Smart Money Is Moving To... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Smart Money Is Moving To... 

A  A  A
In this issue:
» Sensex' journey from 17K to 17K
» Chinese government now scared of a bubble
» MTN cuts Bharti's call
» We can't do without project delays
» ...and more!

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Global markets have been on a tear since the start of March 2009. While emerging markets are up anywhere between 50% and 120%, western markets like the US have also raked in robust gains - all this on the basis of rising investor expectation that the world economy is finally moving towards safety and growth.

Amidst all this, gold remains an anomaly given that the metal generally has an inverse relationship with the stockmarkets. When stocks are on a downward slope, gold gains strength and when stocks are going great guns, the metal isn't in much demand.

But this time it seems different. As you can see from the chart below that indicates the stocks to gold ratio (i.e., number of units of the US Dow Jones index each ounce of gold can buy), it hasn't moved much since the rally began in March this year.

Data Source: Kitco, Yahoo Finance
*Stocks are representative of the US Dow Jones Industrial Index

So is there some hidden danger that investors seem to fear (as they seem to be buying the safe haven gold) even when they are buying equities lock stock and barrel? There is one, at least if one were to believe Alice Schroeder, the author of "The Snowball: Warren Buffett and the Business of Life" and a senior adviser to Morgan Stanley.

Ms. Schroeder expects the danger of a sudden currency (read, the US dollar) depreciation lurking around the corner, which can lead to a mega-inflation. And this is what she believes will keep gold prices strong. As she writes on Bloomberg, "Right now, the American economy is worth less than the value implied by the market value of its obligations. How much less, no one knows. But gold bugs will tell you, privately, that this is why they are buyers. Might as well stock up, they say, before gold becomes a controlled substance. I haven't, so far, but the temptation is rising by the day."

01:17  Chart of the day
Once considered the stockmarket buyer of last resort, India's largest insurance company LIC has been an active investor all these years as well. The company's investment in listed stocks has on an average been around 37% of the BSE Sensex's market capitalization over the past nine years. But as seen in today's chart, LIC has been gradually increasing its investment in stocks, and especially when the markets offer value.

Source: RBI, Trend

While investors and speculators may be euphoric with the Sensex's 17,000 feat, we believe there is every reason to practice caution. The BSE-Sensex' tryst with 17,000 has been propelled by availability of easy money, both in the past (September 2007) and now. The Reserve Bank of India (RBI) touted as one of the most conservative central bank in the world, has also been compelled to be generous in opening the liquidity tap. This was with the intention of 'stimulating' our sagging economy and bringing it back to the '9% GDP growth' track.

The RBI's basic monetary tool to suck out liquidity from banks - the cash reserve ratio (CRR) has been sitting pretty at 5% for nearly twelve months now. The US Fed's and ECB's near-zero interest rates are also directing plenty of cheap hot money to the Indian markets.

Source: RBI, Trend

Further, the IMF believes that while the US institutions were about 60% through their needed write-downs, their European counterparts have recognised only 40% of their losses. Hence there is more bad news yet to come. The story of cheap money is far from over!

The Chinese authorities have had enough of it perhaps. In what could be called a potentially game changing event, a leading news portal has reported that the Chinese Government has made an announcement that further investment in industries such as steel, aluminium, cement and other industries be stopped with immediate effect. Apparently, the Chinese government seems to be concerned with the reports floating around that the ongoing investment boom in the Chinese manufacturing sector is leading to capacity glut and price wars and if allowed to go unchecked, it could set the stage for a potentially nasty outcome.

It should be noted that in order to support growth in the aftermath of the financial crisis, the Chinese Government had asked its banks to lend freely to the manufacturing sector. But the move was starting to have unintended consequences in the form of excessive investment and hence, the decision to rein in expansion in certain industries. Indeed, if the Chinese do get it right, one potential bubble that was threatening to derail global economic recovery would have been nipped in the bud.

Bharti Airtel was the top gainer on the benchmark indices today. This was despite the fact that it disengaged from its merger discussion with South African telecom giant, MTN. While this is a major setback for Bharti Airtel in terms of its long term strategy, investors seemed to have cheered this development.

With the South African government being reluctant to approve the deal in its current form, both the companies decided to disengage from the discussion. Bharti Airtel in its press release also mentioned that it hopeful of the government reviewing its position in the future. In fact, it is believed that both the companies may seek to resolve the regulatory hurdles.

Keeping in mind that a lot of time and effort was put into the agreement and that Bharti Airtel is looking to expand its business internationally on the back of the increasing competition in the domestic markets, one cannot rule out the possibility of the two firms reviving their talks for the third time.

Infrastructure projects in India have for long been plagued by delays in completion and frequent cost overruns. However, as per reports, the percentage of projects posting cost overruns has steeply declined from around 45% in March 1997 to 14% in March 2009. But while it seems like cost overruns are steadily decreasing, it is in fact just a glib cover-up of this unwanted phenomenon.

Project planners have steadily moved towards giving initial cost estimates that already factor in such delays that might take place. In effect, we have moved towards an attitude where time and cost overruns are taken as a given right at the onset of the project itself. So the question arises - Has our infrastructure sector become so comfortable with delays and overruns that we can't even do without them anymore?

Meanwhile, the BSE-Sensex had a rather bumpy ride today oscillating to either side of yesterday's close. At the time of writing the Sensex was trading a marginal 7 points above the dotted line. As for global markets, while the other Asian markets ended a mixed bag, European markets have opened marginally higher.

04:52  Today's investing mantra
"Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed's policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can't predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack." - Peter Lynch
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17 Responses to "Smart Money Is Moving To..."


Dec 5, 2009

It is a great service to the investors.Thank you for your timely caution please go ahead



Oct 4, 2009

I like your balnced approach .PROVIDED ADVISE FOR INVESTMENT with your advise i am investing money for purchasing gold bars and coins and then taking 75% loan from bank and then investing in blue chip company equties.


K G Rao

Oct 4, 2009

Sounds incredible, that LIC's investments over the last several years amount to 37% of BSE's marketcap. Does this mean that LIC holds an average 37% of all BSE equities? Surely I'm not understanding something right. Please confirm or clarify.


Prem Singh Dhankar

Oct 3, 2009

It seems there is another hick-up in offing, it is evident from your analysis. However, challenge will be for indian economy to sustain. Hope politician will give way to economist. Any way thanks for enteresting 5 Minutes wrap-up, keep it -up!


shamji bhuva

Oct 3, 2009

It is a great service to the investors.


mithun waghela

Oct 2, 2009

it's always been an excellent reading! Thank you so much for your valuable advises and analysis. (MITHUN WAGHELA)


Dipak Basu

Oct 2, 2009

I like your balnced approach !!



Oct 2, 2009

Dear Sir Your study and analysis of todays market are fine and exhaustive. Pl go ahead with our wellwishes Balasubramanian



Oct 2, 2009




Oct 2, 2009

Here, Brevity is the soul of wit

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