Good bargains in India & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Good bargains in India & more... 

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In this issue:
» No end to the food crisis
» Consolidation in generics hots up
» A critical day for the UPA
» The results season is in full swing
» ...and more!

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 00:00    A critical day for the UPA
The political drama that has been unfolding in the past few weeks has all the makings of a cliffhanger. Given that the survival of the UPA hangs in the balance, today becomes an important day indeed for the government as the vote on the confidence motion takes place. The magic number being 272, the government is just four short of the required number. While the weakness in the Indian stockmarkets in recent times has largely been a result of global factors, the government losing the vote of confidence will only add further fuel to the fire.

Political uncertainty has played a major role in influencing the movement of the Indian stockmarkets and one does not have to go way back into history for evidence. The election in May 2004 is ample proof. The fall of the BJP government, which had bought cheers to the markets with its slogans 'India shining' and 'the feel good factor' caused anguish in the stockmarkets causing them to plunge significantly before staging a remarkable recovery.

Assuming that the government manages to stay in power, one good thing that will come out of the same could be implementation of some much needed reforms in the banking and the PSU sector. This is considering the fact that it no longer has to weigh the opinions of the Left, which has now withdrawn support.

  • Also read - Of fusion and fission

     00:48    No end to the food crisis
    While the oil prices have come down from their highs and provided some sort of relief to markets around the world, the food crisis just refuses to die down. The International Herald tribune states that as per numbers released by the United Nations' Food and Agriculture Organisation, the rising prices of basic foodstuffs have pushed 50 m more people into poverty and this number is likely to go up to 100 m. According to the World Bank, grain prices have more than doubled since January 2006, with over 60% of the rise in food prices occurring since January 2008. Rice prices more than tripled between January and May 2008, with a slight price reduction in June. Factors contributing to rising food grain prices have been high energy and fertilizer prices, the continuing depreciation of the US dollar, sharply increased use of both cereals and vegetable oils in bio-fuel production and declining global stocks of food grains due to changes to buffer stock policies in the US and the European Union.

    Index of projected real food crop prices
    2004 = 100
    Real prices 2007 2008 2009 2010 2015
    Maize 139 175 165 155 148
    Wheat 154 215 191 166 140
    Rice 130 243 208 183 160
    Soybeans 119 156 147 139 115
    Soybean oil 136 187 173 160 110
    Sugar 133 157 167 176 182
    Source: World Bank

    All these factors have resulted in counterproductive policies adopted by key exporters and importers. The introduction of export restrictions such as those imposed by India and China on rice has restricted global supply and aggravated shortages. With other exporting countries adopting the same stance, the result has been a considerable price spiral. Prices for those crops used as bio-fuels have risen more rapidly than other food prices in the past two years, with grains up 144%, oilseeds up 157% and other food prices up only 11%. This has spiked inflation in both developed and developing countries and has forced governments to make a decision as to which should get the top priority - restricting the rise in inflation by hiking interest rates or focusing more on arresting the economic slowdown.

  • Also read - Problems of a growing food crisis

     02:00    India and China have good bargains...
    ...says Templeton Asset Management Ltd's Mark Mobius. This is after the huge fall in the stockmarkets of these emerging economies, which has made valuations look attractive at current levels. The economies of these countries have been witnessing pressure of late on account of the rising crude prices, soaring inflation and weak economic factors emanating from the US, which is still reeling from the subprime crisis. To put things into perspective, the Sensex is trading at a multiple of 16 times trailing twelve months earnings, considerably lower than the multiple of 31 at the start of the year. Similarly, China's index, which had peaked at 53 times reported earnings in October 2007, has corrected significantly and is trading at a more respectable multiple of 21 times reported earnings.

    We believe that these attractive valuations (many stocks are trading at multiples lower than 10 times), offer opportunities to investors to invest in fundamentally strong stocks from a long-term perspective. While there are concerns, which cannot be ignored such as the double-digit inflation, large fiscal deficits and rising interest rates, we do not expect them to have a very prolonged impact on India's economic growth and the robust long-term earnings visibility of Indian corporates. This would mean not only having a long term investing horizon, but also investing in those companies, which have strong managements and the ability to consistently deliver profits and tide over bad phases.

     02:55    Consolidation in generics hots up
    Consolidation in the generics space is once again taking centrestage. Global generics giant Teva has reportedly bid for the US based generics company Barr Pharmaceuticals to firmly entrench its position as the world's largest generics player. This acquisition is also expected to cement Teva's strong position in the US, as the company's objective is to raise its market share in generic prescriptions to 30% by 2012 from around 20% currently. Other notable example in recent times has been the Japanese company Daiichi buying the promoters' stake in Ranbaxy to venture into generics.

    Consolidation in the key developed markets of the US and Europe will be one of the critical factors to achieve scale, given the heightened competition in the generics industry. Acquisitions alleviate the need to make investments (especially on the sales and marketing front) in any region right from scratch. Therefore, many players are looking to acquire companies that already have a strong presence in one particular region with a large product portfolio. For instance, acquisition of Barr will enable Teva to gain a foothold in the central and east European markets, which are growing at a faster clip than the western European markets. Acquisitions also enable companies to garner a widespread geographical reach, which is a critical strategy in sustaining growth in the global generics market in the long term.

     03:35    In the meanwhile...
    Asian stocks ended today's trading session on a mixed note with the Indian benchmark index closing higher by 1% ahead of the vote of confidence motion. Oil prices remained stable on easing of concerns over supply disruptions after it was reported that the tropical storm Dolly was going to miss the US production areas in the Gulf of Mexico. Gold charted an upward path for the second day in a row as the dollar sank to a record low against the euro. This coupled with the weakness in the stockmarkets has enhanced the appeal of this yellow metal as an alternative investment.

     03.55    The results season is in full swing
    The results onslaught has begun in India and the initial scenario does not appear too enthusing. Despite the hammering that financial sector stocks have received of late on the bourses, the results of some of these financial institutions have been positive, as they have reported a strong growth in advances. Against a backdrop of rising interest rates and demand slightly cooling down, the auto sector is expected to face a tough quarter and this has amply been demonstrated by the subdued performance of Maruti. The pharma sector, in the meanwhile, has reported strong growth in revenues but a slowdown in profit growth largely due to rising material costs.

    More companies will be declaring June quarter results in the coming weeks. As such, basing your investments calls for the long term on the performance of these companies in this quarter might lead you to nowhere. Investing is a game played over the long term, and requires skills like precision (careful analysis of the potential investment) and discipline. Quarterly results are just as intervals in a film, only that there are four such intervals in a year! What happens in the first quarter might not tell you much about what will happen in the next one, and the next two. These shall just be considered as 'breaks' that allow you to take stock of your investments, which should ideally span over a minimum of 12 to 20 such intervals (3 to 5 years, to put it in simple words)!

  • Also read - Results scoreboard

     04.21    Asian Development Banks urges a check on inflation
    The Asian Development Bank (ADB) has urged central banks in East Asia to take more effective steps in curbing inflation and feels that the latter are moving too slowly in this regard. Growth of East Asia has been pegged at 7.6% for this year as well as the next and this could only be maintained if the policymakers adopt timely measures to combat inflation.

    According to the International Herald Tribune, ADB states, "Inflation will likely continue to plague much of emerging East Asia, as current record global energy and food prices seep down into overall economic activity, and there are few signs that they will subside any time soon." While inflation, slower growth in exports and the global credit turmoil have been hurting these economies, a strong domestic demand was enabling them to tide over these adverse factors. However, lack of measures to bring down inflation will definitely lead to a hike in prices and wages and put more pressure on the economy.

    In India, inflation has reached the highest level since the last 13 years and has flummoxed the central bank and the government alike. The latter especially has come under fire given that elections are due early next year (assuming the UPA manages to win the confidence vote). The central bank, in the meanwhile, has clearly given priority to curbing inflation and has resorted to hiking the repo rate and the CRR even if it means slowing down the strong growth that India has been logging in the past few years. This is in contrast to the stance adopted by the US, which in the aftermath of the subprime crisis is not too keen on the US economy slipping into a recession.

     04.55    Today's investing mantra
    "There are all kinds of businesses that Charlie and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do." - Warren Buffett.

  • Also read - More lessons from Buffett
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