Equities or Gold? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Equities or Gold? 

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In this issue:
» Real estate's smart move
» Auto components players' efforts at diversification
» Japan's woes
» DTH players slugging it out
»and more...

00:00 What should you buy - Equities or Gold?
Indian investors are a worried lot these days. Inflation has soared to 12%, interest rates are rising and the current account and the fiscal deficits are widening. Globally too, the scenario appears bleak owing to the subprime crisis triggering massive writedowns by companies in the financial sector, tightening of credit and a drastic meltdown in the housing industry. It's no wonder then that the Sensex has tanked by around 31% since the high of around 21,000 that it attained in January this year. Will this pall of gloom continue? Is this the end for equities as an asset class?

Definitely not according to Prashant Jain of HDFC Mutual Fund. Sifting through ten-year data relating to investments made in equities and gold, he has observed contrasting investment styles. While lower gold prices propelled Indians to buy more of gold, higher prices led them to stay on the sidelines. Equities, on the other hand saw investors buying at higher prices and refraining from exposure during corrections. The basic reason for the same has been attributed to the investment horizon. Since gold is not purchased with a view of selling it in the near future, Indians are not unduly worried about the fluctuations in gold prices. But the investors investing in equities with a short-term view burn their fingers as they try to adopt the nearly impossible task of timing the market. In the process, they end up buying at higher prices and selling when the markets tumble.

Hence it becomes all the more imperative to invest in equities with a long-term investment horizon and not track day to day market fluctuations. This is in fact the best time to buy good quality stocks at attractive prices. If disciplined, equities as an asset class has proved to be more rewarding than gold and this is amply demonstrated by the fact that equities have given investors returns of around 17.2% in the last 20 years as against 9.6% from gold!

00:54 Real estate's brush with globalisation
Narayana Murthy, the iconic founder of one of India's most revered IT company Infosys, had once defined globalization as sourcing capital from where it cheapest, sourcing talent from where it is best available, producing where it is most cost effective and selling where the markets are without being constrained by national boundaries. However, little did he know that few years down the line, this definition of his would be taken seriously by an industry where corporatisation is still at a very nascent stage. Yes, we are talking about the real estate industry. According to a leading daily, a handful of firms from the sector are setting up shop overseas and that too, for a variety of reasons. While financial hubs like US and UK are being sought for locking in long-term private equity funds, countries like China are being scoured for cheaper construction material, a godsend in these times of inflation. Furthermore, destinations like Singapore and Australia are being tapped to unearth potential buyers and those in Sri Lanka and Malaysia for identifying properties for development. These efforts are being taken to beat the slump that is currently underway in India and the one that has come on the back of five years of robust growth.

High interest rates and inflation have not only squeezed margins and scared away buyers but they have also made fund raising difficult, forcing players to adopt different strategies. For the long-term though, the outlook of the sector is quite positive. Assocham, the industrial body predicts the real estate sector to grow nearly 14 fold over the next 10 years on the back of demand from IT services and residential segments.

1:21 Auto parts makers are also facing the heat...
It is not just the real estate industry that is giving a whole new meaning to capitalism. Auto parts industry, one of the worst hit in the recent commodities boom is also looking at various options to reduce its dependence on the highly cyclical auto industry. Worried by falling auto volumes, these players are eyeing opportunities in the vast but still untapped sectors such as defence and aviation. As per a leading business daily, one of the leading auto supplier groups has already started catering to the white goods industry and the aviation sector. Another player has already decided to make structural components for Boeing's 787 Dreamline aircraft while still other has bagged orders to supply to Indian defence forces. As per ACMA, the industry body, these initiatives should be seen as an attempt to utilize the surplus capacities that have been rendered idle due to the slump in the auto industry. Furthermore, they also do a world of good to the margins of the company as products are usually high value add having specialised applications.

2:01 DTH: The next big industry?
Reliance Anil Dhirubhai Ambani Group (R-ADAG) has launched its direct to home (DTH) services under the brand name Big TV. That makes it the fourth commercial player in the Indian DTH space, after Dish TV, Tata Sky, and Sun TV. However, the player with the largest subscriber base is DD DTH, which is a free to air player. Big TV has started out with an offer of Rs 1,499 for the set top box and subscription rates ranging between Rs 250 and Rs 300. It plans to capture a 40% share of the Indian DTH market in 12 months. Currently, India has a DTH base of around 6 m subscribers, which is expected to grow to about 17 m. R-ADAG plans to target 6,500 towns by leveraging its distribution network in group businesses such as telecom.

With Bharti likely to join the fray soon, the Indian DTH space will become one of the most competitive in the world. DTH players worldwide rely on exclusive content to differentiate themselves. However, the Indian regulator has disallowed exclusive content till the market matures. Hence, the players will have to resort to price wars, innovations like interactive services and heavy advertising. And all indications are in that direction, with Big TV setting aside an advertisement budget of Rs 10 bn. In fact, Big TV has already bid US$ 31.2 m to become the official DTH partner of the DLF Indian Premier League for 4 years. This also means that the DTH players will have to go through a long gestation period where they will not break even. Consumers on the other hand will have a wide variety of choices.

2:44 In the meanwhile
Defying weak US markets and snapping a five-day losing streak, the Indian benchmark indices ended on a strong note today with both the BSE-Sensex as well as NSE-Nifty edging 1% higher. The US markets closed lower yesterday as weak economic data, rising oil prices and weak earnings reports from the retail sector combined together to spook investors. This however, did not have an effect on the Indian markets that remained strong right through the day. Among other global markets, while most of the European indices are trading strong currently, majority of the Asian indices also closed higher today. The honors however went to the Chinese benchmark, Shanghai Composite, which spurted a solid 8% in just one trading session. The buoyancy was on the back of reports that the Chinese leadership is considering a stimulus package in the form of tax cuts and aimed at stabilizing stock markets and supporting development for housing markets. Among other news, oil prices edged higher in Asia even as investors await crude inventory data from the US to confirm reports that economic slowdown in the US is pruning demand for oil derivatives such as gasoline. Gold also rose for the third day in Asia on the back of dollar's weakness and falling equity prices.

3:23 Gloom in the land of rising sun
While Indians continue to feel desolate with 7.5% GDP growth expected in FY09, the Japanese have little to take solace from. The country better known as the land of rising sun seems to be once again witnessing the hopes of economic boom sinking. This is despite the fact that Japan was amongst the few developed nations to be least impacted by the subprime financial crisis. The country that has already had its share of financial crisis in the mid-1970s, has projected its GDP to grow by a nominal 1.2% in FY09.

Although the economy was seen as relatively immune to the ravages of the credit crisis hitting the US and Europe and was benefiting from an export boom to the rest of Asia, it has been hit by the sharp rise in the prices of oil and other commodities. Japan, which imports most of its energy, has been hit by the sharp rise in the prices, which have squeezed companies and households alike, reducing their ability to spend and the economy to grow. Based on its assessment of a weak economic outlook, the Bank of Japan has decided to keep interest rates at 0.5%, the lowest among developed countries. One can also gauge the seriousness of the problem from the fact that growth in Japanese corporate bankruptcies in July 2008 surged to a three-year high of 24% YoY indicating that the slowdown in economic activity and rising energy and materials costs are fast taking their toll upon businesses.

4:02 India's food production data emanating positive vibes
Food prices have been scaling upwards for quite some time now. These in turn have not only raised the general price level but also increased the number of hungry people by about 50 m. However, the news flow coming out of India, one of the globe's top food producers should provide some comfort. According to the farm ministry, food grain harvests rose to a record 230.7 million tons (MT) in the year ended June 30 2008 from 209.8 MT in 2000. With sowing progressing at faster rate for most of the crops, CMIE, the private sector firm that tracks the economy, has projected crop production to further increase by 2.5% in 2008-09. If it indeed materialises, then it may result in ease in exports curb and this in turn may improve the global demand supply scenario, thus leading to easing of prices. However, as of now, the empowered group of ministers (EGoM) on food grains has decided to wait till October 2008 to account for actual crop size and accordingly take a call on partially lifting the ban on certain food items like non-basmati rice.

Other food grains exporting countries have also witnessed good harvest. Cambodia, one of the major Asians exporters has lifted ban on rice shipments. Good crop and lifting up of ban by few Asian countries has softened international food prices. The fall in price was also led by appreciating dollar and falling energy prices that diverted attention away from bio-fuels made from grains and sugarcane. Prices of food crops such as rice declined by 29% from its record highs. Wheat and corn have also dropped 35 % and 26 % from their peaks. These developments have however proved to be a two edged sword for India. Earlier, it was being blamed for aggravating food crisis as exports were banned and now, it may be blamed for putting downward pressure on plummeting prices.

04:53 Today's investing mantra
"A percentage point added to your long-term return is priceless. A percentage point added to your standard deviation is meaningless. To equate the meaningless to the priceless one for one strikes me as being absurd." - John Bogle.
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