A disaster in waiting

In this issue:
» Mobius on things that could cause the next big crisis
» Ex-Governor of RBI bowls a googly
» Indian pharma firms in the firing line
» China grows at a record pace
» ...and more!!------------------ Don't Miss! ----------------------
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00:00

We may not have recovered fully from the crisis that hit us last year but there are some people out there who are a step ahead and are already seeking reasons that could cause the next big crisis. Mark Mobius, the widely respected guru of emerging markets believes that derivatives and the stimulus money could well spark the next financial crisis. Speaking to Bloomberg, Mobius has opined that political pressure from investment banks and all the people that make money in derivatives will prevent adequate regulation from coming into effect thus letting it flourish unchecked.

It should be noted that the enormous write-offs of the magnitude of US$ 1.5 trillion that the world's biggest banks had to take last year was due to the excessive use of derivatives, most of it unregulated. Although governments are trying their best to introduce more regulation, banks seem to lobbying hard against any change that would prevent them from taking the risks they took some time ago.

Mobius also noted that a 'very bad' crisis may emerge within a few years as stimulus money to the tune of US$ 2 trillion globally would add to more liquidity and hence, financial volatility. The emerging markets guru has also predicted a number of short, dramatic corrections in stock markets in the short term, saying that corrections of the order of 15 to 20% are nothing when there is uncertainty all around.

00:54

Chart of the day

The financial crisis, which was sparked off by the US subprime mortgage market, has really taken a toll on the global economic growth. As this chart suggests, economies around the world have gone into a tailspin, with the advanced nations taking a real big knock. Average GDP growth for this class of nations is expected to dip by around 3.7% during 2009, as projected by the IMF. Compared to this, emerging nations are expected to see growth fall down to 1.6% level, from almost 6% in 2008.

Data source: IMF's World Economic Outlook, 2009

01:20

Bimal Jalan, the former RBI Governor seemed to have bowled a big googly when he put the government in a spot of embarrassment while talking about the issue of delay in completion of power projects. Mr. Jalan, who is also the member of Rajya Sabha must have indeed raised some heckles when he pointed out that a system that is able to complete a massive exercise like the elections on time is unable to meet the deadline on a power project.

He further added that the government perhaps needs to create a delivery mechanism that was at arm's length to ministries, the almost spotless working of the Election Commission being a case in point. He wondered why we can't make one minister accountable for one project rather than involving large number of ministries in every project.

Jalan did not stop here. He also made a mention of the recent report of the Planning Commission, which found out that for every one rupee that reaches a BPL (Below Poverty Line) household, the government spends Rs 3.35 on the logistics, leading to colossal wastage of tax payers' money.

Indeed, as we believe and as he himself put it, "We need to make some fundamental reforms in the way we run our ministries."

02:11

Anyways, the government has finally conceded to the fact that there will be slippages in India's power generation capacity addition target for the 11th five year plan. In a recent interview, power minister Sushil Kumar Shinde has said that India will probably miss its target of adding about 78,000 MW power generation capacity by March 2012, and might end up adding only about 65,000 MW instead, even though 80,000 MW is currently supposed to be under construction.

This is far from surprising as India has had consistent track record of not meeting its power capacity addition targets in all its past five year 'plans'. In fact, it may seem ironical, but we are of the opinion that even 65,000 MW of new power capacity may not see the light of day before the targeted deadline.

02:42

Every year, a theme has been emerging in the Indian pharma sector with one company setting the trend and others flowing suit. While these themes were construed a plus, the last year unfortunately, was witness to a theme which had problems written all over it. Yes, we are talking of the issues that the domestic pharma companies are facing with the regulators in the US and Europe.

While the saga began with Ranbaxy, subsequently it was Sun Pharma who irked the US FDA. What is more, Wockhardt, Lupin, Matrix ,and Unichem have now courted trouble with regulatory authorities in Europe. What has caused these authorities to be so stringent all of a sudden? Reports of many deaths caused by the poor quality of drugs manufactured by two leading Chinese companies have kept the authorities on a vigil and unfortunately this blemish has spread to India as well.

Having said that, the onus of the blame cannot be laid on the regulatory authorities alone which means that Indian companies are themselves to blame for not sticking to quality standards. And they will have to resolve these issues quickly if they want to salvage their image and shore up their profitability.

03:27

It appears that China, which contributed one-third of the global growth (in terms of purchasing power parity) last year, will also be the harbinger of global recovery from the deep economic crisis. Beating the downturn, the country's GDP figures for the second quarter grew by an impressive 7.9%, triggering hopes that it will grow at over 8% when the developed world will still be wriggling with economic and social pains. The enormous stimulus package worth 4 trillion Yuan acted as a catalyst that not only boosted credit markets but also led to a huge surge in share prices, making China the world's second largest stock market by value.

But the cloudy days are still not bygone for the export-oriented economy as external demand, corporate profits and fiscal revenues continue to fall. Understanding that the recovery is still not firm, the Chinese government stays put with conducive fiscal and monetary policies towards its goal of creating jobs and ensuring social stability.

04:05

The government needs money to fund its 'social investments' and the banking system apparently has plenty of it. The result - the government is likely to borrow Rs 150 bn from the market every 14 days till the end of October, as per a leading business daily. It may be noted that the government is scheduled to borrow Rs 4.5 trillion from the market in FY10.

It is believed that the demand for credit from the private sector will kick in from October. When that happens, the government will be cautious in approaching the markets as it might crowd out the private sector and push up interest rates. At that point of time, the RBI will pitch in with its open market operations. When you have to raise a mountain of debt, it certainly takes a lot of juggling to ensure that you don't upset the apple cart. Once raised, we wonder how easily this debt will then be repaid!

04:38

Indian markets opened on a strong footing today but went below the dotted line subsequently and were trading marginally in the negative at the time of writing. Most Asian markets however managed to close in the positive. Optimism is also being witnessed amongst major European markets currently.

04:53

Today's investing mantra

"We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person." - Warren Buffett