Stock markets give thumbs-up to QE3. Should you? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Stock markets give thumbs-up to QE3. Should you? 

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In this issue:
» Employment outlook weakens the world over
» Diesel price hike to pave way for more reforms?
» The one way for telecom tariffs to come down
» What is worse than the Lehman crisis?
» ...and more!


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00:00
 
Will he or won't he? Unleash QE3 that is. That was the question that was uppermost in the minds of most of the investors, economists, businesses and people the world over. And the US Fed chairman Ben Bernanke finally decided to take a stand and unveiled his third round of quantitative easing. And from the looks of it, is all set to leave its previous two avatars far behind. Infact, it will be fair to say that the current QE does not have any predefined limit. It will continue until its objectives, most importantly an improvement in labour market, are met.

Not surprisingly, this sent stockmarkets across the world soaring. This euphoria is certainly not without reason. The US Fed has effectively opened up the cash spigot and would inject billions of dollar bills into its economy over the next few months. Interesting to note that the previous two rounds of QE by the Fed hardly did much to lift the US economy out of recession. Such measures didn't help the European countries either. All it did was raise government debt to unsustainable levels and bring them to the edge of bankruptcy. But the Fed has obviously not learnt its lesson, or probably has chosen not to.

Obviously, some of this excess money would find its way into India, thus boosting its stocks. However, investors would do well to check their enthusiasm. Just as a rising tide lifts all boats so will a flush of liquidity try to lift stocks of all kinds. In other words, chances are that not just the fundamentally good stocks will go up. But even companies with bad business models and leveraged balance sheets will tend to find a lot of takers. This is not all. There will be a tendency for even good quality stocks to run way ahead of its fundamentals.

Thus, now more than any time before, utmost caution has to be exercised while investing in stocks. The virtues of a strong track record, existence of some form of competitive advantage and good quality management, need to be present in every stock that you are considering for an investment along with attractive enough valuations.

Further, with QE3 now out in the open, gold is also likely to go higher in the medium term as it is the only safe currency around and unlike paper currencies, cannot be printed at will. Thus, the more printing is done, the higher the value of gold goes. In view of this, it will not be a bad idea to have a part of one's portfolio say 10%-15% invested in the yellow metal as well. But at the same time we would advise investors not to go overboard with it.

Do you think the announcement of QE3 by the US Fed will improve the fortunes of the US economy? Share your views or you can also comment on our Facebook page / Google+ page

01:36  Chart of the day
 
So much can change in a year. Indeed during the fourth quarter of last year, employers across countries were a bit optimistic about their hiring plans. But this buoyancy has died a bit. Uncertainty about the euro crisis, China's slowdown and America's presidential election are events that are hurting hiring intentions. This has been more pronounced for India and Brazil where lesser number of employers are now positive about hiring in Q4, 2012. This is not very surprising. The outlook in India has veered towards the negative on account of the economic slowdown, inability of the government to take important reforms and high fiscal deficit. Whether this scenario turns for the better remains to be seen.

Data Source: The Economist


02:11
 
So, the Government of India has had to finally bite the bullet. Last evening, it raised diesel prices by as much as 15% and that too despite heavy political opposition. The move, it is believed, was an attempt to get us out of the fiscal mess we find ourselves in. And to also send out signals to the ratings agencies that it is capable of taking strong decisions so that a downgrade could be avoided.

So far so good we believe. This step, although long overdue, is certainly in the right direction. But the big question from here on is whether this will pave the way for still further reforms? More importantly, will this swing RBI into action and enable it to lower rates in order to stimulate the economy? We don't think we have an answer to the first question just yet. But as far as the second issue is concerned, we would rather wait for the Government to take more concrete steps before announcing a significant interest rate cut. After all, inflation is still high and with wads of money from the west looking to enter Indian markets, any further stimuli may not be the right thing to do. Of course, the RBI would be justified in lowering rates once supply bottlenecks are eased and still further reforms take place. Till such time though, RBI will be better off remaining an inflation hawk we believe.

02:48
 
A couple of days ago the Chairman of TRAI had mentioned that telecom tariffs would come down once consolidation takes place in the sector. The key word in his statement was consolidation. With over 12 operators operating in the country, cut throat competition is inevitable. Unless the competition reduces, there is no way out of predatory pricing. With everyone vying for the subscriber pie, no one is winning. The relatively new entrants are just using price as a method of wooing subscribers. Though they are unable to make much of a mark, all that this has ended up in is rock bottom prices. And if one goes by the available data, the scenario becomes even more ridiculous. As per the latest data of TRAI, the top four operators account for more than 73% of the total revenues of the industry. This shows that the balance, newer operators have clearly been unable to do much in terms of business. Therefore, the only way out is consolidation. Now this could happen in two ways. The first is through mergers & acquisition (M&A). Unfortunately the telecom policy has such silly rules for M&A that operators have not shown much interest in this route. Alternatively, the new operators could continue doing business till they bleed out and fold up operations. Unless the first route is streamlined, the second seems to have a higher possibility of happening. Though it would be sad, but it is inevitable.

03:32
 
Can having tonnes of cash floating around the economy be bad? Definitely, if this money cannot be accounted for. According to a Reserve Bank of India (RBI) official, this can lead to myriad problems. The central bank is now focused on bringing down the cash component in the economy. If India moves to a cashless, or more plastic society it can solve corruption, monetary policy transmission issues, and cash management for banks. Currently, the amount of cash circulating in the system is around 14% of GDP. This makes India one of the highest cash markets. The implementation of communications and technology solutions such as mobile and online banking, electronic fund transfers etc can help bring down the reliance on cash. Both the government and RBI are making efforts to address this problem. Well, with the government in the soup over corruption allegations, this may be a welcome step.

04:07
 
India's economic growth plunging to a nine-year low drew sharp reactions from all quarters. The dismal show of the economy can be blamed on administrative obstacles and policy paralysis. The government's policy paralysis has tarnished the image of brand India and adversely affected the sentiments of foreign investors. So much so that India Inc has called this policy paralysis worse than the Lehman Brothers crisis. During the 2008 crisis, Indian corporations had to cut costs and bring greater operational efficiencies in order to beat the slowdown. But today, the companies are short on ammunition as there is not much they can do. The real cost burdens lie with the government's policy paralysis that has led to delayed project implementation, shortage of fuel, and high interest costs. The government should focus on revving growth. This can be done by taking the reforms process forward. Already, it has taken the first step of raising diesel prices. But it needs to do more. This will help in improving the perception about India's image and attract more investments.

04:45
 
The Indian equity markets rallied through the day on positive global cues and announcement of hike in diesel prices. At the time of writing, BSE Sensex was up by 373 points (2.1%). All sectoral indices witnessed gains except healthcare stocks. Asian stock markets too displayed positive investor sentiments.

04:56  Today's investing mantra
"Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Stock markets give thumbs-up to QE3. Should you?". Click here!

    3 Responses to "Stock markets give thumbs-up to QE3. Should you?"

    sunilkumar tejwani

    Sep 14, 2012

    this will only fuel speculation across equity and commodity markets. What happened in 2007 the same story will repeat.

    Like (1)

    Shabbir Haidermota

    Sep 14, 2012

    I have frequently observed your columns commenting on the Government's policy paralysis resulting in downgrades and detrimental effects on the Indian economy. However, what is missing from the comments is the acknowledgement that despite the Government's best intentions to carry forward reforms and do business in parliament, it is the churlishness and pettiness of the Opposition as well as Allis like Mamata Bannerjee now and the Left Parties in UPA1 that resulted in stalling the Government's good work. What prevents you from acknowledging this fact and giving due credit to the Government ?

    Like (1)

    Prashant Manohar

    Sep 14, 2012

    As per the RBI estimates, cash component of GDP is about 16%. That means 16% of transactions are not considered in the official GDP estimation and also the GDP Growth Forecasts. In that case, it would not be incorrect to assume that the GDP Growth is understated by 16%. Your views please.

    Like (1)
      
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