Of highs and lows - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Of highs and lows 

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In this issue:
» The 'Norwegian' booster to Indian markets
» Another round of capital injection in the US
» Of layoffs and cost cutting
» Russia and its Oligarchs
» ...and more!!

00:00  Ratings agencies on the prowl in India
Is the balance sheet of India Inc. showing signs of becoming stronger in FY09? If India's rating agencies are to be believed, the answer is sadly in the negative. As per a leading business daily, ratings agencies like CRISIL and CARE have had to undertake more downgrades or affirmation to downgrades than upgrades so far in this fiscal.

On a relative basis though, the decline has not been as bad as 1998-99 because both manufacturing as well as financial sector entities have much stronger balance sheets. Having said that, CRISIL has seen demand slowdown in sectors like textiles, IT and automobiles, making them more vulnerable.

Furthermore, it plans to closely monitor three key macro factors over the next 12 months, which will be the critical determinants of the credit qualities of the Indian companies. These are availability of adequate funding at reasonable rates, the intensity of the demand slowdown and the exchange rate. What does this mean for the equity investor? Simple. Stick to companies with strong balance sheets and steady demand for products.

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00:37  How the tables turn!
Members of the OPEC (Organisation of Petroleum Exporting Companies) must have been secretly rubbing their hands in glee earlier this year. Oil, their goose that lays the golden eggs was belting out Ostrich sized ovals. Now that oil has rapidly receded to US$ 70 levels, they appear baffled. That is because the steep upward movement of crude had left the OPEC countries dependent on the commodity for financing their social spending. According to the International Herald Tribune, the cartel will earn US$ 1 trillion from oil and gas this year.

Now that the oil is cooling on the back of lower demand from China and western countries, OPEC is looking at a production cut to the extent of half a million barrels per day. But it will have to careful. It cannot be seen to be pushing oil prices higher and worsening the global financial situation. After all, it blamed speculators for oil's journey upwards. So acting now will expose their bluff.

In India, there are already political voices calling for a reduction in fuel prices that were hiked earlier this year. While it may help bring inflation down and go well with the voters in the forthcoming elections, it would be bad economics. It may be noted that subsidy provided on fuels has severely deformed the entire mechanism and has harmed oil-marketing companies immensely. Form a economic standpoint, this is perhaps the right time to move towards genuinely market determined prices rather than administered prices. That will enable the demand for fuel to adjust to price signals and reduce the government's subsidy burden.

01:36  In Russia, the hunted becomes the hunter
While balance sheets of Indian corporations are still strong, the same cannot be said about the Russian private sector companies, owned 'Oligarchs'. On account of the credit crisis, many of these companies are in deep trouble and funds by the Russian government have been made available to pull them out of their misery. The help however has not come for free.

Oligarchs will have to part with some of their shares as collateral and in case they default, the shares would be liquidated once the market conditions improve. Ironical as it may seem, the Russian government seem to be returning the favour. In the 1990s when the government was in trouble, Oligarchs had provided loans with shares in state owned companies as collateral. The government eventually defaulted and the shares stayed with the Oligarchs. Due to its size, the sale was then dubbed as the 'Sale of the Century'. A leading international daily is calling the current one 'Sale of the Century in Reverse'.

02:12  Amidst cloudburst, saving for a rainy day
That's the mantra being followed by companies across the world as a way to outsmart the demon called 'recession'. From sectors like banking and finance to auto to technology, companies are finding out ways to cut costs, though to an extent that does not pinch growth and survival. So while Internet major Yahoo has announced cutting 10% of its global workforce, finance companies like Merrill Lynch, UBS and JP Morgan Chase are asking their senior managers to do with less. These banks have in fact asked their senior bankers in Asia to fly economy class on short haul flights and reduce non0essential travel.

Considering that revenues from the investment banking business have almost disappeared in this market, it is sensible to cut every single type of cost they can to pare pressure from the profitability. It's like saving for the rainy day when you have already been hit by a cloudburst.

02:44  India shining is passe...it is now glowing like the moon
With much more unknown than known about outer space, astronomy is one of the more arcane and advanced areas of science. Thus, the achievement that reached its pinnacle during the wee hours of today morning is indeed a matter of pride for India. Yes, India has successfully launched its first unmanned spacecraft - Chandrayaan-1, to orbit the moon. This is no mean feat considering the level of technological know-how required for achieving such success.

The mission will last two years and aims to prepare a three-dimensional atlas of the moon, and also prospect its surface for coveted natural resources, including uranium, a fuel for nuclear power plants.

The expected benefits are not just confined to displaying the country's technological prowess to the rest of the world. It is also going to help the country claim some of the business opportunities in the sophisticated field. India's ability to put satellites into orbit has already resulted in lucrative deals. India has indigenously developed several advanced satellite launchers that have been used to launch numerous satellites not only for itself, but also for nations like France, Germany, South Africa, Chile, Israel, Canada, Italy and Russia. Thus, while India's space program is touching new highs, its stock markets seem to be plumbing new lows everyday.

03:26  In the meanwhile...
Fears of worldwide recession continued to weigh heavy on the minds of investors. As a consequence most of the Asian markets including India edged significantly lower today. The Indian benchmark BSE-Sensex came off by as much as 5%, marking a day of continuous sell-off. European markets are also trading significantly lower currently. In the US markets yesterday, stocks tumbled on concerns that lower consumer spending would hurt the economy and affect corporate profits. Global economic gloom also took its toll on crude prices as they continued to slide, reaching below US$ 70 per barrel, despite news of production cut by OPEC getting louder. Even gold was not spared, with the yellow metal coming off by around 3%.

03:51  Norway's booster dose
Looks like the beleaguered Indian stock market is set to receive a much-needed shot in its arm. While foreign investors have been fleeing the markets in droves leading to the meltdown in the Sensex, Norway's sovereign wealth fund, which is the world's second largest (with assets of US$ 350 bn), is set to invest US$ 2 bn in Indian stocks, which is huge by any measure. Of course, there are many aspects to this. One is the updation of the double taxation avoidance treaty signed between the two countries in 1986. The other more important fact is that Norway will not invest in those companies that employ child labour and degrade the environment.

Obviously, the Norwegian Pension Fund sees a lot of value in the Indian stock markets with many of the stocks, after the steep correction, being available at attractive valuations. Will such a big investment restore faith of investors in Indian equities? If it does, it just goes to highlight the herd mentality that prevails in the markets, wherein investors rather than doing some hard thinking themselves are waiting for someone else to take the first step.

Note: Data for Oct till 21st Oct, 2008

04:29  The risk penetrates to safer assets
With risky assets such as real estate and equities offering negative returns and zero liquidity to individuals and corporates alike, the focus of risk has now shifted to the relatively safer asset classes as well.

In an action similar to what its Indian counterpart took a couple of days back, the US Fed has decided to pump in US$ 540 bn into the country's money market mutual funds to relieve them of liquidity pressures. The crisis has arisen with the funds facing severe redemption pressures since the financial crisis deepened last month, forcing them to raise cash by selling longer-term assets at a loss. The short-term debt markets have also been under considerable stress in recent weeks as mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and rebalance their portfolio. While the central bank's 'stimulus package' may cure the short-term distress, it is unlikely to bring enough relief to investors unless the other asset classes show some signs of stability.

04:55  Today's investing mantra
"My approach works not by making valid predictions but by allowing me to correct false ones" - George Soros
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