Can this lead to a 10-fold jump in the Sensex?

Sep 27, 2013

In this issue:
» Will the President stand up and be counted?
» The Fed has destroyed 96% of the value of US dollar
» RBI Governor warns of asset bubbles
» Is this the biggest boulder in India's path
» ....and more!

If time was to be measured by movement on the benchmark indices, it will be safe to say that it has stayed absolutely still in the last five years. The Sensex is around the same levels as it was five years back. And sadly, there are no visible signs of it moving meaningfully higher in the near term at least. Therefore, even a normal return like 15% per annum from here on looks like a distant dream. Thus, imagine our surprise when someone recently mentioned that the index has the potential to be ten times higher than the level it is trading at currently. And that too in the not so distant future!

The gentleman who made what looks like a rather bold claim is none other than India's noted industrialist Mr Anil Agarwal of the Vedanta Group. And what exactly is his recipe for growing the shareholder wealth 10 times in India? Well, it can be put in just one word, Privatisation. Yes, the man who perhaps knows more about privatisations than any other industrialist in the country, disclosed to a leading business daily that taking most Indian public companies private is the key to unlocking enormous shareholder wealth.

No, he is not about a handful of Government insiders gobbling up all the public sector companies in India. Instead, he believes that the Government should still own a minority stake of 49%. And even of the remaining 51%, no more than 10% can be given to any single group of investors. But yes, public companies have to be privatised as per him if we are to extract their full potential. We have such tremendous resources that Oil and Natural Gas Corporation Ltd. (ONGC) can be another Exxon Mobil. Or for that matter SAIL can be another Vale.

Although we don't quite agree with the group's practices on a lot of other matters, we believe that Mr Agarwal does make a lot of sense here. We have also long been proponents of efficient management of our public sector companies. And privatisation would be one of the best ways to achieve this. The Government can simply not be trusted to run these companies in the best interest of all the stakeholders. Simply because their political interests or their socialist agendas more often than not come in the way of efficient capital allocation and shareholder wealth creation. Besides, they hardly have their skin in the game for they know they are the owners as long as they are in power. This makes them give more precedence to short term interests rather than take a long term view.

In other words, the DNA required to run a successful company is far different than that required to run the Government. And if the two are mixed, the end result is out there for all of us to see. Consequently, the Government would be much better off handing over the reins of a lot of public sector companies out there to the private sector. Although we are not sure whether this would lead to a 10x rise in Sensex. But a meaningful boost is definitely on the cards we believe.

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 Chart of the day
Most of you would be aware of the Big Mac index. It aims to bypass the official exchange rate route and hopes to arrive at exchange rates based on purchasing power parity. For e.g. based on big Mac prices, rupee is currently around 67% undervalued w.r.t the US dollar. How about taking this a step further as today's chart shows. As indicated, it highlights how many minutes of labour will be required at minimum wages to buy a Big Mac in different countries across the world. Well, from the sample chosen, India scores the highest. On an average, it takes 347 minutes of labour at minimum wages for a worker in India to be able to buy the Big Mac. Compare this with 183 minutes and 173 minutes required for China and Brazil respectively. What does this show? It shows that either a Big Mac is extremely overpriced in India or that its minimum wages are really low as compared to other countries. Well, it's clearly the latter than former we believe.
To buy a Big Mac at minimum work wage it takes...

Yesterday, we highlighted how the Government seemed hell bent on destroying the democratic fabric of the country by passing an ordinance to protect criminals. It now appears that all is not lost. The much needed President's assent may not come in so easily after all. The President has expressed his reservations and also summoned few important politicians from both the ruling as well as opposition parties for their views on the bill. Whatever be the outcome of these meetings, it will be a disaster if the proposed bill goes through. It will forever impair the already eroding faith in democracy we believe. It is time for the President of the country to stand up and be counted.

Do you think the President will eventually refuse to give his assent or his political leanings from before his Presidential days will come back to haunt the nation? Let us know your comments or post them on our Facebook page / Google+ page

What drives a developing country to become a developed one? In the opinion of Gary Dugan, CIO of RBS Asia and Middle East, it is manufacturing. A manufacturing revolution is essential to make a developing country progress to the developed stage. And unfortunately for India this has not happened. In a recent interview to the Forbes magazine, he has stated that the biggest reason for India's woes is the lack of focus on manufacturing. The stellar growth rate seen in the Indian economy over the past few years was essentially driven by a boom in the service sector. In particular it was the outsourcing sector that had seen the major chunk of the growth. However, as wage rates steadily went up, this sector has been increasingly losing its edge.

In Mr Dugan's opinion, this sector should see some recovery on the back of the depreciation in the rupee. But for the economy to grow as a whole and get back to the 8%+ growth levels, growth in outsourcing sector cannot be the only option. For that kind of growth India has to remove the structural roadblocks in the manufacturing and infrastructure sectors. Regular readers of our 5 Minute Wrapup would recall that this is exactly what we have been highlighting for quite some time. There is an urgent need to revive these sectors. For that to happen there is a need to revive the investment cycle. And for that the government has to kick start policy reforms and implementation. But when that will happen is something no one can pinpoint.

The US Fed chiefs were hailed as 'heroes' for halting global financial collapse. Very recently even the likes of Warren Buffett praised the efforts of Fed chief Bernanke. That the flood of cheap money saved the US and global economy from a catastrophe is the most widely believed misconception. But the gentleman who had earlier criticized Bernanke's predecessor Alan Greenspan strongly disagrees. We are referring to none other than RBI governor Raghuram Rajan. In his earlier stint as chief economist of IMF, Dr Rajan had famously criticized Greenspan's monetary policies. That near zero interest rates would be the cause of instability in global economy was predicted by Rajan even before the crisis erupted. And once again, being criticized for his policy approach as RBI chief, Dr Rajan has questioned the logic of low interest rates.

Low interest rates can bring in more malaise than expected. They can encourage banks and financial institutions to take more risks in investing. They can dissuade savers. They can lead to asset bubbles of gigantic proportions. While most central bankers globally are ignoring these risks, Rajan believes that there are better tools than low interest rates to address the problem of growth.

Here is an interesting quote by Jeff Bezos, the Chairman and CEO of, the world's leading online retailer: "Any plan won't survive its first encounter with reality. The reality will always be different. It will never be the plan."

These couple of lines have a wealth of wisdom in them. Let's consider it in the context of investment. Every time you make an investment, there is an associated plan of action. You have a certain view about the company's business and its intrinsic value. You have certain expectations of the company in terms of growth, margins, etc. And correspondingly you expect the share price to reflect these factors.

Now remember, that's just your plan. It's your hypothesis. It's only a guess. The reality need not match up to your expectations. So while it is a great idea to have a plan, you must be willing to adapt to the changing reality. The most successful investors are known to possess this important trait. They have great ideas and plans. But they are often humble enough to accept reality and make changes in their approach accordingly. We believe this is a very critical lesson for all serious value investors.

The top most priority of any central bank is to manage growth and inflation. Most of us would agree to that. However, how does one judge whether the central bank has done its job properly or not? The best way to do that is to compare the inflation trends when the central bank was in existence and when it was not. Recently, we came across an article which compared the Fed's performance pre and post its existence. And some startling facts come to the fore which may shock any American.

Fed came into existence in December 1913 after an act by the then President. It will complete a century of existence this December. So, for comparison purposes, the post Fed era is 1913 to 2012, 100 years in total. Accordingly, pre-Fed era stands at 1814 to 1913, to ensure consistency in comparison.

Now, let us see how inflation has fared in both these centuries. In the post Fed era, what cost 1US$ in 1913, costs approximately US$23 in 2012! In fact, every decade of Fed's existence has seen inflation go up as compared to 1913. Now let's take a look at the figures of pre-Fed era. In 1814, what cost 1US$ to an average American resulted in a cost of only US$0.47 in 1913! Yes, a decline in cost. This shows that Fed has virtually destroyed the value of the US dollar. While there is difference in the kind of goods that were available in pre and post Fed era which might partially explain the increase in prices, the difference is huge. This indicates that Fed was inept in containing inflation. While some may agree that it has taken measures to save the economy from the 2008 crisis, the repercussions of this liquidity injection exercise will be witnessed in the future. This will again fuel inflation and further tarnish the Fed's report card as far as inflation management is concerned.

Meanwhile, Indian stock markets traded lacklustre today with the BSE-Sensex lower by around 60 points at the time of writing. Banking and realty stocks were seen under the maximum pressure. While Europe too was trading mostly in the negative, most other Asian indices did close in the positive.

 Today's investing mantra
"Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett

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19 Responses to "Can this lead to a 10-fold jump in the Sensex?"


Oct 1, 2013

privatization means what??? no job guarantees only guarantee of monthly expenses and emis for employees-middle class .
and few industrialist who can mange entries of crores as their capital -- with crores and all middle class to vanish(as they can be removed tomorrow morning from jobs).
reality is failure to mange capital allocation in public sector --in fast changing technical world effecting real world--is being punished to commmon man not anil agrawals. we have satyams and many more - even first leasing today-- see list of cdr why you need that if private sector is so efficient??
the why this world-- for few at top or for people???

for middle class --no family- only emi, have living in relation ships thats what it is going to lead to.all rules now becoming anti family.



Sep 30, 2013

Now that the Prince-in-waiting-for-the-elusive-throne has played the typical Congress drama, at least that should give no option to the President but to reject it. HOwever, well before such drama by the Gandhi scion, there was BJP who played out a similar drama. First by opposing the SC verdict and then playing soft ball in Loksabha only to wake up after significant public outcry orchestrated by the only sincere political party, Aam Aadmi Party, and a couple of honest MPs. With SC hitting one more nail on the political coffin through RIGHT TO REJECT (another of IAC-AAP agenda), it appears that the criminal politicians now have no-way to hide. The last nail will be JanLokpal (SC will have to do the favour again as there is no hopes of getting it, with the BJP's PM candidate having history of messing up with the Lokayukta in Gujarat) to build a new, clean and shining India.



Sep 28, 2013

RAHULJI has made the President's Job vey easy; by declaring the Odinance is NONSEWNSE & Must Be thrown into the waste-Paper Basket!



Sep 28, 2013

It is government of the criminals, for the criminals, by the criminals ,


S k Patel

Sep 28, 2013

The ordinance is like writing the obituary of democracy. Repeating the EMERGENCY.


g b pote

Sep 27, 2013

President is rubber stamp of congress. he has to obey the congress party line. he cannot refuse to sign.If refused, consequences thereof will be defamation of congress party.


R P Gupta

Sep 27, 2013

It shows the true face of congress. It is a party of goons and criminals. Country is heading towards feudal old days. If criminals can be allowed to rule the country then time has come to get ready for another bloody not peace movement. The only hope remains is N. Modi.


M T Chiddarwar

Sep 27, 2013

Very soon we will know if Pranab Da is yet another "Fakrddin Ali Ahmed" who signed the "Emergency Ordinance" of Sonia's Mother - In - Law and Raul's Grand Mother.


R P Gupta

Sep 27, 2013

This shows the real face of Congress. Shamelessly, they are protecting their mafia brethren. Hopefully, President think about his long term image and does not allow this to happen. Country will go back to old feudal rulings. Aam Admi will we slave in the hands of goons and mafia. India will be 10xSome African country. Congress o respect to judiciary, no social care but only loot the country at their will and power. May God destroy these goons.



Sep 27, 2013

The President should reject the ordinance. If he doesn't, even God will cannot save our nation.

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