If There Was a Drought... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

If There Was a Drought... 

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In this issue:
» The impact of poor monsoons on inflation
» US housing recovery seen possible now: Robert Shiller
» Big opportunity for Indian Pharma companies
» FIIs responsible for market volatility, believes RH Patil
» ...and more!!

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00:00  Chart of the day
The Agriculture Minister told the Parliament yesterday that the drought situation in the North West was not alarming as the Indian Meteorological Department has predicted better than expected rain in August. However, there is little doubt over the linkages between the Indian economy and the monsoons. In absolute numbers, a vast majority of Indians are still dependent on agriculture and much of that is still driven by monsoons. We had earlier highlighted the relationship between dips in India's food grain production and the GDP growth over the years. Let us take a look at what happens to the food price component of the consumer price inflation in years of poor food grain production. Although we are not saying that the relationship would hold exactly if another drought were to happen, it serves as a good benchmark.

Source: RBI; Inflation indicates the food component of Consumer Price Index

"This is much more important than any up day on the stock market. It may mean that we may have changed direction." This was how one of the most respected economists globally, Robert Shiller, chose to put it across. Indeed, when a sector that contributes around 30% to the US GDP and is responsible for creation of nearly 10 m jobs starts showing signs of recovery, nothing can be more important economically. If you haven't guessed it by now, we are alluding to the US real estate sector. As per Reuters, the widely watched Case-Shiller home price index for the month of May has posted an increase of 0.5%, its first monthly rise since 2006. This is likely to give rise to beliefs that the US economy may be at or near a bottom.

However, caution was warranted as long as the US unemployment rate and mortgage foreclosures, warned Shiller and Case, the people behind the index. Mr. Ajit Dayal, Director at Quantum Advisors, has infact highlighted this concern in his latest edition of the Honest Truth - "Governments in all these countries are trying their best to spend out of the mess but the losses in the portfolio of the banks are still unknown - and large. In the boom days, the banks had given loans to companies and individuals against the assumed value of their existing businesses, their future profits, or the value of their homes. All those assumptions on assumed values are now worthless."

The Indian pharma sector may be facing issues on the regulatory front in the global generics market but that does not seem to taken the sheen away from them. Readers would do well to recall that Ranbaxy, Lupin and Sun Pharma have come under the USFDA scanner with Ranbaxy faring the worst among the three. Despite this, domestic pharma players still have the opportunity to enhance their revenues and profits in the future. And why is that?

Well, for starters, manufacturing costs are nearly 40% lower in India than in the West and this makes Indian drug makers a compelling story indeed despite the problems some of them are facing now. Also, as reported in the Wall Street Journal, although competition from other countries such as Israel and China is increasing, India has an advantage in that it has 107 plants approved by the US FDA, the highest number outside the US, and thrice the number in China. With an estimated US$ 100 bn worth of drugs going off patent in the next five years, the opportunity to grow is strong despite the increasing competition and price erosion. However, all is not hunky dory and failure of some companies to resolve issues on the regulatory front will not only dent performance but also tarnish their image. This is the biggest risk that the pharma sector is facing at present.

"Asset markets have been behaving with the grace, poise, and predictability of a drunken sailor returning to ship after a particularly long night. Just as it seemed the sailor is poised to crash ignominiously into the sea, a sudden jerk shifts the miscreant to an upright position and disaster is averted. While the first quarter was characterized by expectations of looming financial collapse, the second quarter saw expectations shift violently towards stabilization and imminent recovery. Needless to say, investors are forgiven for feeling more than just a little nauseous." This is how a US based asset management company, GMO, chose to describe the behaviour of global asset markets in a recent global market review.

Mr. RH Patil, popularly credited with reforming stock exchanges in India by setting up the National Stock Exchange, has something similar to say about the Indian stock markets. According to him, average middle class investors are afraid to enter the market and invest as there is just too much volatility these days. He in turn holds the overwhelming influence of speculative foreign investors like hedge funds responsible for this volatility, as their investment decisions are influenced by factors that are materially different from Indian institutional investors. A point well worth keeping in mind the next time you see stock prices excessively beaten down due to FIIs desperately selling their shares in Indian companies.

When will the world recover from the economic slowdown is anybody's guess. Uncertainty about the Indian GDP growth disagrees to dwindle with the widening fiscal deficit and weak monsoons. Seconding the same, Mr. Raghuram Rajan, an advisor to Indian Prime Minister, rationally pegs the Indian GDP growth to be around 6% for the fiscal, contrary to the government's estimates of around 6.25% to 7.75% GDP growth. Mr Rajan believes that as there is no room for any more fiscal incentive, a bad monsoon will prove to be a spoilsport for our recovery. With rains so far being 19% less than normal and many parts of northern and north-western regions already drought hit, inflation particularly in food products is expected to surge.

Commenting on financial sector reforms, he suggested that disinvesting part of government stakes in public banks, empowering their management to look out for suitable merger opportunities so as to gain scales, easing investment restrictions on long-term players like Insurance companies will go a long way in reinforcing Indian financial sector. Absence of a proper bankruptcy code in India makes bonds appear as risky as equities particularly in times of distress, obstructing the development of a robust bond market. We could not agree more with the expert.

Although stock markets in India were trading in the red at the time of writing, they rose considerably from the day's lows on account of increased buying activity, especially amongst auto and IT heavyweights. The BSE-Sensex was trading lower by about 170 points. As for global markets, nearly all the Asian markets ended in the red today. The European indices are however, witnessing a positive trend currently. Asian stocks ended their 12 day positive run today over concerns of high valuations. China's benchmark index ended lower by 5% today. It may be noted that it was valued at its priciest in nearly 17 years. Will India witness something similar?

04:45  Today's investing mantra
"Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies" - Benjamin Graham
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5 Responses to "If There Was a Drought..."


Jul 30, 2009

Now at last a common investor has the opportunity to understand what is happening in the market in 5/10 minutes without going through lot of magazines and newspaper articles.Please continue the good work.


saji koshy

Jul 30, 2009

express the great deal,if you think it



Jul 29, 2009

great article



Jul 29, 2009

the chart of the day is the highlight is the best part of the summary


Ramesh L.

Jul 29, 2009

Good reading for Market interested persons. Brodens your thinking.

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