We're not out of the woods yet - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

We're not out of the woods yet 

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In this issue:
» Roubini, Bill Gross: The worst is not over yet
» Land acquisition not a contentious issue
» New rules for US credit rating agencies
» Led by food prices, inflation turns positive
» ...and more!

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We had earlier cited that Warren Buffett is of the opinion that the US economy is past the critical point in its efforts to recover from the recession. But not everyone believes so. Professor Nouriel Roubini, who was among the first to gauge the true extent of the global financial meltdown says, "The financial system is severely damaged, and it's not just the banks. It's going to be death by a thousand cuts." He adds that more than 1,000 financial institutions could go under when the crisis is finally over and housing prices should fall by another 12 % in the next year. This is in sharp contrast to Buffett's view that the worst is over for the residential real estate sector.

Interestingly, another financial stalwart, Bill Gross of Pimco believes that tracking the housing sector is not of much use anyway, as it cannot lead the US out of the recession. In fact, Bill Gross believes that Americans should not expect a robust bull market. He says, "It's time to recognize that things have changed and that they will continue to change for the next - yes, the next 10 years and maybe even the next 20 years."

So, what is the takeaway for the individual investors in all of this? Firstly, that it is futile to look for a consensus on which way the broader economy is going to go and when. Secondly, thankfully genuinely long term investors need not lose sleep over the issue. As Warren Buffett said on the topic earlier this week, "I'm not buying them (stocks) based on whether we're coming out of the recession in three months or six months or a year. I'm buying them because I think we're getting good value over time. And I think it is a mistake for investors to focus on business forecasts instead of looking at the intrinsic value of the business." We believe that this also applies to investors here in India.

01:15  Chart of the day
It is now well known that even as the developed economies were gripped by the global financial meltdown, China and India stood strong. And that is reflected in the foreign direct invest (FDI) flows to the region. Today's chart shows the FDI inflow into India in 2008 and compares it with the developed economies as well as other emerging markets. While China is now the 3rd largest FDI recipient country in the world, after the United States and France; India ranked at the 13th place is fast catching up. In fact, China and India are ranked numbers one and three, respectively, as the most preferred FDI locations in United Nations Conference on Trade and Development's (UNCTAD) World Investment Prospects Survey 2009-2011.

Source: World Investment Report, 2009, UNCTAD

Building good quality roads are an essential part of infrastructure development but in India it is not that simple. This is because the fragmented and often confusing rural land ownership environment in India's hinterland has posed a significant challenge. As a result there are many projects which are not finding bidders and some others are yet to be completed. However, Indian Minister of Transport and Highways Mr. Kamal Nath does not seem to be unduly worried. The government wants to acquire land for a big roads development project and Mr. Nath contends that this is not a contentious issue since it has the right to use land for road development. As reported in the Wall Street Journal, the government is looking to build around 7,000 kilometers of roads a year for the next five years, costing them US$ 85 bn, of which US$ 45 bn is supposed to come from the private sector. On these, it is looking at a return of 15% to 16%. While the focus on infrastructure development is certainly a positive, obviously execution is going to be a big challenge.

Primary articles, especially food items have pushed the inflation rate into the positive territory this week. After staying negative for 13 weeks, the inflation index was recorded at 0.12% despite a high base rate of 12.4% during the same period last year. Demand for primary articles especially food items coupled with weak monsoons have pushed up the prices. Moreover, speculative activity in perishable items like fruits, vegetables and milk has added further pressure on the prices. Although, we have received good rainfall in the recent days, which have reduced the shortfall, shortage in items like paddy and sugar will continue. Further, water reserves are still inadequate. This is expected to result in the shortfall of water for irrigation of the winter crops. In spite of the government's recent steps including import of raw sugar and crack down on hoarders, we expect higher prices to rule during the coming months.

Memories of the Lehman collapse are fresh in the minds of most people who have lost money due to the credit crisis. Moreover, many of them are even more grief stricken now than they must have been when the whole debacle actually happened. That's because even though one year has gone by, many of the lax regulations that didn't put a check on the problem have still not been reformed. But things have are now beginning to gather momentum. Yesterday, the US market regulator, the SEC, proposed new rules designed to prevent conflicts of interest and provide more transparency for Wall Street's infamous credit rating industry.

This industry, dominated by three large players (Standard & Poor's, Moody's Investors Service and Fitch Ratings), has been widely criticised for its role in the causing the financial crisis. This is because they were the ones that were being relied upon and paid to give advice to people about the safety of securities. And even though that is the entire essence of their job, they completely failed at warning people about the toxic nature of the subprime mortgage securities. In fact, their recklessly awarding these securities an 'investment grade' rating is what contributed to such a large mass of people actually buying them without even giving them a closer look, thus directly contributing to the spread of the crisis. It comes as a big relief that with the proposal of the new rules, the SEC intends to come down hard on these companies. Let's hope that this helps prevent creating another such problem in the future.

Walk into any McDonald's in Mumbai and you should be mentally prepared to wait in a queue before placing an order. Once that is done, finding a place to enjoy the meal at the restaurant is another task. This is especially the case on weekends. Considering that these restaurant chains are so busy, can you ever imagine it running into losses? Well, a leading business daily has reported the McDonald's in India has accumulated losses to the tune of around Rs 4 bn. It may be noted that this figure is not yet verified. As per the company spokesperson, "There is nothing extraordinary about accumulating losses when you are starting in a country with a great potential and growing fast." It is true that McDonald's is a relatively new company in India. It's been around for only thirteen years. We believe, it will be interesting to note how it fares in the days ahead as it will indicate what other franchises can expect out of India.

Meanwhile, after starting the trade on a negative note, the BSE-Sensex largely languished in the red during the day. At the time of writing, the Sensex was down 50 points. The Indian markets seemed to be moving in tandem with other Asian markets, most of which also displayed weakness and closed in the negative. Europe, however, is trading in the positive currently.

04:50  Today's investing mantra
"We are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek." - Warren Buffett
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4 Responses to "We're not out of the woods yet"

Amit Goyal

Sep 21, 2009

Amit Goyal Ex Accounts person from McDonald's in India , how does McDonald's accumulated losses to the tune of around Rs 4 bn, when every outlet is running on 65%margin.
Amit Goyal



Sep 18, 2009

This daily article is mostly a cut and paste affair and the writer does not take a clear cut stand on anything.
Every day the basic tone of this article changes like the weather.
There is no concept of ferreting out the real fact behind the reported news .
Simple reproduction of what the "so called legends " say is a most unsatisfactory aspect.



Sep 18, 2009

In the 5 Minute Wrapup, the indian sensex data for the day (last thing before the end quote) is not updated at close of trading. Request provide updates as on market closing rather that during the session.



Sep 18, 2009

Infrastructure is todays hot topic.All former governments were only announcing big big things for which exchequor dosent have money.PPP is the only solution. Concerned contractors given liscence to collect "TOLL" for longer time to do so . Common man is the only sufferer since we have to pay heafty charges for travelling may be by own car or public transport & if this is going to continue till the entire life of bridge or road is over. No question of transfer only build operate & suck the blood.There is no option but to be a silent spectator,that to for a span of 25 to 30 years ! Mera Bharat Mahan !

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