy, the Fed chief went on to add that strains in financial markets, declining house prices, a weaker labour market and higher oil prices were all putting pressure on the outlook. Furthermore, Bernanke seemed to have made it quite clear that if given a choice between pulling out the economy from its current state and reining in inflation, he would much rather prefer to do the former. This in effect would mean that the Fed is in no mood of raising interest rates unless inflation expectations worsen a great deal. This would also imply that weakness in dollar would continue as investors try to take their money out of the green back and put it into more attractive investment avenues. This is quite in contrast to the steps being taken by the RBI, which has opted to rein in inflation and has hence been raising rates aggressively the past few months. But then economic growth is not a problem with the world's second fastest growing economy as is inflation since it makes survival for the millions of people that live below the poverty line difficult.

     03:07    India's biggest internal threat
    Although India is the second fastest growing nation in the world in terms of GDP, its policymakers will have to ensure that its growing wealth percolates down to the lowest strata of society. Unfortunately, they are realizing this the hard way. Inappropriate distribution of wealth in India's mineral rich states of Bihar, Orissa, Chattisgarh and Jharkhand has led to a great deal of unrest among the tribal population there and quite a few of them have turned Maoists, known in India as Naxalites, orchestrating large scale attacks on politicians and government officials, mainly the policemen. Infact, such has become the magnitude of the threat that prime minister Manmohan Singh has dubbed the problem as the biggest danger to India's internal security. However, efforts to tame the threat have commenced and as a part of the same, security officials from Indian states plagued by Maoist rebels will meet in the Indian capital to discuss the ways and means to tackle the growing menace. What is worrying is the fact that the insurgency is not only restricted to the four states or the so-called 'red corridor' but is also spreading to big cities. One observer put it aptly when she said, "There are enough poor and disaffected people in Delhi and Mumbai . . . It's not hard to capture their minds and preach about injustice because it is quite obvious.

     03.54    Markets will rebound, says fund manager of one of India's biggest fund houses
    Sensing nervousness all around, Indian Merchant Chambers (IMC) brought together two of India's best known money managers at a seminar and urged them to share their insights on the Indian markets and the way ahead for equity investors. While concerned about recent volatility, both of them painted quite a rosy picture from a medium term point of view and were unanimous in their view that the domestic economy and consequently, the stock markets are likely to see better days ahead. Sanjay Sinha, SBI Mutual Fund's Chief Operating Officer and one of the two managers invited to the seminar said that domestic mutual funds have bought more so far this year than the entire 2007 put together and there has been a sea change in the psychology of investors as compared to 2004 and 2006, when they pulled back or kept away from the market. When probed on the current market volatility, Mr Sinha said "It would be hard to predict market outlook, as there is a series of factors that might decide its movement, but it can be said that there is less possibility of 'V-shape' recovery in near future."

     04.25    In the meanwhile...
    After showing a lot of promise in the early hours, the Indian markets did not fail to disappoint once more and closed the day well below the dotted line. The markets opened on a positive note today, probably on the back of record decline in crude prices. However, the indices were unable to hold on to their gains for long as selling at higher levels led the Sensex to give up virtually all its gains mid way through the trading session. Although the index did make an attempt to once again go well above break even, the selling pressure during the latter half of the day was too much to overcome, resulting in another day of declines. The overall market breadth was negative with losers outnumbering gainers by a ratio of 4 to 1 on the NSE. As regards global markets, while the Asian indices closed a mixed bag, the European indices are trading lower currently.

  • Also read - Results scoreboard

     04.52    Today's investing Mantra
    "The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear" - Warren Buffett

  • Also read - The devil is in derivative
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