Problems of plenty - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Problems of plenty 

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In this issue:
» Poverty in the developing world
» Scramble for talent in the oil industry
» Japan's new found aggression
» India's comfortable forex reserves
» And more...

 00:00    Developing world gets poorer
US$ 1 (approximately Rs 40) was all that citizens of developing nations had to spend every day in 1981 to consider themselves above the poverty line. Keeping in mind the rise in food and living costs, the World Bank revised this figure to US$ 1.25 a day in 2005. The result being that the most of the developing nations whose populations have grown at a faster rate in the past one and a half decade as compared to their prosperity find more number of people below the poverty line than in 1981.

The World Bank states that nearly 1.4 bn people (a quarter of the developing world) are currently living in extreme poverty on less than US$ 1.25 a day. This figure would have been 1 bn people considering the previous US$ 1 a day yardstick. The new figures are likely to put fresh pressure on big donor countries to move more aggressively to combat global poverty and on developing countries to introduce more-effective policies to help lift the poorest. Particularly, sub-Saharan Africa, the world's poorest region, where poverty levels have not changed in nearly 25 years and half the region's population were below poverty line in 2005. The good piece of news is that World Bank economists think that the world was still on target to meet a United Nations goal of halving the number of people in poverty by 2015. As far as India is concerned, while it has managed to pull nearly 10 m people out of poverty between 2002 and 2005, if US$ 1.25 is taken as a benchmark, then only 4.7 m people have come on the right side of the dreaded line. We may be growing at 8% per annum but our poor are not transforming themselves fast enough.

 00:37    Find oil later, first find the men!
Many years of under investment and growth in the consumption of oil have led to high crude oil prices. These high prices have now ignited a massive exploration drive for the oil and gas companies. The renewed activity in turn has led to huge rise in demand for all things essential for exploration - equipment, rigs, ships and most importantly, skilled workers to manage it all. A rig requires a workforce of about 300 people to keep it running 24x7. With rigs becoming more computerised, the level of technical expertise required of the workforce is very high. Add to that, the difficult nature of life on a rig- the harsh conditions, demanding working hours and survival in conflict prone regions. No wonder, the industry is facing an acute shortage of technically equipped brave hearts. In fact, even the research and development side of oil exploration faces an acute shortage of skilled manpower. With many scientists being laid off in the era of benign crude prices, the next crop of talent preferred computers to geology. While the industry is likely to adjust to these realities in the long term, it will have to address the current shortage of labour by forking out higher compensation.

 01:11    In the meanwhile
Despite its peers in the developed world ending marginally higher yesterday, weakness was witnessed in Indian markets through out the day today. Eventually, the BSE-Sensex closed lower by 180 points and the NSE-Nifty shed 40 points. With the Indian markets increasingly being perceived to be moving in opposite direction to oil prices, increase in crude prices for the third straight did not augur well for the Indian indices and quite expectedly, the sentiments remain subdued for the major part of the day. It did have other Asian indices from China and Japan for company. Most of the European indices are also trading in the red currently. In the US markets yesterday, stocks ended marginally higher as investors remained on the edge on the back of rising oil prices and news of more pain in the housing sector.

 01:34    Japan is conquering the world
The Japanese economy is not exactly growing at a blazing pace. Far from it, the economy is infact suffering from the ills of economic slowdown like its peers from both the developed and the developing world. However, that has not stopped Japanese companies from intensifying the pace of acquisitions abroad. The global credit turmoil has afflicted economies and stockmarkets alike and since many companies are available at cheap valuations, Japanese companies are leaving no stone unturned in the M&A space. Consider this. According to Bloomberg, Japanese companies have cash equal to 11% of their assets, the second-highest amount after China among the world's 10 biggest equity markets.

No wonder then that these companies are utilizing their cash resources in snapping up assets abroad and what better time than now when the world economy is reeling under a meltdown. Bloomberg data shows that foreign purchases by Japanese companies climbed to US$ 48.6 bn so far this year from US$ 25.4 bn for all of 2007. In stark contrast, the value of deals in the US is down 67% from 2007 and in the UK acquisitions have plunged 66% as debt financing costs climb. India itself was witness to Japanese 'invasion' when Daiichi Sankyo, Japan's third largest pharma company purchased the promoter stake of India's biggest drugmaker Ranbaxy. What remains to be seen is whether Japanese companies can generate value from these deals and not suffer from a sense of deja vu when in the 1980s these companies ended up overpaying for a lot of assets.

 02:18    Europeans aren't producing more of...
...babies, you see! As per the findings of an official European Union (EU27 - group of 27 nations) study, Europeans are likely to face a demographic decline in just seven years' time - the point at which deaths will exceed births in the region. Eurostat, the EU's leading statistical agency, has prepared the report.

As reported by the International Herald Tribune, the report "reveals large variations between the birth rates of member states but paints an overall picture of an ageing population. The document does not explore the reasons for differences in European fertility. But it does hint at the profound economic and social changes likely to unfold during the next half century, as the proportion of older people grows steadily."

As per Eurostat, the EU27 population is projected to increase from 495 m on 1 January 2008 to 521 m in 2035, and thereafter gradually decline to 506 m in 2060. The population is also projected to continue to grow older, with the share of the population aged 65 years and over rising from 17% in 2008 to 30% in 2060, and those aged 80 and over rising from 4% to 12% over the same period.

The union is now betting on a positive net migration (greater number of foreigners settling in than those leaving the region) to be the only population growth factor for the region. Now you understand the rationale behind Indian pharma and IT companies' push to the European markets? The skill-set and healthcare requirements that this population decline will entail can in fact provide a big growth opportunity for companies from these sectors over the next many years.

 03:17    Is it the oil of the 21st century?
Whoever said GDP growth benefits the entire nation may have to think again. If one throws Mother Nature into the equation, then surely, every dollar of GDP gained from industrialization or some other source, results into a loss for the environment. While this may not be quantifiable, it will definitely have long lasting repercussions. One such repercussion that is staring humanity in the face big time is growing shortages of what the Economist terms as the oil of the 21st century. We call it the elixir of life. Indeed, we are referring to water and that too of the fresh type. As per the magazine, supplies of water are coming under great strain on account of the rising population and the aspiration of leading a 'water intensive life' of billions of people in Asia. What makes matter worse is the fact that water, unlike oil has no substitute and furthermore, it remains so underpriced throughout the world that its value barely registers in the minds of people and hence, continues to be wasted. However, if something is not done soon enough, the problem is likely to snowball into a disaster of epic proportions. Although steps are being taken by responsible corporates in terms of reducing consumption and using wastewater, these may not prove to be enough. Signs of discontent were already visible when some time back activists in India agitated against the use of groundwater by soft drink majors like Coca Cola and Pepsi. Although the courts ruled in the favour of the latter, Coca Cola had to undertake projects like rainwater harvesting and efficient use of water in the villages adjoining its plants to change sentiment. We do need similar projects but corporates need to come forward on their own and not be forced or compelled.

 04:07    Comfortable with India's forex reserves: IMF
International Monetary Fund's latest report on emerging Asia's forex reserves shows India in a good light and has said that the country's forex reserves of around US$ 286 billion are much above the optimal level of around US$ 175 bn. Based on different parameters and ratios like reserves to months of imports, reserves to broad money supply, reserves to GDP, reserves to short-term debt and reserves to total foreign exchange liabilities, the report showed that India was holding more than the level required on all counts. Other emerging nations that featured in the study and were the ones to have comfortable reserves were China, Hong Kong, Korea, Taiwan and Thailand. However, it had a word of caution for countries like Singapore, Philippines and Indonesia, where reserves stood near optimal reserves. Looks like most of the countries have learned big lessons from the Asian financial crisis of the late 1990s when flight of capital induced one of the severest slowdowns in the region. Although India escaped virtually unscathed, it previously ran into its own set of problems in the early 1990s when it faced one of its worst forex crises ever. The recovery though has been spectacular. Aided in no small measure by its liberalization policies and openness to trade, it has seen its reserves swell to nearly US$ 300 bn, amongst the highest in the Asian continent. From struggling to meet its import needs, a problem of the opposite kind is facing the country, call it problems of plenty.

 04:52    Today's investing mantra:
"Confronted with the challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety" - Benjamin Graham
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