We may not see a bubble in India in next 50 years

Aug 12, 2010

In this issue:
» 4 Indian companies get higher than sovereign rating
» Half of rural India still lives in darkness
» Speculation affecting food prices
» Chinese housing prices may see 60% slump
» ...and more!!

---------------------------- Exclusively for Serious Investors... ----------------------------
We are so certain you will find huge value in our latest long-term wealth creating opportunity that we're offering you something for the first time ever - A 365 Day 100% Money Back Guarantee. *
So, what is this service all about? Click here for full details...
* No terms and conditions apply.

Rewind back to the year 2006. It was a time when the world was awash with liquidity. Real estate in India was setting new records everyday just as it was doing in the US. Money was flowing into the sector like there was no tomorrow. Yet four years later, banking system in the two countries is perched at two extremes. The banks in US have needed massive capital injections to help them recover from the real estate crash. No Indian bank on the other hand has come even remotely close to failing after the onset of the credit crisis.

Agreed that there are a lot of factors that could be attributed to the extremely healthy state of Indian banking even after such a devastating crisis. We believe the most important of them all could be put down in just three letters, RBI. Yes, that's right. It was indeed the huge preventive measures taken by India's central bank back then that helped us come out of the crisis virtually unscathed. And this is not the first instance that RBI has come to the rescue of India's financial system. Time and again it has ensured that Indian banks do not get too carried away by the bubble mentality.

That the RBI really means business was on display yet again recently when it came out with a discussion paper on new private sector banks. Apparently, the RBI has set some really strict terms for new bank licences. Furthermore, it has also made quite clear its unwillingness to give banking licenses to industrial groups and NBFCs with interest in real estate.

And this is not all. There are a lot of other safeguards in place as well. Clearly, RBI is one institution which starts with the assumption that every entity is guilty until proven innocent. And we firmly believe it should stay this way. For this will make sure that we do not have credit crisis even over the next 50 years.

 Chart of the day
Global economy enjoyed a period of low inflation for most part of the 1980s and 1990s and also a good part of the early 2000s. This could certainly be attributed to a lot of favourable factors. One of the most important was the rise of China as a manufacturing powerhouse. Low wages and a fixed currency peg to the dollar made sure that the dragon nation kept exporting goods on a massive scale and that too at pretty competitive rates. But perhaps not anymore. As today's chart of the day shows, wages for an average Chinese worker is on the rise in real terms and this is likely to put pressure on cost of goods coming out of China in the coming years.

Source: The Economist

The credit profile of the average Indian corporate has gotten better in recent times. Or so opines rating agency Standard & Poor's. According to S&P, this is on the back of higher demand for products and services stemming from good domestic macroeconomic conditions. Not to mention a gradual improvement in the global economy. In fact, it has rated four corporates above even India's sovereign rating. These four companies are Reliance Industries, Wipro, TCS and Infosys Technologies.

S&P feels that these companies would be able to service their obligations even if the sovereign comes under severe stress. In general, debt has increased for some companies but they are also expanding, while others have deleveraged debt. This has led to the overall improvement in the credit profiles of corporate India. Ratings from these agencies need to be taken with a pinch of salt. However, they do have direct implications for Indian companies. This is because it is these ratings that determine the interest rates that companies will have to pay on their borrowings.

Most Indian investors rely a lot on the growth potential of India while making their investment decisions. And you might be no different. But what if the India growth story ends with a whimper? Well, if the country's power woes were to continue unabated, this might become a reality after all. As per a report in Mint, around 57% of rural households and 12% of urban households in India have no access to electricity. That partly explains why our per capita power consumption (700 units a year) is way below the world average (2,600 units).

The power sector is already battling a number of serious issues that have stymied its growth. Fuel and equipment shortages are the norm. Vast tracts of land to set up the plant are hard to come by. Over that, the whole host of regulations makes the project execution very tiresome for companies. All this has resulted in the country consistently falling short on capacity addition targets. If we do not get over these issues fast, which anyways looks very bleak, the day is not far when we will rue our destinies.

The origins of economic activity lies in basic needs. While air and water mostly remain outside formal markets, food and shelter squarely fall in the economic domain. A lot of attention has been paid to the disruption in the housing markets in the last few year and the ensuing financial crisis. Not enough has been said about food though. During the height of the last bubble, food prices shot up to the point where there were food riots in the poorer nations. Think Bangladesh and Haiti. Turns out, food prices are going up so high again that another set of riots may occur soon.

A column in the Financial Times points out how food prices are set by three forces: supply and demand; speculation and the political equations of food producing and consuming countries. Sadly, very little attention has been paid on regulating world food trade. Another worrying trend in the increasing speculative money moving towards food commodity markets. We generally get worried when markets malfunction in any sector or geography. But when it comes to food markets, it has a very high human cost. Especially of poorest of the poor.

Rs 35 bn worth of redemeptions! That is the kind of outflow that the Indian mutual fund industry witnessed in July 2010. Reasons for the same could come from several quarters. Investors being wary of yet another crash, ban on entry loads and regulatory dispute on schemes are just a few of them. But what is certain is that the industry needs to revamp its operations on an urgent basis. In a sector where size was all that mattered, huge outflows could be suicidal. Performance has been the key metric that the mutual fund regulator is emphasizing on these days. And probably that is what even the players should focus on instead of relying on distributors to popularize their schemes.

Property prices in China have soared in recent times to reach unjustifiable levels. And banks have been responsible for the same as they have lent indiscriminately to the sector. So, it hardly comes as a surprise that Chinese banks have been instructed by China's banking regulator to undergo stress tests. This is for the scenario of a 60% plunge in home prices envisaged in Chinese cities where prices have jumped out of control. What happened to the property market in the US is still fresh in the minds of everybody including the Chinese. The mortgage market there collapsed and triggered the biggest global financial crisis since the Great Depression. Little surprise then that the Chinese authorities do not want to find themselves in the same boat. The Chinese government has been doing its bit to ease the housing bubble. It has taken steps such as lifting minimum mortgage rates and down payments for second homes. It has also suspended lending for third homes. This has obviously not satiated the government. And so it wants to take additional measures to prevent the kind of crisis that emanated from the US.

The Indian indices languished in the negative territory for most of the session today, only coming close to the dotted line in the final hour. The benchmark indices shed gains backed by selling pressure in FMCG and IT stocks. Asian markets across the board are trading lower with Australia and South Korea leading the pack of losers. The BSE-Sensex was trading nearly 4 points higher at the time of writing. The European markets have opened on a cautious note.

 Today's investing mantra
"If you're an investor, you're looking on what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "We may not see a bubble in India in next 50 years". Click here!

14 Responses to "We may not see a bubble in India in next 50 years"


Aug 12, 2010

You have positive outlook in regard to banking in India. As a person who studied the PSUs and Government Office working, I can confidently state that most of the data on which decisions are taken is based on manipulations. Most of the economic data furnished to the public, I am sorry to say does not speak the truth.

The banking industry in India lends to the Builders on the basis of IODs and then the purchasers on the basis of Purchase agreements. The same property thus gets financed twice which generates liquidity. This is the source of funds to the real estate companies. This is what causes high valuations of the property. Similar is the case with the vehicle finances. Many vehicles are seized and is lying in the backyard which is not sold in the market as second hand cars. How long the bankers can assure the public the lending is secured?



Aug 12, 2010

Wow! "We may not see a bubble in India in next 50 years"?! Such exuberance from many 'wise' quarters is an assured sign that the bubble is on and is only about to burst!!

There are innumerable number of economic sooth-sayers who said in Jan 2008, when Sensez was near 21000, "India Story is so strong that only Sensex 45000 seems to be the next stop"; "question is not if but when"; "Global turmoil will not touch India, due its inherent strength and strong domestic consumption driven growth".

Ofcourse, many of those pundits, instead of licking the wounds, are offering bold 'buy low, sell high' kind of advises dime a dozen, ever since, even now!!

I say: When you hear "no bubble, we are strong", from 5 different sources, offload 50% of what you have, at market price; when you hear that from 10 diff sources, particularly domestic pundits, offload 100% of your holding.

When to buy: When the same 5 say 'this aint no bottom, we have long way to go', invest 50% cash in to equities - robust ten industrial houses; when you hear that from 10 different sources, you guessed it right, particularly domestic punters, invest 100% in equities & simply wait for next sooth-sayer announcement!!

As for now: I guess, we are near about in a bubble, waiting for a trigger - may be more bad news from China, shall cause a run. Sure enough, from deep down, we shall bounce back to 21000 certainly, in the medium term. Watch the space (once in 3 years!) for me to tell you when we will reach 45000!!


Vivek Bhatnagar

Aug 12, 2010

I cant comment on whether there will be a bubble in India in the period mentioned but have views on why Indian banks survived without a scratch when their counterparts in the US went down
1) The property prices didnot drop anywhere as what happened in the US.At max it was 25% in India.
2) Property dealings in India typcially do not get registered at the true value (lot of black money invlolved) .i.e the banks finance 80-90% of the white component only and this in case of second sales (and most new sales apart from few big builders) is 60% to 70% or so and hence actually the exposure in this case for the bank is @ 50%-50% of the asset value. Now the fall in the market in India was much less than this and hence there was no reason for the borrower to default on bank payments, even in case of liquidity crunch the borrower will prefer to sell and repay the bank rather than giving away the asset to bank, If property prices had fallen more and the banks would have left with mortgage properties things might have been very different
3) What %age of Indian banks funds were exposed to the property market

I am very spectical of preventive measures of Govt working whether its for food shortage, inflation, Dengue fever, monsoon flooding, terrosist attacks etc and hence see no reason why RBIs preventive efforts will work



Aug 12, 2010

Buble is not formed in day or two , and on what basis one can predtic next 50 yrs , our memory is just too short, we are just following the junk we are provided by govt papers no one want to verify the truth behind the paper and get excited like small kid and starts predticing what will happen next 50 yrs

Equitymaster requests your view! Post a comment on "We may not see a bubble in India in next 50 years". Click here!