There is no avoiding a Japan like situation - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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There is no avoiding a Japan like situation 

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In this issue:
» What is the real value of Indian airlines?
» Pay to be linked to performance in public banks
» Demand for office space has slowed down
» Some trying times ahead for bauxite importers
» ...and more!


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00:00
 
The 'lost decade' in Japan is referred to as the time after the collapse of the asset price bubble within the Japanese economy in the 1990s. This occurred gradually rather than catastrophically. However, although the term is often used to describe the years from 1991 to 2000, failure of the Japanese economy to significant rebound after that has meant that the term has come to refer to the subsequent years as well.

Thus, when the global financial crisis struck in 2007, policy makers in the US and Europe wanted to make sure that their economies do not face a Japan like situation. And so the idea was to act fast, clean up battered balance sheets and provide a bold economic stimulus. First thing that these economies did was lower interest rates. The aim was to offset the spike in debt costs that companies and consumers were facing. What is more, the cuts were faster than what the Japanese had achieved. But this hardly helped in bolstering consumption. Indeed, with asset prices falling and unemployment rising, consumers, not surprisingly, were wary of spending more. The second agenda of bolstering balance sheets also had its share of problems. Governments borrowed to fund the bailouts. So banks' balance-sheets were strengthened at the expense of public ones. All this only achieved was rack up government debt literally to the point of bankruptcy.

Thus, the irony is that although the US and Europe consciously sought to avoid a Japan like situation, it only seems more and more likely that they are heading that way. Indeed, they will have to realise that money printing and stimulus measures will only postpone problems rather than solve them. This means that governments of these countries will have to come out with entirely new and meaningful ways to deal with the problem. Or let their economies go bankrupt and accept the fact that the kind of growth that was seen in the past is unlikely to be replicated in the years ahead.

Do you think that the US and Europe are increasingly facing a Japan like situation? Share with us or post your comments on our Facebook page / Google+ page.

01:26  Chart of the day
 
Although inflation expectations in the developed economies are not likely to increase much, the impact is most likely to be felt on the wage front. Today's chart of the day shows that most European countries are expected to see wages grow at a lower rate than inflation in 2012. The notable exception here is Germany. Thus, this only means that the average workers in these countries is going to see considerable pressure on incomes as wages fail to rise in tandem with inflation, thereby reducing purchasing power.

Data Source: The Economist


02:01
 
We think it was the maverick tycoon Richard Branson who once commented that the best way to become a millionaire was to start a billionaire and then buy an airline. Well, there couldn't be a better description to explain the perennial woes of the airline industry, isn't it? Hence we were hardly surprised when an article on firstpost.com came to the conclusion that the real value of all the Indian airlines put together will not be more than Re 1.

There are certainly no zeros missing here. Given the kind of debt most of the sector companies are swimming in, it will not be too much of a stretch to call their equity worthless. Also, please do bear in mind that even with two major airline companies non operational, the ones that are operational are still struggling to make profits. Clearly, the aviation sector as a whole was just not conceived to make its shareholders rich. One merely has to be content with its ability to do a social good and forget about investing in them.

02:37
 
In an organization, the incentive pay is usually linked to the employee's performance. It is a natural derivation of the carrot and stick approach. The employee gets a carrot in the form of a bonus or incentive if he performs. And a stick in the form of a reprimand or pay cut, etc if he doesn't. But this policy does not hold water when it comes to the public sector banks. There, employees are still being rewarded as per the age old policies. Incentives are given to the top 25% of the employees irrespective of whether they meet their targets or not. The Finance Ministry has sought to change this rule. It has proposed that from now on, incentives would only be given to the employees who have met their said targets.

This means that only those employees would be rewarded who have done their job well. Irrespective of whether they have outperformed their peers or not. This policy is good as it would force employees to work hard to meet their targets. But it would fail to identify the outperformers. A better incentive scheme would be one which combines both, i.e., meet targets and outperform while achieving it.

03:08
 
The global slowdown has impacted the demand of office space in the country. Due to the slowdown, many multinationals especially from the IT and banking, financial services and insurance (BFSI) have started consolidating their operations in the country. And this is reflected in falling absorption rates across the country. Absorption rate is the rate at which available homes are sold in the market during a given time period. It may be noted that during the first half of 2012, the absorption of office space has declined by 32%. The absorption rate in National Capital Region (NCR)-Delhi dropped to 21%while that from Mumbai dropped to 19%. Apart from global slowdown, high interest rate and property prices have been another dampener. Due to the slowing demand, the supply has also been impacted. In fact, it has fallen by approximately 52% in the first half of 2012. And the situation is unlikely to improve in the second half as well. After the residential downturn, it seems now even the commercial segment is facing the heat.

03:43
 
You must know that bauxite ore is used in procuring alumina, the smelter feedstock for aluminium. It is reported that bauxite demand is set to increase at an annual rate of 6.9%. From 220 million tonnes (mt) in 2011, bauxite demand is set to rise to 750 mt by 2030. It must be noted that there are ample proven bauxite reserves across the continents. Yet there are some supply concerns emerging that cannot be ignored. For one, bauxite volumes have declined. Secondly, exploitation of mines for long periods has resulted in inferior quality bauxite yield. However, a major shock came in when Indonesia announced its new mineral policy. The country has declared a 20% export duty on 65 minerals. Even worse, it has ordered a ban on exports of bauxite and 13 other minerals 2014 onwards. Meaning, it will allow exports of only value-added material either in the form of alumina or aluminium. Given that Indonesia accounts for a sizeable chunk of the global bauxite supply, this is indeed a cause of concern for bauxite importers. It is feared that other countries too may follow Indonesia's footsteps.

04:11
 
For all those who have been positive on gold as an asset class, the following development is likely to make you do some rethinking. The fact that India is the largest consumer of gold is not unknown. It would not be wrong to assume that within India, 60% of the population - that which relies on agriculture - would be the highest consumer of gold. Now, with the monsoons being the way they are this year - weak, the demand for the precious yellow metal is expected to go down.

As reported by the Wall Street Journal, a sputtering start to this year's monsoon rains has forced farmers in India to put their gold buying plans on hold. The Bombay Bullion Association shares similar sentiments. This we say because it estimates the volume of gold imports during the second quarter of the current year to have slid by 60% YoY. For 2012, India's gold imports are expected to decline by 40% as compared to 20% decline projected prior to this year's monsoon season. However, one must not ignore the fact that gold itself has gotten dearer (due to the rupee depreciation), which would have made the metal less desirable.

Some experts argue that India's consumption does not have an impact on gold prices as it used to earlier and that other factors - such as QEs - could lead investors to place their money into safe bets such as gold.

04:45
 
In the meanwhile, the Indian equity markets continued to trade firm after opening on a positive note. At the time of writing, BSE Sensex was up by 157 points (0.9%). All sectoral indices were trading positive today. Barring Indonesia and Malaysia, all Asian stock markets too displayed positive investor sentiments.

04:55  Today's investing mantra
"People who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run." - Benjamin Graham & David Dodd
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3 Responses to "There is no avoiding a Japan like situation"

sunil agarwal

Aug 8, 2012

the more a country ( all public, pvt and Government )rely on borrowed economy, more is the chances of deep rooted & prolonged recession. After all, only those entities be allowed to borrow, who can bear that.

Like 

radha

Aug 7, 2012

Bailing out banks and keeping interest rates low are not solutions themselves- the funds should be used to create jobs in the economy- this is not happening- all these funds are again invested in speculative assets- commodities - and hence the economy / public is not getting the impetus required- alongwith easy money policy, conditions should be stipulated that the money will be utilised for productive invts within the economy

Like 

Piyush Gupta

Aug 7, 2012

I wish India could follow the Indonesian example of subjecting bauxite export to 20% duty, as I strongly believe that the stabilization in Indian economy is due to over exploitation of natural resources and exporting them at dirt cheap prices. This of course is the easy way out to meet the ulterior motives of our policy makers.......but this cannot last long. The national character needs to be changed towards patriotism and other things, like national prospertity will follow as a natural consequence. Indian economy is being slaughtered by the ills in the political system.

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