The Trillion Dollar Push For Markets - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The Trillion Dollar Push For Markets 

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In this issue:
» The time bomb is ticking
» After subprime, it is crisis of another kind
» Buffett believes that recovery is near
» Why is the US scared of China?
» ...and more!

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India's infrastructure story goes well beyond roads, bridges and ports. It anchors on the savings of Indian citizens. Yes, you read that right! As per the latest Goldman Sachs report, India will require US$ 1.7 trillion in financing over the next decade to meet its infrastructure needs. This estimate tops both Goldman Sachs' earlier estimate of US$ 620 bn as well as our government's 11th Five-Year Plan (2007-2012) infrastructure spending of US$ 500 bn. Even if the financing for the 11th Plan has been accounted for, we will need at least a trillion dollars more to execute the investments required.

Goldman Sachs expects most of the infrastructure investment to be funded by India's domestic savings without significant recourse to external borrowings. This belief stems from the trend of rising domestic savings rate and robust balance sheets of private sector companies. Goldman Sachs has pegged the gross savings rate in Asia's third largest economy to rise to 40% of GDP by 2016 (from 37% in FY09) and remain at high levels for well over a decade. These savings will be pertinent to fund public private partnership (PPP) projects that are estimated to fund 30% to 50% of the total infrastructure investment in the next decade.

However, what is even more important to note is that for this plan to fructify, India's household savings must be intermediated through the financial sector (pension funds, insurance and the like) to the government, which then spends on infrastructure. Else, as the chart shows, rising savings could possibly have little or no impact on public sector / infrastructure investments.

Source: CMIE

Allowing institutions like IIFCL to raise funds through long term bonds or allowing the Pension Fund Regulatory and Development Authority (PFRDA) to route investments from pension funds to equity and debt markets for the long term could be ideal ways to tap the potential savings.

India's infrastructure buildup and financing thus presents enormous opportunities, not just for producers of capital goods, developers and raw material providers, but also for financial intermediaries.

01:17  Chart of the day
It is common knowledge that the world economic order is rapidly changing. And the prime perpetrator of this change is the debt servicing capacity of developed and developing economies.

While countries like Japan, US, UK and Germany have long been criticized for their outsized public debt levels, the fastest growing economies - India and China - are following close on the heels. Countries like Japan and Germany that have amongst the highest public debt to GDP ratio in the world have turned cautious about the growth in their public debt (growing in single digits in each case). India too having nurtured her public debt to 59.5% of GDP by FY09 has now turned wary about the growth in the debt level (up 8.6% YoY). However, UK, US and China, despite the alarming growth in their debt levels last year (22%, 26% and 28% respectively) seem to be complacent about containing the same. Their mantra seems to be - Borrow more to consume more.

Source: Economist

After subprime crisis and liquidity crisis, it is now the turn of currency crisis. Investment guru Jim Rogers believes that the worst of the economic crisis is not yet over and a currency crisis can happen this year or the next year. And what is the reason he has cited for the same? There is too much debt in the system. For instance in the US, the deficit has soared above the US$ 1 trillion mark and is not likely to reduce dramatically for some years to come. What is more, the gargantuan stimulus packages announced by the Obama administration while they will pull up the economy in the short term, is certain to come back and haunt the economy in the longer term. Hence, the pressure on currencies notably the dollar is likely to intensify.

Rogers further believes that the current recovery is a just a consequence of the fact that consumption had plunged so drastically in 2008 that people have to buy things that they need in 2009. And that it would be folly to assume that China would bail out the world from the crisis, when it has its share of problems as well for which it is utilizing the resources it had saved up till date. We believe that Jim Rogers has come up with some valid arguments and it will be interesting to see how the dollar reacts to this chain of events over the coming months.

The US has a reason to be celebrate. In an interview to CNBC, Warren Buffett has said that the US economy has "plateaued at the bottom right now" and that "we're past the critical point" unless there is some unforeseen catastrophe in the offing. In terms of specific sectors, he believes that the worst is over for the residential sector. However, there will be huge losses on credit cards and commercial real estate. He does not think that there is a great probability that there will be a double dip recession. It may be noted that although Buffett does not follow key economic data points very frequently, he has the insight of looking at his businesses at Berkshire everyday. So, his view on the economy incorporates a great deal of bottom-up data. Moreover, given his genuinely long term investment horizon, his 'buy' decisions often come precisely when the economic indicators are the most dreadful.

While the Chinese continue their border intrusion, they are also asking for additional visas from the Indian government. The reason is that the Chinese investors are using Chinese workers to execute projects undertaken by them instead of using the large work force present in India. This serves to provide employment for the Chinese workers and at the same time ensures that every last penny earned is channeled into the Chinese economy. While the Indian government has asked the Chinese to employ more Indian workers, it is being lobbied by the Indian partners of the Chinese who are keeping the Hindi-Chini-Bhai-Bhai spirit alive to issue more visas. However, the Indian foreign ministry has come down heavily on this and refused to issue additional visas, instead suggesting that Indian workers be hired.

The US is growing increasingly insecure about China and its propensity to buy US debt. As per a CNN Money report, as of the end of July 2009 China owned US$ 800 bn in US Treasuries ( up 3% from month before). But what gave the US sleepless nights was the slight dip in China's holdings from May to June. For if China were to start selling or reducing its holdings, the US is surely going to be in a big fix.

A big sale of Treasuries could cause long term interest rates in the US to shoot up, thus having far reaching implications for the country. The last thing that the US, which is still recuperating from being at the epicenter of the credit crisis, needs right now is an upward movement in interest rates. But some apprehensions that the Chinese have, like a weakening dollar, inflation in the US, and American tariffs on goods imported from China, hold the potential to trigger a sale by the dragon nation. And such an event holds the potential to send the US into a tailspin all over again.

Indians need to talk more for telecom companies to grow! Telecom companies in India that managed to clock superlative growth rates even during the recent economic meltdown when every other sector was in stress, are now feeling the heat. These companies that have capitalised on the premise that 'more Indians will talk', will in future have lesser connections to sell. This is because as per a leading business daily, in six years, every Indian will own a mobile phone. The report says that while India's population is estimated to touch 1.28 bn by 2015, the country's mobile density is likely to more than double to 86.66 per 100 persons by then. That means leaving aside children and people below poverty line, every adult Indian citizen will have a mobile phone. That leaves telecom companies only one premise - 'Indians will talk more' - to grow their revenues.

After opening strongly in the positive, profit booking in index heavyweights led the BSE-Sensex to move closer to the dotted line at the time of writing (up 34 points). On the global front, while key Asian indices closed firm, European indices are also trading in the green currently.

04:52  Today's investing mantra
"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing" - Warren Buffett
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2 Responses to "The Trillion Dollar Push For Markets"


Sep 18, 2009

Janet l Yellen Fed president says that Growth recovery in US is due to dimnishing inventory liquidation which is short lived though important for stimulating the economy.
Krugmann fully agreeing with Yellen says that inventory led growth is short lived.The real recovery curve of US is very slow rise from bottom.However the real danger is a second depression worse than the first. The only way out according to Krugmann is for the government to keep up the stimulus spending notwithstanding the inflation.
Roosevelt made the mistake of stopping stimulus spending and tightening credit too early for fear of inflation precipitating the great depression after a similar recovery.


Sunil M S

Sep 17, 2009

Indians need to talk more for telecom companies to grow: the report was informative and timely. Could it be why Bharti Airtel has been lethargic in the stock market for some time now? It used to be a rare blue chip that never failed to reward investors in the past, but not any more. RCOM too, recently, crashed from Rs.364 to Rs.238 and has partly recovered to Rs.314; still a far cry from its historical high of Rs.844 of Jan.'08.

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