Who's next after 'Great Fall of China'?
(Aug 28, 2015)
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In this issue:
» Global stock market crashes over the years
» Smart cities initiative makes progress
» Domestic pharma sees rising woes
» ...and more!
Many unpleasant words begin with the letter D. Death, disease, depression, debt, deflation... "Decoupling", on the other hand, has a nice ring to it. Economists certainly seem to love saying it.
Remember "de-coupling"? Don't blame yourself if you don't. You may have heard it last in 2008 or 2013. The word shows up prominently in news and blogs every time there is a major market crash. So as markets across the world catch the Chinese fever, be prepared to hear economists, central banks and your broker to tell you to think about decoupling. But this time is different. No, really.
The last time you heard of decoupling, it was in context of the US. Haven't you heard this saying? "When America sneezes, the whole world catches a cold."
Well, everyone said so when the US economy succumbed to the subprime crisis in 2008. At that time, the US Fed kept moving interest rates to zero. And the excess liquidity kept finding its way to the supposedly decoupled economies. Investors poured money into emerging markets, hoping that they would decouple from the crisis in the US.
Economists repeated the 'decoupling mantra' in 2013.
But this time it's not the US but China that is sneezing. And whether decoupled or not, every economy, even the US, is catching fever!
China's slowdown has understandably impacted global markets. This at a time when its currency is competing hard with the US dollar. Not to forget, as a major producer and consumer of commodities, China has the biggest influence on commodity prices.
In the Chinese context, therefore, decoupling is no longer a respite. China has close economic ties with both developed and emerging economies. Plus, neither are the emerging nor the developed markets decoupled from the commodity crash. Nor will China's slowdown leave global GDP growth intact. And the extent and pace of China's fall is instead up for debate.
As an investor, it is impossible to predict such trends. By now, though, you also have enough proof to discard the decoupling theory. So all you are left to do is to watch out for what happens after "the great fall of China".
As we saw in 2009 and 2013, global economic shivers aren't necessarily bad for investors. The market crash may offer opportunities to buy a few stocks you've always wanted. But don't stop at that.
Remember, the economies are as strong as their weakest links. And as economies succumb to their weakest links, they pass on the growth opportunity to those who can capitalize on it. For the US, the weakest link was its poor credit history. For China it has been an overdependence on cheap labour and currency.
Watch out for trends in manufacturing and credit that will reveal companies set to capitalise on the US and China's weaknesses.
And do not forget to price in India's weakest link (the government's performance) when you look to invest for the long term.
Which opportunities and risks are you looking at in the aftermath of the market crash? Let us know your comments or share your views in the Equitymaster Club.
P.S. Want to know how to 'Crash Proof' your portfolio?
We believe we have found "5 Warning Signals" or "5 Red Flags" that show up in a business right before its stock price plummets.
In fact, ensuring that you're not investing in businesses which show these "5 Warning Signals" could potentially be the difference between creating wealth and incurring losses with your stock market investments.
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The gravity of the recent market correction in China can be put into perspective by comparing it to the crashes since 1929. While the extent of the fall is meaningful, one can safely conclude that this may not be the end of the bloodbath in Chinese markets. As poor economic fundamentals and asset bubbles in China continue to unravel, the economy could see more fund outflows. And the impact of the same will continue to be seen in markets the world over.
So besides currency wars, interest rate volatility and commodity rout, indices will remain vulnerable to economic data from China in the coming months. None of these macro scenarios should change your investment strategy. However, do ensure that you pick your investments carefully.
Pecking order of global stock market crashes
Back home, the ambitious '100 Smart Cities' plan seems to be finally chugging along. Now, if you could recollect, we had discussion on Smart Cities as one important Megatrend at the Equitymaster Conference 2015. Megatrends is the principal driving force behind The India Letter. And the creation of smart cities is the perfect recipe not only to create well connected business centres but to spur economic growth through better employment opportunities.
The government has released the list of 98 cities that constitute 35% of the urban population and have been earmarked for development under its Smart Cities mission. Among them, the states of Uttar Pradesh, Tamil Nadu and Maharashtra will be developing 10 or more number of smart cities. Under the plan, the Centre would be initially providing Rs 20 m to each of the smart cities for laying down the plan. In the next stage, 20 cities will be selected in each of this year and over the next two years to receive the government funding of Rs 5 bn spread over five years. Apart from this, the government would also be providing Rs 3 trillion for various urban initiatives.
But the real success of these initiatives will depend upon investments of similar scale being made by States, civic bodies and private players. However, challenges remain as the private sector is still not out of the woods and the local civic bodies are constrained by their limited financial strength and capacity to execute such large projects. No doubt the smart cities initiative can be a turning point to jumpstart the economy but the key lies in ironing out the hiccups in its execution. Therefore, while we would be closely monitoring this important Megatrend, we certainly would avoid being overtly enthusiastic unless there is a clear plan to overcome the teething problems.
Talking about Megatrends, the Indian pharma industry could witness some challenges to its growth. There was a time when many Indian pharma companies, built their fortunes in the largest generic market in US after expiry of blockbuster drugs. But the dynamics changed gradually, which have not been in favour of these pharma companies. Along with the competition intensifying, the companies also started facing compliance issues and lower number of approvals. Not to say a number of manufacturing facilities have also been pulled up for not complying with USFDA norms.
Things do not seem to end here. Since some time, there is a rising trend of consolidation in the US distribution system which is changing the competitive landscape of the market in US. As a result, this is impacting the bargaining power of the drug companies, as the lower bidder takes the pie. Consequently, generic prices of various drugs have been declining since some time. Such challenges are expected to continue for the pharma players. However the companies which will be able to offer niche drugs, where not many companies are present will be able to remain ahead of their peers.
The Indian stock markets opened the day on a strong footing and continued to soar higher during the course of the day. At the time of writing, the BSE-Sensex was trading higher by 346 points (up 1.3%). Power & IT stocks are leading the gainers today.
"Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." - Warren Buffett
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|This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Madhu Gupta (Research Analyst).
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