Don't Lose Sight Of The 'Real' Risk - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Don't Lose Sight Of The 'Real' Risk 

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In this issue:
» Government's lackadaisical attitude on tackling corruption
» Power capacities face execution blackout
» No bubbles yet in China
» HNI wealth to soar in India, China
» ...and more!

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'Realty sector back to hiring mode as demand improves' - so goes a headline in a leading business daily today. While we do not doubt that realty companies now have a lot of money to pay to new employees, we remain unsure about the 'demand' side given that realty prices remain high in India and property buyers are yet to make a comeback. As the latest issue of The Honest Truth puts it aptly - "Buying real estate - or renting it - is still way beyond our means."

So there you are. Using the cheap money that these real estate companies have received from banks under the garb of bailout packages, they definitely seem a happier lot these days. And so are investors in them, who have seen their real estate stocks skyrocket 2 to 6 times over the past six months. We, however, remain wary of real estate companies and their stocks' valuations. While most companies still have their balance sheets in mess and have not seen a real increase in demand from property buyers, their stocks have returned to expensive valuation levels, which seems unjustified. At such a juncture, thus, we would advise investors to practice utmost caution in dealing in such stocks lest they might burn their fingers (and pockets) again!

00:57  Chart of the day
The world leaders at the G20 meeting this year announced that they would phase out fossil-fuel subsidies in the medium term. These countries account for 80% of greenhouse-gas emissions. As per the International Energy Agency estimates, poor countries, defined as those outside the OECD, spend US$ 310 bn a year on such subsidies, mainly for petrol. However, most of these countries have tried to do away with the fuel subsidies over the years to cut down their budgetary expenditures. China cut down its fuel subsidy from 2.9% of the government budget in 2005 to 0.2% in 2008. For India, fuel subsidy stood at 0.4% of the planned expenditure in 2008. Having said that, as today's chart shows, Indians are one of the least recipients of fuel subsidies on per capita basis even when compared to our neighbouring countries.

Source: International Energy Agency

Five months ago, the Indian ambassador to the US, Ms. Meera Shankar, wrote to the Prime Minister's Office highlighting instances of millions of dollars being paid as bribes to Indian government babus by American companies. Bribes were paid to officers from Customs, Excise, Sales Tax, the Indian Navy, Maharashtra State Electricity Board, Indian Railways, Indian Central Insecticides Board among others. This had come to light after a US government report suggested that several people had admitted to paying the bribes. Sadly, however, no action has been taken by the Indian government so far. Corruption is one of the main reasons why we score poorly on several social economic indicators. Not only does it eat away public spending as it travels from government coffers to their targets, it suffocates private enterprise. Yet, the powers-that-be have a lackadaisical attitude in tackling this menace.

Is the government responsible for corruption in India? Tell us .

Till recently Swiss Banks Association (SBA) maintained its stand that India was not welcome on a name fishing expedition. However, recently the bank softened its stand and after negotiations with India has agreed to amend its laws which will allow Switzerland to exchange information on all tax matters, including cases of tax evasion. This will help India get information on accounts maintained by corrupt politicians, government bureaucrats and industrialists in Swiss banks and help bring to book their unaccounted and untaxed wealth.

India has historically been a victim of many power capacity addition delays in the past, leading to unmet targets and perennial power deficits. Now, the country's largest power equipment maker is following suit as far as its own capacity to manufacture power equipment is concerned. As per reports, BHEL is slated to miss its target of achieving a power equipment manufacturing capacity of 15,000 MW by December. The company has attributed this slippage to delays in capital equipment procuring. Whatever may be the case, the company has long expressed its confidence in reaching this target and also has a target of reaching 20,000 MW capacity by FY12. But this slippage in the capacity addition for the 15,000 MW mark makes one even more skeptical of the longer range target. With such poor execution record, the Indian power sector seems far from being the lead indicator of the country's economic growth potential.

Once bitten twice shy. This phrase would sit rather lightly on the shoulders of economists and financial experts around the world. What else would explain their current fascination with the game of detecting asset bubbles? Indeed, most of them failed to detect the US housing bubble and were a silent spectator to the devastation that followed. Not wanting to repeat their mistakes, they seem to be extra vigilant this time around and have zeroed in on China as one of the most likely candidates for the sighting of an asset bubble.

But an article in Economist believes otherwise. Putting forward some strong arguments it has opined that neither the Chinese stock market nor its housing market have any signs of bubble just as yet. In fact, even the investment boom that took place post the implementation of the country's stimulus packages has not gone into creating excess capacities and has instead been directed towards infrastructure projects. However, the article has gone on to state that while there may be no significant bubbles in China just yet, the government should start taking action and curb its easy liquidity policy

Given the phenomenal growth that China and India have logged in over the years, the global crisis notwithstanding, these two nations are expected to grow stronger than the developed economies in the future as well. Thus, it is hardly surprising that as per a report released by Merrill Lynch Wealth Management and published in Business Today, the high net worth individual (HNI) wealth in China and India is expected to rise by more than US$ 4 trillion over the next ten years. This implies an annual growth rate of 8.8% until 2018, higher than the global average of 7.1%. Both these countries witnessed a fall in HNIs in 2008 as a fallout of the global financial crisis. But the scenario is set to turn around soon. Thus, as long as the economy grows at a robust pace, the HNIs in both these economies will continue to prosper. The vital question is whether the benefits of economic growth will trickle down to the poorer sections of the economy?

We received several queries on yesterday's issue titled "Buying Gold? Consider this instead..." asking about silver ETFs in India. While there are several silver ETFs in the overseas markets, only one mutual fund in India had applied for a license for the same last year and is yet to receive it from the regulator. We shall certainly update our readers as and when there is further development in this regard.

Meanwhile, the BSE-Sensex moved below the dotted line after opening in the positive today. At the time of writing the BSE-Sensex was trading 93 points lower. As for global markets, while other Asian markets closed higher, the European markets have opened a mixed bag.

04:55  Today's investing mantra
"The best stock to buy may be the one you already own." - Peter Lynch
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11 Responses to "Don't Lose Sight Of The 'Real' Risk"


Oct 25, 2009

News letter are really enlightening the knowledge.



Oct 20, 2009

Corruption,What's it? Very base of our system is the corruption. System can survive without Oxygen but can't without Corruption.It has been rooted in our soul & blood since 60 years. Only hope is from Young Blood,I think Times Group is doing something in that direction.
Thanks & Regards.


Sarbjit Singh

Oct 19, 2009

hi,sir you are too good,i appreciate every word you have written



Oct 18, 2009

how prudent it is to invest in satyam computer at current levels.


Susheel Mittal

Oct 17, 2009

I would like to know what are the ways to invest in silver at the moment apart from physically buying it.



Oct 15, 2009

todays edition is very nice.thanx to equity master for giving me chance to express my views.i just want to add something on indian curroption that culprits are governing india thats why there is no action about this, and some how public also culprit because there was strong agitation for GAY relationship but its a matter of india's growth but now there is no such agitation by public.why from 5 months Government and Public specially media is so silent,why dont they demand for immediate action for this national issue.they should punish hardly.



Oct 15, 2009

Your newsletter is really awesome



Oct 15, 2009

it is refreshing to have your viewon not seeing any bubble in chinese econonomy.Your comments on Reality sector are equally true.
iAppreciate your observations.



Oct 15, 2009

This is not new investigation about bribing our companies .Recollect high drama when Enron project negotiations were on (12-15 years ago).
When our minister himself admitts that we ? have to do something to eradicate curruption.
Take the recent NRHM (Nat.Rural Health Mission).Funds are plenty but the poorest of poor is not able to get benefits of the scheme why ? (Due to high degree of bribery in the system).Unfortunately nobody thinks that do your duty sincerely. 5th & 6th Pay commission has enhanced the salaries - there is no excuse for poor wages. May god save our nation !


niraj singh

Oct 15, 2009

hi, sir i am niraj singh

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