A change in guard & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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A change in guard & more... 

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In this issue:
» Fending off the Olympics 'curse'
» How are the Olympics and pharma connected?
» Global auto market is shrinking
» Microsoft and Google war heats up
» ...and more!

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 00:00    Subbarao to replace Dr. Reddy
Contrary to popular expectations, the Prime Minister has appointed Finance Secretary D. Subbarao as the next governor of the central bank, replacing Dr. Y. V Reddy. At a time when the economy is fighting the highest inflation since 1992, it was expected that the government may extend Dr. Reddy's term because of his decade-long experience at the RBI. Mr. Subbarao will serve for three years, replacing Dr. Reddy whose term ends on September 5. Meanwhile, in a recent interview to Bloomberg, Mr. Subbarao was quoted saying, "I can't say firmly that inflation has peaked because it will depend on a number of factors including global factors which are beyond our control". He also cited further rises in interest rates as the 'obvious solution'. Thus Mr. Subbarao may have to follow Dr. Reddy's four-year-old policy of raising borrowing costs as inflation has shown few signs of easing. India's central bank, which prepares monetary policy in consultation with the Finance Ministry will pull out all stops to check prices ahead of elections in May 2009.

During his tenure, Dr. Reddy has done a brilliant job of keeping growth and monetary stability well balanced and at the same time safeguarded the Indian banking sector from the global financial crisis. Dr. Reddy has altogether increased the repo rate by 3% since October 2004 to prevent the second-fastest growing economy after China from overheating. He also raised the proportion of CRR that banks need to set aside by 4% since December 2006 to check money supply from stoking inflation. His diligence in efficient governance of the banking and financial sector has been acknowledged the world over. All in all, Mr. Subbarao has very large shoes to fill in.

  • Also read- The RBI doesn't give up

     01:01    Fending off the 'Olympics curse'
    The Olympics have come and gone and while China put up a spectacular show both in the organisation of the event and the competition itself, the limelight has now shifted to the state of the Chinese economy. An interesting fact reported by Morgan Stanley is that 10 of the 11 Summer Olympics host nations (dating back from 1956) analyzed by the firm saw growth and investment slump in the year following the games; the only exception being the US in 1996. Will China be successful in breaking this 'curse'? Infact, key data released with respect to the Chinese economy has not been very enthusing. China's growth slowed down to 10.1% during the second quarter as against 12.6% in the corresponding period last year.

    The Chinese authorities seem determined to reverse this trend. The government has started easing lending restrictions and is contemplating doling out a fiscal stimulus package of US$ 58 bn. Tax cuts are also on the agenda. Bloomberg states, "China has tripled railway spending this year to 300 bn yuan. The current five-year plan, which runs through 2010, calls for investing almost 4.8 trillion yuan on power stations, waterways, roads and other infrastructure projects; more than the combined output of Taiwan, Thailand and Vietnam. Reconstruction after May's Sichuan earthquake could cost another 1 trillion yuan".

    The Asian economies are already feeling the effects of the slowdown in the US and Europe. A Chinese slowdown will only worsen matters further. Hence, China's spending on infrastructure is critical for the Asian nations to enable them to brave the rough weather.

  • Also read- China's post-Olympics endeavours

     01:42    The link between Olympics and pharma
    What has the Chinese Olympics got to do with Indian pharma companies? The link between the two is raw materials. India at present imports huge quantities of intermediates from China, which the former uses for the manufacture of APIs, which in turn are used in making finished dosages. In a bid to keep pollution under check before and during Olympics, China had shut down many factories which were major pollutants. A host of intermediates manufacturers were among those who were asked to shut down production.

    As a result, other producers hiked prices and this has impacted Indian pharma companies in the form of higher raw material costs. Higher intermediate prices pushing up raw material costs had hampered domestic companies last year as well. However, the sharp appreciation of the rupee against the dollar helped them cushion that blow. This year the scenario is different as the rupee has been depreciating and the high cost of imports do not seem to be abating. While this problem is expected to pressurise pharma companies for the rest of the year, things should start looking up from the start of next year once the production in China scales up.

     02:18    Auto sales are slowing in India and China
    As economic growth slows down across the globe, how can the auto industry be far behind. As per IHT, with fastest growing auto markets like China and India facing the prospect of declining sales in view of tough economic conditions, analysts seem to be scaling down growth targets for the current year. Although resource rich nations like Brazil and Russia are proving to be the exception, the size of their auto market is still small for them to make any significant impact on the overall growth numbers. While China is expected to grow at its lowest pace in recent years, growth in India is likely to turn negative for the first time in three years as higher interest rates scare away buyers. However, this has not deterred companies from announcing new launches as outlook for the longer term remains buoyant as ever. Competition has also become very intense as almost all the major carmakers engage in a race to set up capacities in developing economies to compensate for the low growth in mature markets. To put things in perspective, China has turned from being one of the most attractive to being the most competitive auto market in a short span of just five years. And it looks like India might also be headed the same way. Tough times indeed for auto makers.

     02:53    Past, present and future...
    Researchers love to find parallels. Sometimes they look at the present to extrapolate the future and sometimes they study the past to predict the future. In trying to understand how China is likely to grow from here, Washington based Carnegie Endowment for International Peace has looked at Japan's past. Japan grew by 8% to 10% in order to move from a per capita GDP of US$2,000 to US$ 10,000. Economists believe that the later a country begins its catching-up with the rest of the world, the more rapidly it modernises. Since China began only 3 decades ago, it is likely to grow faster than 10% in the future. In fact, it is likely to catch up with the US by 2035. China's story has another parallel with Japan. Japan polluted heavily in its march towards economic progress, something China is now accused of. Chillingly, the researchers believe China will follow Japan's trend of an ageing population as well. However, one should be careful in relying too much on parallels and trends, as they do not always hold true. For example, Philippines was the second-richest country in Asia after Japan in the 1960s. Now it is nowhere in the contention.

     03:23    In the meanwhile...
    The tropical storm Gustav finally hit the shores of the Gulf Coast of Mexico. While the damage was not as severe as the one caused by Hurricane Katrina in 2005, it was huge nevertheless. Gustav is expected to translate into insured losses of a gargantuan US$ 10 bn. While this is a fraction of the US$ 41 bn in insured losses caused by Katrina, it is still ranked among the top ten most costly losses in the US. What compounds matters further is the fact that Gustav has hit the US at a time when the economy is much more vulnerable than what it was in 2005.

    However, Gustav's failure to match Katrina saw markets breathe a sigh of relief as crude oil prices declined to US$ 111 a barrel. The slide in oil also caused a fall in other commodities notably metals such as copper, gold and zinc. While the Asian indices closed a mixed bag, the Sensex posted strong gains of 4%.

     03:50    Google and Microsoft war heats up
    The rivalry between Google and Microsoft has inched up a level to the field of web browsing. Google will introduce a free Web browser called Chrome, which will now compete with Microsoft's Internet Explorer. With the evolution of Web browsing through cellphones, the usage of the Web and Web based advertising is only expected to widen. Hence this move by Google to corner a slice of the Web browser pie, which until now has been single-handedly dominated by Microsoft. Readers would do well to recollect that Google had thwarted Microsoft's attempts to takeover Yahoo. The two companies are already competing with each other in the fields of online search and Internet advertising, besides making operating software for cellphones. While Google has emerged as the winner in the online search and Internet advertising space, toppling Microsoft in the web browser arena may not be that simple. As reported in the International Herald Tribune, Microsoft still holds 73% of the browser market. The market share for Firefox has climbed to 19%, while Apple's Safari has 6%.

  • Also read - Google thwarts Microsoft

     04:19    China will make its own diesel...
    As per a report of Goldman Sachs, China is likely to completely end its diesel imports by February 2009 on the back of increased diesel production from domestic refineries. This would be a remarkable transition from China's present status as Asia's largest diesel importer. With new state run refineries coming on stream to the tune of 1 m barrels per day and private ones resuming production, the country will increase its diesel output by over half a million barrels per day. The report also mentions that about 2.5 m barrels of refining capacity will be added globally over the next few months, which will in turn depress the refining margins from current levels.

     04:33    Dividend payouts on the decline
    Profits of India Inc. have grown at a scorching pace over the past few years. But have the dividend payouts kept up pace? Not really, according to a study conducted by the Economic Times. A surge in capex plans has meant that companies are plowing back the profits into the business to bolster growth rather than dole out the same to investors as dividends. Infact between FY04 and FY08, the dividend payout ratio slumped from 30.1% to 23.9% with the CAGR growth pegged at 23%. During the same period, net profits recorded a robust CAGR growth of 33%. While the payout ratio of manufacturing companies has come down due to the capacity expansion activities undertaken by a majority of them, that of the financial sector companies have dropped only marginally. However the payout ratio was the lowest for the hotels, tourism, transport and communication sector.

     04:55    Today's investing mantra
    "Lethargy, bordering on sloth should remain the cornerstone of an investment style" - Warren Buffett.
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