US$ 28 trillion gone. More to go. - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

US$ 28 trillion gone. More to go. 

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In this issue:
» Capex on the backburner
» Japanese dial into India
» Amex now a bank
» Economic slump does not stop Indians from talking
» ...and more!

00:00  Capex on the backburner
The heydays were in 2006 and 2007 when India's GDP was blazing at 9% plus and Indian corporates drew huge capex plans to capitalize on this buoyancy and cater to the insatiable demand. But come 2008 and the optimism considerably petered out. Due to the worsening economic scenario and consequent adverse impact on demand, as many as 34 expansion projects with an investment of about US$ 190 bn got delayed by an average of about 19-months. As a result, the cost overruns have been pegged at 30%. Just to give a perspective as to how bad things have become, consider this: ArcelorMittal, the world's largest steelmaker is believed to be shelving its 8-year US$ 35 bn expansion plan. And some of this effect has spilled over to Indian companies too. As published in a leading business daily, Mr Mahesh Vyas, MD and CEO at CMIE has stated that projects that have taken off and nearing completion are unlikely to be stalled. However, those that are still at the planning stage could be put on the backburner for the time being as uncertainty about the state of the financial crisis still prevails. In fact, if the demand further slackens, companies will certainly have a tough time making sure that their existing plants are operating at full capacity.

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00:37  A soft bail out for Indian PSU banks
The public sector entities chose to turn a deaf ear to the Finance Ministry directive early this year asking all the PSUs to park 60% of their funds with public sector banks. With liquidity drying up and PSU banks facing shortage of capital to comply with the Basel II norms, the Ministry has chosen to offer them a soft 'bail out'. It has once again directed the government companies to deposit 60% of their surplus funds with PSU banks, despite the fact that the rates offered by the latter for bulk deposits may be less competitive to those offered by private sector and foreign banks. The directive, however, comes as a huge relief to the smaller government banks that can neither raise funds at competitive rates nor dilute the government's stake beyond 51%.

01:02  US$ 28 trillion gone. More to go.
Sample this. As per Bloomberg, more than US$ 28 trillion has been erased from global equity markets this year as credit losses and write downs climbed to US$ 690 bn in the worst financial crisis since the Great Depression. The erosion of this magnitude has led a lot of experts to believe that the markets have indeed bottomed out. However, if you are one Mr. Jim Rogers, the answer is likely to be in the negative. Rogers, one of the world's most successful investors in recent times, believes that despite the carnage on Wall Street, the US and the European markets are still expensive on any historic valuation method. "We may be hitting 'a' bottom. I don't know if it's 'the' bottom". This is how the savvy Rogers chose to put it across.

Interestingly, Rogers' views are in contrast to another of the world's most successful investor, Warren Buffett. The Oracle of Omaha, through one of his articles earlier this year, had mentioned that the US stocks had started looking attractive from a 5 year perspective and he himself was moving from bonds to equities in his personal portfolio. It could be the difference in their approach that could be responsible for bringing out the contrast. While Buffett is known for not trying to time the market and look for absolute bottom, Rogers' mostly top down approach makes it difficult for him to zero in on specific pockets of opportunity, an art that the sage of Omaha excels at. Interesting to note that Rogers' has also bought equities in recent times, but they have been mostly in China, a nation that he strongly believes will eventually take over from US, the mantle of the world's biggest economic power.

02:10  In the meanwhile...
Key Asian markets except China languished in the red today as concerns over economic growth and credit crisis continue to loom large. Along with the BSE-Sensex, key indices in the Japanese, Singapore and Australian markets also lost more than 1% of their market capitalisation today. European markets across the board have opened in the positive today. The rupee closed at 49.1 to the US dollar.

Confirming the apprehensions about the severity of economic meltdown in the country, India's index of industrial production (IIP) rose by only 4.8% in September 2008 as against 7% during the corresponding period last year. Crude oil prices fell to 20-month low of US$ 59 a barrel, which could reduce dollar demand in the local market.

02:25  Japanese dial into India
Dr. Manmohan Singh's recent visit to Japan seems to be paying off in the form of island nation's increasing investments into India. After Japanese pharma major Daiichi brought over Ranbaxy, it's time for the Japanese telecom major, NTT DoCoMo to set its eyes on the Indian opportunity. As reported on Bloomberg, DoCoMo is planning to buy a stake in the unlisted Tata Teleservices, which offers mobile and fixed-line services apart from selling Richard Branson's Virgin Mobile services in India.

DoCoMo's proposed investment is seemingly with a view to benefit from the opportunities in the fastest growing telecom market in the world. The Bloomberg report further indicates that the Japanese company intends to buy a 26% stake in the Indian telecom major for a consideration of US$ 2.7 bn, thus valuing the company at about US$ 10.4 bn.

Japan has an 80% mobile penetration and thereby is not expected to offer much headroom for growth in the future. In comparison, India's teledensity stands at a much lower 30%. However, while Japan has grown its subscriber base by just around 0.4% YoY in the month of September 2008, growth for the Indian telecom market stood at over 50% YoY. DoCoMo, in its latest quarter's presentation has in fact projected a 15% YoY decline in its subscriber additions during the current fiscal.

Apart from these deals (Daiichi and DoCoMo), Japan has been one of the major investors into India over the past few years. The direct investment (FDI) from the country into India was around US$ 1.8 bn in 2007, tripling from 2006 levels of US$ 600 m.

03:16  Amex now a bank
15 years after American Express spun off its investment banking subsidiary Lehman Brothers Holdings, the largest credit-card company in the US has joined securities firms Goldman Sachs and Morgan Stanley in gaining 'liquidity support' from the US government as part of the US$ 700 billion bailout package for the country's beleaguered banking and financial system.

American Express, which has consolidated assets to the tune of US$ 127 bn has been severely hit by defaults on its credit card dues fueled by more than 700,000 US job losses this year. The problem has got multiplied with the fact that home loan borrowers who have run out of capacity to repay their mortgages have been using credit cards to do the same. To put things in perspective, the size of the US credit card industry is nearly 83% of the size of the Indian economy and recovering unsecured loans of this magnitude is set to be a formidable task for American banks and credit card companies. The Federal Reserve's approval to convert American Express into a bank holding company will give it the lifeline of access to government funds until it gets its books in order.

03:53  The epicenter of the global financial tsunami
The global financial meltdown that has engulfed most asset classes began with the housing sector. As per some estimates, around 42 m houses in the US have mortgages. Out of these about 10 m houses have mortgages larger than what the house is worth (termed as being 'underwater').

As per IHT, the very centre of the housing crisis can be zeroed in to about 20 places in just 4 American states - California, Florida, Nevada and Arizona. The dubious distinction of being the most indebted housing community goes to Mountain House, California. Here, about 90% of the houses are underwater. The average house owner in Mountain House is underwater by US$ 122,000.

As a result, consumer spending in this community has come to a virtual standstill. Shops around the place are witnessing their worst-ever sales. So self-denial is in vogue now. Home food instead of dinners at restaurants, renting instead of buying DVDs and lesser Christmas shopping. That's a snapshot of how the most consumerist nation on the planet is discovering the limits of spending on credit.

04:28  Economic slump does not stop Indians from talking more...
Atleast that is what the data on new GSM users suggest and is the opinion of telecom majors like Bharti Airtel. India added a record 7.7 m mobile users in October to its GSM-based networks, despite signs of slowdown across most other sectors. As per Cellular Operators' Association of India (COAI), total GSM mobile users at the end of October numbered 241.4 m, up 3.3% from 233.7 m in September. The country's telecom market is the 4th largest in the world in terms of wireless subscribers and 5th largest in terms of total telecom subscribers. The total wireless (GSM and CDMA) subscriber base in the country is expected to cross 500 m by the end of March 2010. Despite high inflation levels and lower economic growth, the inelasticity of demand for telecom services, availability of cheaper handsets, focus on regulatory measures to take telephony to rural markets and lower tariffs have kept the fortunes of this sector buoyant.

04:45  This island nation may cease to exist
Maldives, the island nation in the Indian Ocean, is the smallest Asian country in terms of population and area. It is believed to attract nearly a billion dollars worth of tourist revenue every year.

While the island is on an average 1.5 meters above sea level, the highest point in the country is only 2.4 meters above sea level. The UN has forecasted that the seas are likely to rise by up to 59 cm (0.6 metres) by 2100, due to global warming. Taking this into consideration, the country is planning to secure its 300,000 islanders from becoming environmental refugees. Maldives' first democratically elected president, Mohamed Nausheed has proposed to create a sovereign fund from the revenue the island earns from tourism as the nation is looking to acquire land in other countries. As such, countries like Sri Lanka and India are on the radar. In fact, it is also looking at the possibility of acquiring land down under, i.e. in Australia due to the availability of unoccupied land. Perhaps policy makers across the more developed regions could take a lesson or two in how to plan well in advance from the Maldives government.

04:57  Today's investing mantra
"Whenever I read about some company undertaking a cost-cutting program, I know it's not a company that really knows what costs are about. The really good manager does not wake up in the morning and say 'This is the day I'm going to cut costs,' any more than he wakes up and decides to practice breathing." - Warren Buffett
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