China's own Warren Buffett - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

China's own Warren Buffett 

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In this issue:
» CAT to be outsourced...
» Whose oil is it anyway?
» Talk more, surf less
» Shipping sector: Which way will it sail?
» ...and more!

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00:00 CAT to be outsourced...
The Indian Institutes of Management (IIMs) are looking to outsource the common admission test (CAT). They have taken this move after years of criticism over errors and leaking of exam questions. They plan to make CAT an online test by 2009. In fact, the IIMs have already initiated the process by issuing a pre-qualification notice in March in which about 30 companies had placed initial bids. Out of these, four companies have been short-listed - ETS Prometric, Pearson Virtual University Enterprises, Eduquity Ventures and Attest. Prometric handles the GRE and TOEFL exams, while pearson handles the GMAT. Eduquity and Attest are Indian companies. This is a positive development as computer based testing will reduce human error and sporadic complaints of impersonation at test sites. It will also facilitate 'on demand' testing as opposed to 'single day, single test'. It may be noted that the number of test-takers for the CAT has jumped from 90,000 to 230,000 aspirants over the last four years.

0:30 Whose oil is it anyway?
About 88% of world's proven oil reserves of 1,148 bn barrels are under the control of national oil companies (NOCs) with no equity participation by international oil companies (IOCs) in them. IOCs in the western part of the world now control less than 10% of the world's oil and gas resource base.

The latest round of the battle between NOCs and IOCs was fought between the British oil giant BP and Russia and as expected, it went against BP. The company had to dismiss its US CEO and allow more control to its Russian partners. Ironically, it could have been a lot worse for BP had Russia not decided to halt the slide in its stock market after its war in Georgia. BP's oil fields in Siberia are among its most valuable assets and account for 25% of global output. The company must be counting its lucky stars to not have lost the entire asset given how difficult IOCs are finding it to discover new reserves.

These developments also highlight the precarious position of oil assets located abroad. India too is now betting big on overseas oil blocks through ONGC Videsh and is exposed to the risk of nationalisation. Hence, it is vital that we build oil & natural gas security within India by encouraging domestic exploration on a priority basis.

1:07 Talk more, surf less...
Yes, that is exactly what Indians are doing! Given that more Indians are talking on their mobile phones and that Indians are talking more on their mobile phones, the impact of demographic dividend on the growth of mobile companies remain uncontested. However, the same does not seem to be filtering in when it comes to internet penetration in the country. Infact, the problem is not just with India but the whole of Asia. According to the International Telecommunication Union (ITU), even though Asia is the world's largest broadband market in terms of absolute numbers, it lags way behind the US and Europe in overall penetration, with just 3.6 out of every 100 inhabitants connected to the high-speed Internet.

The Asia Pacific region has about 1.4 bn mobile phone subscribers, representing 42% of the global market, and it is expected to exceed 50% within the next two years. India and China together have total cell phone subscribers of about 900 m, accounting for a quarter of the world's total. Also, every month, India adds about 9 m new subscribers, which is higher than in China. However, the flipside is that although India is the world's fastest-growing mobile phone market with nearly 300 m subscribers, only 11 m people in the country have access to the Internet. Given that India is striving hard to project itself as a high quality service outsourcing destination to the world, the deeper penetration and wider usage of the internet is inevitable.

  • Also read - Opportunities in infrastructure-IV

    1:47 Shipping sector: Which way will it sail?
    The shipping sector is currently at crossroads. On one hand, shipping companies are sitting on 40 months' worth of orders on account of lack of space for building more vessels. New yards are under construction. Companies are in a race to buy other ship makers at high valuations as they expect the demand for sophisticated energy-product carriers and offshore energy plants to remain strong on account of high oil prices.

    On the other hand, some believe that the industry may soon be heading into a multiyear downturn, and that the bold efforts to buy up other shipbuilders could backfire in a big way. New ship orders are dwindling. A boom in orders, which saw the industry's orders topping the 10,000-vessel milestone as of August 2008, is fading as global trade cools and commodities prices begin to ease. The slowing global economy is hurting worldwide trade and rising steel prices are squeezing shipbuilders' profit margins. Shippers are having a hard time obtaining financing on account of global credit crisis, leading to order cancellations. Most worrisome is the surging cost of steel. The price of A-grade steel ship plate climbed nearly two-thirds from the previous peak in mid-2005, much faster than a rise of about 15% in new ship prices during the same period. Hence companies with scale and capability of delivering premium ships like drill ships and very large crude carriers would be better suited for long-term prospects.

    2:26 Budget deficit to widen in FY09...
    As per CMIE, the total government expenditure was budgeted at Rs 7,509 bn in FY09, an approximate increase of 5.2% over FY08's actual expenditure. This is further expected to increase on account of the unaccounted expenditures such as the Sixth Pay Commission and farm-loan waiver. The total payments towards debt relief package and outgo on account of Sixth Pay Commission would total to Rs 306 bn. In addition to this, firming up of interest rates on government debt papers and higher subsidies than that budgeted for, would exert pressure on government's finances. The additional subsidies for petroleum on account of surging crude prices and fertilisers due to a sharp rise in the price of raw materials in the international market are likely to increase government spending by Rs 1,300 bn. All this is expected to push up the total expenditure to Rs 9,114 bn. CMIE opines that the increased spending by the government ahead of election is likely to widen the gross fiscal deficit to 5.3% of GDP as against 2.5% in FY08. The higher fiscal deficit runs the risk of impeding economic growth, as the funds meant for investments to boost economic growth will be diverted to finance unbudgeted expenses.

  • Also read - Pay commission's recommendations to hurt fiscal deficit

    3:00 Inflation slips for the second week...
    India's wholesale price based inflation index slipped to 12.34% for the week ended August 23 from 12.40 % in the previous week. The main reason for the decline was the easing of prices for food staples like lentils and vegetables. While economic growth eased to 7.9 % in the first-quarter to June, the weakest pace in three-and-a-half years, a greater priority for the government will be to control prices. High prices cause unpopularity among the poor masses, who are the hardest hit. With national elections due by mid 2009, the policy makers are likely to keep a close watch on inflation. It may be noted that the next monetary policy announcement is scheduled for October 24.

  • Also read - Inflation number last week

    3:19 Growth amidst controversies
    Small and medium scale companies in the IT space now have something to cheer about. The West Bengal IT minister plans to set up a special economic zone (SEZ) for small and medium scale IT companies. The government's intentions are influenced by the fact that many of these small and medium scale companies are not able to buy land at very high prices. While SEZ policies have been mired in controversies, Assocham has released some very compelling numbers indeed! As per a study conducted by them, exports from SEZs have registered a splendid growth of 192% between FY06 and FY08. What is more, this kind of phenomenal growth is not expected to ease anytime soon and in fact the study expects growth to witness a quantum jump of 451% by FY09. Further, the industry association envisages SEZs to create direct employment opportunity for 10 m skilled workforce. Investments are also expected to pour in with US$ 75 bn expected by the end of 2009 and US$ 250 bn by the end of the 11th Five Year Plan period. Talking about controversies, the government is expected to announce some amendments pertaining to the rules of the Special Economic Zones (SEZ) Act, 2005 as approved by the Empowered Group of Ministers.

  • Also read - SEZs: Intention without execution

    3:53 China's own Warren Buffett
    Boasting of one of the world's largest forex reserves, few would have expected the Chinese central bank to run into problems. Although it has not just yet, cracks have begun to appear with economic experts questioning its tiny capital base. As per a leading international daily, appreciating Yuan has led to its investments, mostly in US dollars, to erode at a rapid pace thus necessitating infusion of capital. While the central bank can of course print money, it risks stoking inflation that is already at a high. It also does not want to take help from the finance ministry for fear of jeopardizing its independence, especially at a time when both of them have found themselves at opposite ends of forex policies. As mentioned before, while the problem is not alarming, the growing discontent amongst the Chinese officials of being misled by the US is indeed palpable. They argue that China was lured by US into buying its securities, which the later knew would plunge in value. In fact, a book "Currency War" that discusses this issue threadbare has become a Chinese best seller.

    Indeed, by appeasing Americans, the dragon nation has seemingly put the interest of its own citizens on the backburner. What else could explain the low deposit rates that an average Chinese gets when inflation is hitting through the roof. This low cost fund is then used to buy US debt that hardly pays anything, by the truckloads. In effect, a poor Chinese citizen is funding the rich American's extravagance. Its time China hires some asset management expert to manage its trillion dollar reserves. In effect, China needs its own 'Oracle of Omaha'.

  • Also read - China's post-Olympics endeavours

    4:39 In the meanwhile...
    Key Asian markets closed weak today. The losers' list was led by China (down 3.3%) and India (down 2.7%). Indian markets languished in the red through out the day and ended with substantial losses. Overall, losses in Asia were led by further signs of a slowing global economy. US stocks tumbled yesterday amidst rising jobless claims and a weak performance by energy producers on the back of tumbling crude prices. European markets are also trading weak currently. The benchmark BSE-Sensex ended the week with losses of 0. 6 %.

    4:55 Today's investing mantra
    "By confining himself to a relatively few, easy-to-understand cases, a reasonably intelligent, informed and diligent person can judge investment risks with a useful degree of accuracy." - Benjamin Graham
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