India to grow faster than expected - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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India to grow faster than expected 

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In this issue:
» RBI growth estimate might prove conservative
» Brace for lower returns for years, says Bill Gross
» Is a bubble being developed in China?
» Jim Rogers finding hard employing one of his favourite strategies
» ...and more!!


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00:00
 
Ok, the Indian central bank is known to be conservative and rightly so. But this conservativeness sometimes also spills over into other realms. Take GDP growth projections for example. While it did revise India's economic growth projections for FY10 to 6%, it still fell short of claims made by the government of 7%. And now, RBI's case has become even weaker. As per a leading daily, Morgan Stanley, one of the world's leading financial institutions, has put India's GDP growth at 6.5% and that too, with an upward bias. Although it agreed that there are strong chances of agricultural output weakening due to poor monsoons, higher than expected industry growth rate and rainfall and crop area under cultivation trend improving at the margin, might more than offset the same and thus lead to a 6.5% GDP growth.

Morgan Stanley also expects wholesale price inflation to rise to 6% by end-March, above the RBI's estimates of 5%. If its predictions do indeed fructify, it could well translate into higher earnings for corporate and consequently, higher stock prices. But the question that remains is - has the market already factored the same? We believe that while the markets are not looking significantly overvalued, they aren't undervalued either and stock returns from here on may depend more on stock picking skills. Of course, a 15-20% correction from here on may really set one up for attractive long-term returns.

00:49
 
Further evidence that economy might do better than expected came from the quarterly results of Tata Steel, India's largest steel producer. Of course, the company reported a drop in standalone profits of the magnitude of 47% but what must have pleased economic analysts is the strong 22% jump in domestic volumes on a YoY basis. Although some of it is related to market share gains, the trend is indeed heartening from both the steel industry as well as economy point of view. Hero Honda, another market leader, but in the two-wheeler space also announced its results yesterday and like Tata Steel witnessed a strong 25% jump in volumes. While some of the gains were attributed to market share gains here as well, the strong performance put up by both these companies do indicate that consumption and infrastructure demand in country is indeed growing at a very satisfactory pace.

01:21  Chart of the day
Today's charts of the day display the comparative performance of gold versus stocks (US' Dow Jones Industrial Index, excluding dividends) since the year 1967, the last year when gold prices were linked to the US dollar at US$ 35 an ounce. Since then, as the left-hand chart shows, while gold has outperformed stocks in two decades, stocks have beaten the yellow metal in the remaining two. In the latest completed decade (1998 to 2008), while gold generated returns of 11.6% on an average annual basis, stocks returned just around 2% (excluding dividends). Now coming to the right hand chart, it shows that every Rs 100 invested in gold in 1967 would have turned into more than two times the money that every Rs 100 invested into stocks would have become (again excluding dividends).

Importantly, as you may see from the right-hand chart, gold has really spiked since 2007 when the first hints of brewing financial market collapse were visible. The indications are clear, if you believe the world will remain in turmoil for the next many years, gold has to be a part of your portfolio. Also, while these charts might scare you from buying stocks, we must add that we are here talking about US, where companies have seen their best years long time in the past. As far as Indian companies and their stocks are concerned, the future still remains bright. You just need to make the right choices!

Data Source: Gold.org, Yahoo Finance

02:16
 
Bill Gross, perhaps the world's best fixed income manager has just released his latest monthly letter, which as usual has some great insights to offer. This time around, he has chosen to castigate funds charging high management fees. Not that investors in India need to worry a great deal but it does pose some huge problems for the average American investor. A 1% management fee that most equity funds in US have gotten so used to charging their clients may, according to Gross, now amount to as much as 15% of the total returns going into the pockets of actively managed funds. This is because the current era of economic growth in the US is drastically different from the one that existed in the past where a nominal GDP growth of 5% was assumed to be de rigueur.

A prolonged and a strong divergence away from this normal has put so much strain on the economy that a portion of the US production capacity and labor market will have to be permanently laid off. Furthermore, diminished risk taking and strict policymaking will ensure that the 'new normal' nominal GDP will likely be centered closer to 3% for at least a few years, thus affecting the return on capital as well. So, while Goldman Sachs may be getting some color in its cheeks back, return to stability for the broader US economy may still be way down the road.

03:06
 
Asset bubbles seem to be in short supply currently. And they should be! After all, something that is available in plenty in the previous boom suddenly becomes deficient in the next one. Since the previous boom was characterized by bubbles across a wide variety of assets, finding one in recent times is really akin to looking for a lost needle in a haystack. Little wonder Jim Rogers is finding it difficult to successfully execute one of his favorite strategies these days. Shorting markets that is. As the investor extraordinaire told to Bloomberg currently, for one of the few times in his life, Rogers does not hold any large short positions.

Of course, he could consider US Treasury bonds as the rate they offer currently is indeed farce. But even that possibility is ruled out because of the money printing by the US Fed, which is ultimately being used to buy back bonds from the market. And who dare go against the US Fed, especially its ability to print endless amount of money. Thus, while Rogers may not be able to short US Treasury, with the kind of printing that is going on, he may soon find another asset class to do so.

03:48
 
Does the answer to Jim Rogers' predicament lie in the emerging market equities, particularly China? The Shanghai composite index had fallen 7.6% at its lowest point yesterday, to finally close 5% lower for the day. One of the reasons for this steep fall was reports that some major Chinese banks were about to shut down lending for the year, though nothing of the sort is confirmed yet. This comes on the back of the Chinese banking regulator instructing banks to ensure that loans flow into the real economy rather than into stock markets and real estate. Not surprisingly, fears of a bubble being built up in these asset classes are rife, warranted by the view that a chunk of the money from recent stimulus packages has entered into these assets.

As per a Financial Times report, loans by Chinese financial institutions are up a stunning 34.4% over the past year, leading to strong suspicions of overheating in the Chinese economy. Getting a clear picture of macroeconomic movements is always tricky. But if it is indeed true that a lot of the stimulus package money is flowing into the stock markets instead of the real economy in emerging markets, it is definitely a cause for concern not just for China but for all emerging markets that have seen their stock markets zoom up almost vertically.

04:37
 
After threatening to once again end lower, the Indian markets staged a smart recovery and were trading comfortably in the positive at the time of writing. Most of the Asian markets have also closed in the positive today. Europe too has opened largely on a positive note.

04:42  Today's investing mantra
"We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. This focus doesn't guarantee results: We both have to buy at a sensible price and get business performance from our companies that validate our assessment. But this investment approach - searching for the superstars - offers us our only chance for real success." - Warren Buffett
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2 Responses to "India to grow faster than expected"

Yezdi Surty

Aug 5, 2009

Coments and views are good. The articles are worth reading. A thought for the future.

Like 

mukul gandhi

Jul 30, 2009

good in depth analysis

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