Next phase of India's growth that you should not miss! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Next phase of India's growth that you should not miss! 

A  A  A
In this issue:
» Investors are flocking to mutual funds
» RBI keeps rates unchanged
» Japan's prospects continue to remain dim
» Does the Peak Oil Theory still hold merit?
» ...and more!

It is anybody's guess as to when the developed economies of the US, Europe and Japan will start posting decent growth in GDP on a sustained basis. Infact, it is doubtful whether these countries will even revert to the growth rates they reported in the past. Which means that an era of a 'new normal' in growth cannot be ruled out.

That is not likely to put a complete stop to the loose monetary policies of the US Fed and central bankers elsewhere. Most of them still have hopes that cheap credit will revive their economies. So we will hardly be surprised if these accommodative polices continue for some more time to come. In this regard, the new fund managers of Pimco opine that liquidity in the global markets is likely to remain ample going forward. At the same time, global economic growth going forward would turn out to be more uneven.

What this means is that while the US, Europe and Japan are still struggling to recover, some of the other emerging economies still have enough growth potential. And so this excess liquidity is bound to find its way there like it is doing now.

India is a classic case in point. No doubt the slowdown in the last year had spooked serious investors and corporates alike. But the Modi government promises to be a different kettle of fish. And while it is still early to judge its merits, we believe that this new government still has the means to unleash the next golden decade of growth for India.

The other encouraging factor for India unlike the US is that the RBI is in no mood to let loose like its US counterpart. So in a scenario where the RBI continues to maintain a hawkish stance (till inflation cools off), the Modi government has upon its shoulders the added responsibility of reviving the Indian economy through growth and development. Something that its predecessor failed to do.

For India Inc., there cannot be a better time than this to capitalise on India's next phase of growth. There are some good investment opportunities in companies that have strong business profiles, pricing power, sustainable competitive advantage and healthy financials among others. And as Indian companies prosper, this is bound to translate into wealth creating opportunities for investors too. And this is where Tanushree Banerjee, our Managing Editor of the India Letter, and her team will play an important role. They will be coming out with stock ideas every month that will help you profit from what they call The Golden Decade Megatrend.

Do you think that India will witness the best phase of growth in the coming decade as compared to other emerging economies? Let us know your comments or share your views in the Equitymaster Club.

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02:01  Chart of the day
Given the way the markets have been behaving of late, we come across a good number of articles which discuss about how individual investors' interests in stocks are making a comeback. Here's proof of the same.

In the year till date (January to August 2014), mutual fund inflows stood at about Rs 250 bn. In the previous four years -during the same periods - the averages stood at negative Rs 34 bn; definitely a huge jump this year! The continuing Modi wave and its effect on the markets are the key factors for driving individuals back to the markets i.e. after staying away for many years. Not to mention the fact that mutual funds are doing their bit to attract investors as well - by launching new schemes.

While investing in equities is a must, we believe investors generally tend to have a bad sense of timing the markets. While it makes sense (and one that has worked) for investors to stay invested in stocks over longer periods, the fact of the matter is that the best returns do tend to come to those who invest in difficult/ uncertain times. While we are not hinting at investors not putting money in markets now, but we believe the current scenario may not be the most conducive for going all out on equities. We believe the odds having better returns would drastically improve if the simple practice i.e. of practicing low P/E investing is followed by individuals.

Investors make a beeline towards mutual funds

As widely expected, the Reserve Bank of India (RBI) in its fourth bi-monthly monetary policy statement has kept key rates unchanged. While the key repo rate continues to stand at 8%, the reverse repo also remains at 7%. Repo rate is the rate at which RBI lends money to banks for short-term. The RBI has also kept both the statutory liquidity ratio (SLR) (22%) and the cash reserve ratio (CRR) (4%) unchanged. SLR is the minimum bond holding requirements that lenders must set aside, while CRR determines the percentage of bank deposits that must be kept at the central bank.

Considering the risks pertaining to achievement of its 6% consumer inflation target, the status-quo policy is on expected lines. While inflation has seen some moderation in recent periods thanks to the softening international crude prices and the foreign exchange market stability, the food price risks continue to raise its ugly head. The Governor expects a higher number of 7% by next year end. The RBI's stance stems from the anticipation of revival in economic activity, fall in consumer inflation and fiscal tightening. As for the banking system, growth in credit in the near term will largely depend on economic revival as against fall in interest rates.

The most visible signs of an economy headed towards the worst are that of decline in household and industrial spending. Unfortunately that is exactly the case with Japan. While the household spending fell for the fifth consecutive month, factory output numbers were also poor. To put things in perspective, the Japanese policymakers have already pumped in liquidity to revive the economy. Prime Minister Shinzo Abe's policies are in fact designed to boost the economy with cheap money. The Bank of Japan will have to mop up the entire issuance of public debt for years to come, covering the budget deficit with printed money. However it has become evident that the cheap liquidity, like in the case of Fed's QE, is not having the desired results. The Bank of Japan remains confident that an improvement in employment rate will revive the economy in coming quarters. However, according to us, the money printing activities of central banks around the world will only stoke inflation and asset bubbles in the years to come.

How long you think it takes for an organic matter to convert into crude oil? Well, scientific study suggests that the time taken runs into hundreds of millions of years. And how long does it take us to burn say few litres of it? Maybe not more than a day if we are in the mood to go for a long drive. We hope you understand the enormity of the situation. Something that takes millions of years to form gets used up in a matter of a day! No wonder the supply of oil is not able to keep up with demand and is leading to what scientists are calling the Peak Oil theory. As per them, there will soon come a time when the supply of oil rather than increasing will hit a plateau and irrespective of how hard we try, we will never be able to increase the rate of production of oil in the whole world.

There's a surprising twist to this story though. The doomsday scenario of peak oil has been in existence since decades and the US even got a taste of it when its production went on an irreversible decline after the 1970s. However, what the theory did not account for was the ingenuity of the human mind. There was a leap forward in oil technology and thank to a concept called fracking, the peak oil has once again been pushed back by few decades we believe. Now the question that begs itself is whether the constraints we face are technological? Or whether we are genuinely limited by the amount of oil in the ground? One thing that even the harshest critics of peak oil theory will be free to admit is the fact that oil is indeed a finite resource. Consequently, the earlier we increase our reliance on renewable sources of energy like solar and wind, the better it will be we believe.

In the meanwhile, the Indian stock markets soared higher in the post noon trading session. At the time of writing, BSE-Sensex was trading higher by 216 points (+0.8%). Barring IT, all the sectoral indices were trading in green with consumer durables and healthcare sector stocks witnessing the maximum buying interest. Most of the Asian markets were trading in the red with Hong Kong and Singapore being the biggest losers. However, the Chinese index is trading in the green. European markets have opened the day on a strong note.

04:56  Today's investing mantra
"The idea of a margin of safety, a Graham precept, will never be obsolete. The idea of making the market your servant will never be obsolete. The idea of being objective and dispassionate will never be obsolete." - Charlie Munger
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4 Responses to "Next phase of India's growth that you should not miss!"

RK Srivastava

Oct 7, 2014

Though I am a naive in financial matter, nevertheless I fully believe that Modi Government is different than all previous ones. Simpy because the top leader Mr. Modi is totally a different type and fully devoted for the uplift of his countrymen and he knows by his own experience as CM of Gujrat how to do the business. Let us wait for atleast one year to see the fruits of his vision and hard labour. Without going to nitty-gritty of business I am amply sure that coming decade will bring prosperity to this country.



Oct 6, 2014

Dear Sir,
We depend more on USA, European countries, & moderately on Presently developing economies for our exports, but our import from developed economy is higher than the minimal rest of the economies!
In this scenario if all the developed ones are loosing their steam to china & other developing nations & also not actually recovering from their down fall, we, India can`t depend more on them, & Foreign currency fall, more need for import, internal problems of subsidies, current A/C. deficit,slowing down of infrastructure, political corruption!!,& so on may crop up to
pull down our growth!! So, all together A big war is on the way to curb the over all trend & reset the new world with new world development!!!


Terence Verma

Oct 1, 2014

I am very optimistic about the tremendous economic growth possibilities for India, considering that there is a whole lot the new engine in front shows promise about. He will build the momentum and move out of the way...just what is the need of the times.



Sep 30, 2014

Next phase of India's growth will be visible to common citizen when the next budget in 2015 is presented. Then only how the taxes on common citizen is levied will be obvious. One has to wait to see how the present Govt. is going to have the present fiscal deficit reduced. It has to be thro' FDI,reducing the PSUs' ownership or by taxing the common citizen!

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