Another bubble is brewing in Asia - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Another bubble is brewing in Asia 

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In this issue:
» Zoellick foresees currency tensions
» Consumer prices in India have barely eased
» Employees' Provident Fund says no to equities
» FDI inflows in India to rise in FY11
» ...and more!!

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There has been a lot of buoyancy in emerging markets these days. Money has just been pouring in as the developed countries have remained stuck in a slump. As a result, stockmarkets in many of the emerging countries including India have zoomed. And have raised concerns of bubbles being formed there.

But the worries have not been restricted to stockmarkets alone. Property prices in Asia have also been skyrocketing. In this regard, Dominique Dwor-Frecaut, strategist at the Royal Bank of Scotland opines that property bubbles of an "unprecedented magnitude" will happen across Asia next year. Especially if Asian central banks do not tighten monetary policy now. Moreover, he believes that countries that are preventing the appreciation of their currencies are facing considerable inflation in real estate.

Even though the severity of the global crisis has not been felt as deeply in the Asian countries as in the West, the former has still been following loose monetary policies. In China especially, property prices have run far ahead of fundamentals. Prices in Hong Kong and Taiwan were 20% above their 2008 peak. Mumbai too has witnessed a surge in property prices. But this has more to do with the greed of developers rather than any lack of tightening measures by the RBI.

In fact, the RBI has been raising interest rates as it has to deal with the problem of inflation. The rupee has also been appreciating without too much intervention by the central bank. But property prices in India are a different matter altogether. Prices have been rising even when there have hardly been any buyers. The demand for homes is very much there. All developers have to do is focus on 'affordable homes.' But sadly, they do not want to see reason.

01:23  Chart of the day
India's inflation at the consumer level has been high for quite some time now. As today's chart of the day shows, consumer prices in India barely eased in August 2010 as compared to August 2009. Even when you compare inflation in India with that in the other countries, India has jumped ahead by a wide margin. Food prices will have to come down if the overall inflation has to come down. The RBI seems confident of inflation coming down within its comfort zone by the end of this fiscal. One will have to wait and watch.

Data Source: The Economist

World Bank President Robert Zoellick is a worried man. What's perhaps keeping him up at night are the growing tensions arising from currency devaluations. "I don't foresee that we're moving into an era of currency wars but there's clearly going to be tensions, particularly if you have countries that have trade or current-account surpluses that are intervening to keep their currencies at lower rates", Zoellick is believed to have said recently.

Clearly, there were huge trade imbalances earlier also. But what makes the current case unique is the fact that countries that have huge deficits are not in the best of shape themselves. And they too want their currencies to depreciate rather than appreciate. Take the US for example. One of the ways in which it can get out of its current mess is to start reducing its current account deficit and if possible, even move to a surplus. But countries like China and Japan are not letting this happen. They are instead keen on devaluing their own currencies against the US dollar. No wonder, there are going to be tensions.

The US has its fingers crossed. As part of its attempts to pull the economy out of recession, the US Fed is betting on asset purchases on a large scale. Fed Chairman Ben Bernanke feels that such asset purchases have helped in lower borrowing costs in the country and consequently aided the recovery in the US economy. He also feels that more buying by the Fed could further ease financial conditions. However, such a policy also has its detractors. Many feel that further buying by the Fed will not prove to be as effective going forward. And could instead cause other adverse effects in the economy in future years. Whatever may be the case, for now, the Fed looks all set to continue with its asset buying programme.

Call it an opportunity lost. One that could have otherwise helped not one but several causes. Trillions of rupees of long term domestic investments could do wonders to India's infrastructure funding. We could then bid adieu to the greedy FIIs without blinking an eyelid. Indian pensioners who would be putting in their life's saving could then expect some really attractive returns. And for Indian stockmarkets, there could be nothing better than domestic investors reaping the benefits of home grown behemoths. But that is not be.

As much as the Finance Ministry would like to partially channelize provident fund investments into Indian stocks, the regulators seem to disagree. The EPFO which manages pension fund of 50 m Indians finds it too risky to park a small portion of the funds into Indian stocks. With Rs 3 trillion under its kitty, the body has promised returns of 9.5% for this fiscal. We wonder if putting atleast 10% of the funds would do any disservice to the investors? As long as the money is put into solid companies at reasonable prices, there is no reason for the investments to depreciate. We wonder if it is a question of arrogance or wanting to remain completely impervious to change!

Foreign exchange reserves are important for any country. India is no exception to this. While Foreign Institutional Investors (FII) have been pumping money into Indian markets, off late, Foreign Direct Investments (FDI) have lagged behind. It is the latter that is more attractive as it is more long term in nature. However, the commerce minister Mr. Anil Sharma is confident that the FDI flows in India would rise in 2011. FDI was sluggish in 2009-2010 due to an overall slowdown in US and Europe. However, this trend is expected to reverse and 2011 is expected to see a much better inflow as compared to last year.

Gold's glitter has rubbed off on the super rich as well. As per a leading business daily, globally high net-worth individuals are loading up on the yellow metal. And they are all being driven by the high global economic uncertainty and gold's rising prominence. We believe that going overboard with any asset class is not the right way to go. And the same holds true with gold as well. Just a 5-10% allocation to the precious metal is fine.

While we are on gold, there is widespread speculation on the yellow metal these days. It is understandable. After all, its prices seem to go up unabated. On good news as well as bad news. However, gold prices have weakened for the first time in a week, as the US dollar has snapped back. It may be noted though, gold is still up about 10% since the start of 3QCY10, and in the last twelve months is up 33%. Clearly then, it seems that the latest pullback is just a pause before the precious metal is back on its upward trajectory.

After opening below breakeven, markets had a volatile trading session, and are currently trading in the red. The BSE-Sensex was trading 3 points lower at the time of writing this. Gains were seen in the consumer durables and power space. The FMCG index however was the biggest loser, by far. The rest of the Asian majors were trading mixed, with Japan up 1.5%.

04:56  Today's investing mantra
"The best assets you can have during inflation are your abilities." - Warren Buffett
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11 Responses to "Another bubble is brewing in Asia"


Oct 6, 2010

@ chanakya - we are talking about 10% of corpus in equity markets. Not more. Do the math.

@ Pradip Thacker - subsidies to the builders? don't we have enough? Then why not subsidies to other service providers? airline sector has been clamouring for it since some time, I guess. Then cement, rubber, chemicals, architects, lawyers, hospitals all should get government subsidies!



Oct 6, 2010

It is informative with regard to the current unpredictable trend in respect of the on going global economy.



Oct 5, 2010

In today as well as previous version you correctly stated that property prices are unduly high. All the investors are putting their money, but there is no end user at a such high price. We really need affordable home.But nobody (Devlopers) has an eye that what is actual demand. And another thing is that most developer or brokers do not show market price on papers, if you have instant cash you can buy property,so at least a salary class person who depends on home loan,never fulfill this condition.
specially I am waiting when this bubble will brust, so I can make for me and my family a dream and sweet home.
Thanks for you,that you have raised a real voice,and hope upcoming issues will also point out on this matter.


Prakash Holla

Oct 5, 2010

I agree that Bombay's real estate is way beyond bubble:it is now insanity! A relation was one of the last few investors with a job to buy real estate in Nepean Sea Road,Bombay = 1100 sqft = Rs 1.4 lakhs in 1972 and that too with a Re 1 lakh soft loan from his employer. Already by 1973 end the price had shot up to Rs 3.5 lakhs (after the Israel-Arab shootout). He sold out in 1989 to move to B'lore. Today I believe the building is valued at Rs 75000/100000/125000? per sqft. Who can afford this kind of investment? Samudra Mahal, Worli is I believe valued at Rs 150-200,000 or more per sqft by the recent deal of the widow of the founder CEO of Yes Bank



Oct 5, 2010

Your query: "Indian pension Funds are not investing even 10% in stocks. We wonder if it is a question of arrogance or wanting to remain completely impervious to change!". It is not arrogance; it is in part, the good old sheer incompetence of Govt, flowing down thru the bureaucracy in-charge of the pension fund and for the other part, Left gets shocks when stocks are mentioned; never mind the fact that their Comrades in China have long since 1960 shun blind Karl Marxism and have pushed the country up, forcing rest of the world to take a look at them and acknowledge China's existence as a force, mostly for good reasons!!! For our Left, and hence the jittery incompetent rest of the political class, who are stuck in the 'inclusive' mess, the total lack of political will compounds the problem, sending 'political signals', to the so called independent pension fund manager (hmm! independent, yet Govt appointed!). Result, a chorus of "Stocks? forget it; they are worse than Raavann!", not withstanding the fact that this is one avenue that SHALL give a substantially higher return than the 9.5% per annum (certainly over the longer period of say 20years that is available for every pensioner!), provided a) one is willing to take the responsibility to explain the inevitable slumps (yes, stocks do go down, which are only blips in such a long span, still delivering steep growth curve, often time, even if the Fund Manager sleeps through the slump!)and b) Suresh Kalmadi is not appointed as the Fund Manager! Well, are we not talking of more of the absent political will? For one, Kalmadi was the same incompetent and corrupt Kalmadi even six months ago, as everyone including Sonia and the economist Doctor knew; they also knew, the result of inaction six month ago, surely shall be more mess, if he is allowed to continue. Yet they (and ofcourse Kalmadi) lingered on - thanks to lack of political will, until a bridge fell, literally on the powerful people's lap, forcing them to change their policy of considered in-action!!! Back to Pension Fund - you are right; with one stone you could kill two birds; fund the infrastructure need of the country using the domestic money & pay back to the desi givers (today's Indian youth & tomorrow's pensioners) by way of better returns, instead of FIIs walking away with the cake. Inclusiveness in Governance in India has come to mean, include all fools, in Governance, irrespective of which party flag they are carrying, to miss the train yet again!! We have not one but two light blue turbaned people, up their, who surely can see the opportunity; yet.... Jai Hindustaan!



Oct 5, 2010

I am of the opinion that the only way the prices of RealEsatate can come real/domn is if instead of financing the Buyer the Goverment should finance the Builders so that they dont cry the liquidity crisis every now and than and since for the finance that they take they will have to make the payment in time along with the interest thereof and hence will have no option but to bring down the prices to real and reasonable thereby bringing a great relief to the genuine Buyers who right now are unnecessarily burdened with the high loan at a higher cost because of the inflated prices of realestate.



Oct 5, 2010

putting EPF funds in scam driven stock markets and thru dubious intermediaries is not such a bright idea.



Oct 5, 2010

very good analysis about real estate.Article in Times if India 2-10-2010 is worth reading. Thanks


Dr. Shreedhar V. Sherigar

Oct 5, 2010

It is informative with regard to the current unpredictable trend in respect of the on going global economy.


shyam karmarkar

Oct 5, 2010

Your to-day's newsletter is a correct reflection of really what is making stock market run only in one direction and also property prices have reached at astronomically high peaks and these are not sustainable for long time.Abig time correction is due any time and one should play in this stock as also realty market very cautiously.This seems to be a bubble which will burst anytime.Special thanks for alerting prudent investors well in time but I am sure very few will take this in right perspective and many wills still burn their fingers as in the past.Allt he best for ur future endeavours.!!!regards.

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