The Chinese join in, what about India? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The Chinese join in, what about India? 

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In this issue:
» Would Buffett lose sleep over losses?
» Stimulus, the Chinese way
» All Is Gone (AIG)? Not yet
» Sensex at 20,000 again?
» ...and more!

00:00  Stimulus, the Chinese way
After the US and Europe, the Chinese have also got into the act now. The act of rescuing their domestic economy and in the process, stalling the global slowdown. According to the International Herald Tribune (IHT), China has announced a stimulus package to the tune of US$ 586 bn spread over the next two years. That's nearly 15% of the dragon nation's GDP. China will take certain monetary and fiscal measures like its western counterparts. However, the main focus will be on public spending. It will carry out infrastructure and social welfare projects such as railroads, subways, airports and rebuilding earthquake hit areas.

The move is not surprising as the Chinese economy, which registered growth in excess of 10% for 5 years, is feared to slow down to below 6% in the fourth quarter this fiscal. However, the timing of the announcement is noteworthy. It comes days before the Chinese President travels to the US for the G-20 meet. Since India will be part of the meeting as well, it will be interesting to see if New Delhi makes any announcements soon.

It may be noted that the Indian commerce minister has said that the country will spend a little under US$ 5 bn on infrastructure projects like power and roads in the next 6 months. We wonder if that's enough!

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00:37  Chinese stimulus plan for Australia
China's spending plan for the next two years must have raised hopes in Australia, a country that has been one of the biggest beneficiaries of the dragon nation's investment spree of the last many years. This is for the fact that Australia has been one of the major suppliers of commodities to China to help build its ports, airports, buildings, bridges and roads. Australia abounds in materials like iron ore, coal, copper and agricultural commodities. And with there being vibes that China's growth is expected to halve to 5% going forward, the Australians were left shuddering. Now the latest announcement of China's big-bang infrastructure plan for the next 2 years must have brought relief to the Kangaroos.

00:56  Is TV slowdown proof?
A leading business daily carries two contrasting stories on the Indian electronic media today. One points out how advertisers plan to cut down nearly 20% to 24% of their budget for sports in FY09. These advertisers include firms from the auto, insurance, telecom, real estate and FMCG spaces. The other story mentions how most direct to home (DTH) operators are in the process of introducing the high-end personal-video-recorder service in India.

We find the contrast interesting because immediate ad spends reflect a slow down in the economy and the margin pressures being felt by India Inc. However, the intense competition in the DTH space and new product launches clearly signifies that the India growth story and that of its bulging middle-class will outlast any slowdown effects we might see in the immediate future.

01:19  Sensex at 20,000 again?
In our recent WebSummit, Ajit Dayal has said that the Sensex can breach the 20,000 mark again in around 2 years.

The next bull run requires two triggers to be in place -greed and pleasant earnings. The central bankers are trying to take fear out of the system and bring back the psychological trigger of greed. However, it is difficult to guess when that might happen. From an Indian perspective, if the economy continues to grow at 6.5% to 7% and companies can show profit numbers that begin to please investors, the general crowd will be back to the stock markets. That is probably 6 to 9 months away i.e. around June 2009.

Within 2 years, the BSE-Sensex can be back to levels of around 20,000 to 25,000. That's based on the premise that corporate earnings will come through and valuations return to around 15x, the average index level PE multiple over the last decade. Right now the markets are trading at around 10x earnings. So 50% of the upside could come from better valuations and the balance from earnings growth over the next 2 years.

01:50  Profits slump but Buffett not losing any sleep
"Successful investing requires intelligence that only few possess. The world's most astute investors have in their possession nothing short of crystal balls, which enable them to predict an economy's and a company's future with utmost precision and thus, earn outsized returns from the same." If you are an investor who is thinking along the same lines, then we have got one more excuse for you to debunk this grossly out-of-place myth. Yes, even the most seasoned investors have to live through short-term fluctuations in performance. One need not look beyond Warren Buffett for proof. The current crisis in the US has left even Buffett's investment company, Berkshire Hathaway with huge drop in profits. As per reports, the company's third quarter earnings have sunk 77% on a YoY basis, led mainly by unrealized losses on derivatives and investments and a huge drop in profits from insurance businesses. However, the company's operating earnings, which exclude investment and derivative losses that are largely unrealized, slid a lot less 19%.

Going by the master's public statements, he is unlikely to lose any sleep over the poor quarterly performance of his investment vehicle. This is because quarterly fluctuations in earnings, especially of the unrealized types are of little concern to him. In his 2007 letter to shareholders, Buffett had said the following, "Our derivative positions will sometimes cause large swings in reported earnings, even though Charlie and I might believe the intrinsic value of these positions has changed little. He and I will not be bothered by these swings even though they could easily amount to $1 billion or more in a quarter -and we hope you won't be either. You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run. That is our philosophy in derivatives as well." Investors need to pay careful attention to the last line and just as the legend, should try to sacrifice short-term swings in prices for outsized long-term gains.

02:47  All Is Gone (AIG)? Not yet...
In mid-September, a day after Lehman Brothers declared bankruptcy, the US government took a 79.9% stake in AIG and the Fed provided the insurer with an US$ 85 bn line of credit. This was because the world's largest insurer with more than US$ 1 trillion in assets and 74 m customers in 130 countries was 'Too Big To Fail'. The plan was to allow AIG to spin off many of its businesses over two years and eventually repay the debt.

However, the subsequent days of global financial crunch reduced the value of AIG's units, as well as others' ability to buy them - thus complicating the efforts to spin off assets. AIG itself aggressively cut the premium rates to hold on to clients and thereby jeopardized its own profitability.

Having realised that the 'Too Big To Fail' organisation is once again in trouble, the government has offered the beleaguered insurer a larger bailout package valued at more than US$ 150 bn that includes lower interest rates and more time to repay the debt. As per Bloomberg, the government will cut the original US$ 85 bn loan to US$ 60 bn, buy US$ 40 bn of preferred shares and purchase US$ 52.5 bn of mortgage securities owned or backed by AIG. Further, the tenure of the loan will be extended from two years to five years and the interest to be charged on the same will be reduced from 8.5% per annum to 3% per annum. On amounts AIG does not draw, it will pay interest of 0.75%, rather than the 8.5% under the earlier agreement. The question here is, how long will the organisations that are large in size continue to get away with their unpardonable deeds?

03:35  Borrowing from the Taxman...
It is common knowledge how the corporate world is overwhelmed with liquidity problems. As a result, Indian companies have come up with new ways of using their cash in the most efficient manner. They are able to achieve this goal by increasingly deferring as much of their tax payments as possible.

According to tax laws, companies are required to make advance tax payments in four installments based on their profit estimate for the year. The list of the number of companies that are now choosing to pay a higher proportion of the liability only at the end of the year is steadily increasing. The crux of this strategy is that the company would need to pay 12% annual interest on these deferred payments. But since the prime-lending rate of most banks is in the region of 13% to 16%, their net savings would be at least 1% to 4% in annual interest costs.

04:00  Facing a bleak Christmas
Retailers in the US are having a hard time. In the throes of an economic slowdown, while they had anticipated a drop in sales and had therefore cut back inventories accordingly, what left them flabbergasted is the magnitude of the same. The cut back in inventories not being enough, retailers are finding it difficult to even sell the current stock on the shelves. Discounts and mark downs are being offered like never before but to no avail. Consumers with fat wallets and those who are struggling to make ends meet have all undertaken a big cut on their spending. Given that consumer spending accounts for two third's of the nation's economic activity, the large decline in sales only reiterate a fact already known: the US is in a recession. Rising unemployment with more job cuts on the anvil means that consumers are not likely to open their purses and splurge anytime soon. This means that big retailers such as Walmart, JC Penney, Costco and the like will have to brace themselves for a poor Christmas season and New Year. Infact, unless there is some drastic pickup in economic growth, a subdued sales scenario is likely to carry over next year as well.

04:46  In the meanwhile
The Indian markets opened strong today and marched to the strident drumbeat of global cues, seemingly pepped up by the Chinese stimulus package. Oil and copper rallied as did index futures on the S&P 500, which climbed 2%. China (7%), Japan and India (6% each) led the pack of gainers in Asia. Europe is also trading in the green currently.

04:55  Today's investing mantra
"Stock market timing cannot be done, with general success, unless the time to buy is related to an attractive price level, as measured by analytical standards" - Benjamin Graham.
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