10-year bull run & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

10-year bull run & more... 

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In this issue:
» US$ 10 bn IPO in controversy
» Indian gold demand to remain strong
» The key to 10% GDP growth
» Oil wealth wasted in Iraq
»  ...and more!

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00:00 "The bull market for commodities has a long way to go"

Legendry commodity analyst and investor Jim Rogers, who in April 2006 correctly predicted that the price of crude oil would touch US$ 100 (Rs 4,000) a barrel and that of gold US$ 1,000 an ounce, in a recent investor conference in Amsterdam predicted that the fundamentals for commodities are currently 'astoundingly' good. He opined, "The bull market for commodities has a long way to go and may end by 2020 based on historical cycles."

Rogers has predicted that agricultural commodities and crude oil may fuel the rally for five more years as global supplies will not increase fast enough to meet demand. The prices for commodities like copper, iron ore and coal all rose to record highs this year on increased demand for raw materials from emerging economies. The emerging economies, particularly China and India, are amongst some of the largest consumers of essential commodities. However, as per Rogers, the same does not seem to yet have touched the peak. If these predictions are to come true, then the assurances of soothsayers, who are envisaging global inflation levels to cool off, need to be taken with a pinch of salt.

00:37 Dire predictions on oil...
Not just Rogers, other experts like this economic research house based in the UK are also bullish on crude oil prices. The Chatham House has indicated that the world is staring at a serious shortage of oil supply over the next few years, which may eventually drive up prices to US$ 200 a barrel. However, a collapse in demand may however act as a reigning factor for oil prices. Inadequate investment by oil companies in raising output and not because the world lacks oil reserves is what is causing supply shortages.

01:02 ...and not so dire on rice
A leading business daily reports that rice prices in Asia are likely to cool down early next year if India were to relax its ban on exporting the food commodity. While the prices, which currently hover around US$ 710 per tonne might retreat to under US$ 700 by March 2009, the report does not see them falling to the US$ 200-300 range that prevailed for the past two decades.

Rice prices nearly trebled to US$ 1,080 per tonne in April this year as export bans meant to cap food-fuelled inflation in countries like India, Egypt and Vietnam triggered a scramble by importers, who rushed to secure supplies to avoid shortages of the commodity.

01:27 Beneficiaries of oil's rise are wasting it all away!
As per the US government auditor, Iraq is generating revenues of about US$ 80 bn a year, mainly from its vast reserves of crude oil, but spending only about 1% of that on maintaining critical infrastructure projects such as roads, bridges and sanitation. Meanwhile, the US has appropriated around US$ 48 bn in the past several years to help reconstruction efforts.

The Iraqi government, which controls the fourth-largest oil and gas reserve in the world, with an estimated 115 bn barrels of crude, gets approximately 90% of its revenue from oil sales, which have jumped 50% in value with this year's rise in prices. The US government auditor estimates that in 2008, Iraq could generate between US$ 74 bn and US$ 86 bn in revenue, if the price of Iraqi oil ranges from US$ 97 to US$ 125 a barrel and oil export volumes range from 1.9 m to 2.0 m barrels a day. In 2007, Iraq spent 90% of its revenue on operating costs such as salaries, pensions and services. Most of the remainder was spent on investment expenditures, such as structures, machinery and vehicles. Just 1% of the Iraqi government expenditures went to maintenance of roads, bridges, vehicles, buildings, water resources, sanitation and electricity installations. Hence, while one part of the world is getting poorer having to pay for the expensive fuel, the richer world does not seeming to be putting its wealth to the best use.

1:59 The king of IPOs in controversy
With the Left no more in power to refrain PSU divestments, the Finance Ministry is doing the best of what it can, in the minimal time available with the present government, to cash in on the PSUs. The UPA government has in fact given approval for stake sale worth US$ 10 bn combined for two of the largest PSUs in the country - BSNL (telecom) and NHPC (hydro-power). The former's IPO is though still caught in an internal strife between the top government officials as also on account of objections from the company's employee union.

The government is planning to offload 10% stake in BSNL to raise US$ 10 bn, which will make it the largest ever IPO in the country. The Communications Minister has stated that the company (with nearly 75 m subscribers) is targeting revenue of Rs 500 bn in FY09 (Rs 398 bn in FY07) and may be listed on the bourses in the price range of Rs 300 to 400 a share, that will make its valuations nearly 5 to 6 times that of Hutchison Essar, which was recently acquired by Vodafone.

  • Also read - Will UPA go fast on stalled economic reforms?

    02:28 Indian gold demand to remain strong
    The World Gold Council estimates gold demand in India to remain strong during the current quarter. This optimism stems from a good monsoon and consumers' strong confidence in gold buying, especially during the upcoming festive season. The council further states that, over the past five years, there was a steady growth in gold demand in the country in volume terms even when prices doubled (gold prices have increased by 123% over a 5-year period).

    Having said that, gold prices tumbled to an eight-week low today (US$ 860 an ounce), after the dollar jumped against the euro, prompting some investors to switch funds back into currencies.

  • Also read - Who's making the most of India's economic growth?

    02:56 The key to 10% GDP growth
    While the Finance Minister and other policy makers still continue to wonder as to what will take for India to touch a double digit real GDP growth number, the Asian Development Bank (ADB) in its outlook for 2008 has given an answer. The bank has acknowledged that in the past decade the Indian economy has undergone a transformation and climbed to a high-growth trajectory as macroeconomic and structural reforms reduced regulation, improved the business environment, and opened the economy to greater competition. Yet the bank opines that the country needs to focus on certain key areas with the potential to push growth to the 10% mark.

    The most crucial factors pointed out are enhancing the policy and regulatory framework to encourage the private sector and reining in fiscal deficits. A dynamic private sector that creates jobs, increases productivity, and invests in the economy plays a crucial role in bolstering growth. ADB has opined that removing the bottlenecks to private sector growth and competition in India could well generate an additional 2% of GDP growth.

    The report states that the bottlenecks can be removed by attacking shortages of professional skills. Although 90% of employment opportunities require vocational skills, only 10% of educated youngsters are equipped with them. Almost two thirds of young workers have below primary education and about 90% of them hold low-quality, informal sector jobs. An estimated 80 m Indian workers need up to 2 years of training for professional skills. Only about 15% of manufacturing firms provide on-the- job training, which raises their productivity by a quarter above those that do not.

    The Government on its part has embarked on a skills development mission to impart the required training, but covering the entire gamut of skills required through public funding may not be financially. A new approach is needed to leverage the private sector for investment in education and training, on-the-job training programs in firms, and increasing private participation in higher education.

    03:45 Even the PSUs fasten their belt
    At one point of time the services of global consulting firms McKinsey and Boston Consulting Group (BCG) were only sought by the best of the private sector giants. Times have changed. India's largest public sector lender, SBI has been hiring the services of McKinsey for the past 4 years to improve efficiency and productivity. The results of the same have been amply evident in the outcome of project 'Parivartan'. The bank has not only been focusing on improving profitability by shedding most of the intermediate layers from its organizational structure in an attempt at faster decision making. In a similar attempt, PNB, on being advised by BCG, has shut 26 zonal offices and about 2,000 employees have been shifted to generate new business and marketing fee based products. Had it not been for the government's welfare policies, the PSU banks were all but raring to go.

    04:02 In the meanwhile
    While most of European indices have started on a positive note today, the Asian markets closed amidst mixed signals. The Indian BSE-30 index in line with its counterparts in China and Hong Kong had a weak session and closed just above the dotted line. The Chinese CSI 300 index infact tumbled 4.7% to its six-week low amidst concerns that security breaches may disrupt the Olympic Games, which start today.

    Global markets are likely to continue to remain choppy over concerns of recession and hyper inflation. Inflation in India (as measured by wholesale price index, WPI) has breached the 12% mark for the first time in 13 years on the back of soaring food and non-food article prices. However, as indicated by policymakers, the RBI and economists, it is expected that lower crude prices and monsoons will lessen inflationary tendency going forward bringing the number to single digits by early next year.

    04:23 Foreign airlines flock to India
    They are cutting flights to several destinations in the wake of a worldwide slump in business, but international airlines are doing just the opposite in India because they believe the country's international air traffic will only grow in the coming years. Interestingly, this comes even as the domestic aviation business is going through a downturn. India is seen as a growing market for international airline traffic and the current market size is nearly US$ 5 bn a year. Further, what is also attracting international airlines is the fact that India has a liberal bilateral government policy with most countries and has sustained an appreciable economic growth amidst global recession. The global aviation industry is waging a losing battle against rising aviation fuel costs, which have increased 30% in 2008. However, international airlines expect potential passenger growth from India to nullify the impact over the long term.

  • Also read - Jim Rogers is buying airline stocks

    04:40 Apparel makers beat the twin traps
    The government has asked domestic apparel makers to stock cotton to beat the twin traps of shortage and rising prices. But these companies themselves are trying to evade the twin traps of inventory pile up and fall in realisations. Apparel makers in India are cutting production, deferring expansion plans and closing unprofitable stores as costs soar in the wake of rising inflation and a marginal slowdown in the economy dampens consumer sentiment. Some apparel and textile companies are yet to recover from the shock of significant forex looses borne in the last fiscal.

    04:53 Today's investing mantra
    "In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen." - Warren Buffett.
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