India's defiance and more - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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India's defiance and more 

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In this issue:
» Doha dies a controversial death
» Lopsided arms exports
» ICICI Bank's chief speaks
» Housing trouble in the US
» ...and more

100% Returns in 3 Years Predicted. Read Now.

 00:00    Doha dies a controversial death
With the global economy plunging into a recession post the September 11 attacks in the US, efforts were made to resuscitate the same and what came out of those efforts was the 'Doha Trade Negotiations'. It was an attempt to replace the various bilateral trade agreements between nations with a more vibrant, universal multilateral trade agreement. But after 7 long years, member nations have decided to put an end to the negotiations on the back of irreconcilable differences between the developed nations, most notably the US and the developing nations like India and China. Infact, several western newspapers have held India as the main culprit for the collapse on the back of its reluctance to reduce protectionism for its 600 m strong peasant workforce. Indian newspapers though have blamed both the US and countries like India and China for their excessive demands on each other.

With both India and China getting a first hand view of the effect of globalisation, it is sad that these very nations oppose free trade. However, they are also concerned about the remainder of their population that has not yet reaped the full benefits of globalization, preferring to keep them protected from imports from other countries and at the same time, ensuring that they too move up the economic ladder. Until then, it seems that the world will have to live with bilateral trade agreements. The collapse of the deal though is a big set back to other smaller and poorer developing countries that were counting on the deal to lift them out of years of poverty and low economic growth.

 00:45    The invisible 'China' hand
A research paper published by the University of Chicago Business School's hallowed precincts has given further proof of why free trade is good not only for the developing world but also for developed nations. In the US, where there is a fashion amongst people of agreeing to disagree with others, one thing has remained remarkably unchallenged and it is the belief that since the 1980s, the gap between the rich and the poor has widened. However, what is perplexing is the fact that these so called poor Americans have showed no signs of reduced material wealth what with sales of DVDs and other luxury items like A.C.s and dishwashers remaining buoyant as ever. The answer to this mystery could be found in the research paper. Using extensive data compiled over many years, the research argues that cheaper Chinese imports, especially non-durable items have helped the poorest families in US enjoy a better standard of living as compared to their rich counterparts, who spend a lesser portion of their incomes on these non-durable items and more on expensive services and other products. Thus, despite a stagnant or a declining wage profile, the poor American has been able to improve upon his standard of living, thanks mainly to low cost imports. Perhaps a lesson or two here for rich European nations that deal strictly with cheap imports from developing nations in order to protect their own workforce.

 01:25    Now that's some concentration of power
If you are looking for a global industry that is highly concentrated, your search is likely to end at the arms industry. As per Economist, just five countries have amongst them cornered 80% of the global arms export between 2003 and 2007. The US came out on top, accounting for nearly a third of the total deliveries of large conventional weapons, each of which are assigned a value according to cost, strategic importance and other criteria. Israel and South Korea emerged as the key buyers of US arms supplies. In terms of the biggest recipients, China emerged as the single largest buyer with India and the UAE among the other big buyers. Although arms exports does a world of good to the exporting country's GDP and its technological prowess, for the importing country, it means diversion of funds that could have been used elsewhere for more productive purposes. Although some amount of deterrence is indeed needed, it will be hard to reach a consensus on how much is enough? It is common knowledge that in view of its hostile nieghbours and porous borders, India has to spend a lot to keep its defence machinery functioning. Some respite on this front could well do a world of good to the government's finances.

 02:07    "I think it is the mindset that has changed dramatically"
These are the words of KV Kamath, the MD and CEO of India's biggest private sector bank ICICI. In an exclusive interview to DNA Money, Kamath, amongst other things spoke about the direction of the economy, the changing mindset of India's entrepreneurs and the longer-term future of the bank he helms.

On being asked on the kind of slowdown that he was witnessing and whether there was indeed a slowdown, he sounded upbeat on the economy and had the following to say, "You will find that in every industry, whether it is banking and financial services or manufacturing or any which sector; people are clearly fighting the cost curve. To me this is the sign of a new India. 10-15 years back, India would never have come out of it, there would be a deep gloom about everything around us. I think it is the mindset that has changed dramatically."

Mr. Kamath also sounded positive on the huge infrastructure spend that India is planning to undertake and projected no major difficulty in meeting the needs for funds.

Lastly, when probed about the future of ICICI Bank five years from now, he said the following - "The Indian financial services business will grow 2.5-3 times the overall growth rate. ICICI will be somewhere in that range. We don't make forward looking statements but I would think that if you use that as a proxy, you can judge where we will be every five years."

The man in charge of India's biggest private sector bank is definitely not short on optimism.

 02:49    US Inc. profits down
"Profits at US companies may have dropped the most in at least a decade last quarter after credit write-downs triggered a combined US$ 7.4 bn loss at Merrill Lynch & Co. and Lehman Brothers Holdings Inc.," reports Bloomberg. A compilation of data of the companies that have reported quarterly results so far shows that earnings of S&P 500 index companies have declined by almost 24% YoY. This decline is being led by financial companies, where profits have dropped by a jaw-dropping 87% YoY!

Things are relatively better in India where financial firms continue to grow profits, though the pace has slowed down on the back of treasury losses and slowdown in credit off-take. The 23 banking companies that have announced their June quarter results so far, combined profits have grown by 8% YoY.

  • Also read - India Inc.'s June quarter results scorecard

     03.13    Necessity scores over discretionary
    Sony Corp reported yesterday that its quarterly profits have declined by 50% YoY. Colgate also reported its earning numbers where profits have in fact jumped 19% YoY. Indication enough that companies selling necessities (like toothpaste) are better off than those selling durables (like music systems, televisions, which are dependent on discretionary spending of households) especially in times of slowing economic growth.

    Equitymaster readers know this fact for we've recently offered investment ideas based on this very theme of 'necessities being recession proof' (Read more)

     03.30    Hope for better than 8.5% on pension funds
    The Left parties, which had been cornering the government in demanding a hike in interest rate earned on pension funds after the rise in inflation, were opposed to the induction of private players in the pension sector. However with the Communists having withdrawn support to the UPA government recently, the government has had the leeway to undertake economic reforms. The government has shortlisted 3 private sector players - Reliance Capital, ICICI Prudential and HSBC to manage provident fund of nearly 40 m employees in the government and organised sector along with SBI. This will however put an end to the monopoly of SBI in managing provident fund totaling to about Rs 2,500 bn. Currently, the government is paying about Rs 50 m to SBI to manage the corpus fund. After the induction of more fund managers, the fee is expected to be reduced to Rs 25 m (0.01% asset management fees). However, what holds the key to better returns for subscribers to the pension funds is whether the government allows them to invest a proportion in equities and whether the fund managers can deliver higher returns without risking the capital.

     04.02    US housing bottoming out?
    The US housing scene continues to turn out dismal numbers with latest figures of the S&P/Case-Shiller home price index of 20 cities showing a decline to the tune of 16% YoY. Moreover, the prices have been declining for 22 quarters in a row. In fact, all the 20 cities covered have reported price declines, with 9 cities posted record lows. The last major decline started in April 1990, but was not as severe in its duration or extent of losses.

    Cities in the Sun belt such as Las Vegas, Phoenix and Miami have born the brunt of the slowdown, falling more than 28% during the last 12 months. Cities in the Northeast such as Boston and New York have had less painful declines. One of the reasons for the decline is the increasing number of bank foreclosures. Banks are willing to sell at lower prices because an inventory of vacant homes runs a large bill of property taxes, maintenance and utility costs.

    As with declines in any asset class, it is perhaps time to reconsider if valuations are now attractive. In fact, there are already signs of buyers stepping back into the market in places such as Las Vegas and Phoenix where sales volume has increased. However, there might still be pain left with inventory of vacant homes as a percentage of total homes for sale trading hovering in the region of 2.8% as opposed to historical levels of 1.7%. Moreover, high mortgage rates nullify the effect of affordable prices by pushing monthly payments upwards.

     04.37    In the meanwhile...
    The Indian stockmarkets closed strongly today with the BSE-Sensex gaining almost 500 points. These gains followed a similar performance from other key Asian markets, except China, which closed in the negative. While shares in Hong Kong ended almost 2% higher, those in Japan closed with 1.5% gains. Yesterday's surge in the US indices along with the US$ 2.5 per barrel decline in crude prices was seemingly the lead driver for these Asian markets today. European markets are also mirroring the trend and are mostly trading amidst gains currently.

    Gold is following a reverse path, with the precious metal currently trading under US$ 907 per ounce, down almost US$ 10 per ounce from yesterday's levels. And as reported by CNN's financial website, stock futures in the US are pointing to a weak opening today as investors await report on oil inventories and employment survey.

     04.52    Today's investing mantra:
    "Turnarounds seldom turn, and the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price." - Warren Buffett
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