Hedge funds will be destroyed - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Hedge funds will be destroyed 

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In this issue:
» Indian electorate yearns for change
» Indian corporate sector performance scorecard
» BHEL faces discrimination
» Enlighten the child within you
» ...and more!

00:00  Please bring on the change
The world's most powerful democracy has already elected a new leader. Many believe that the leader has come like a breath of fresh air. It is now the turn of the world's biggest democracy to do so. The Indian national elections are some months away. But six states go to polls over the next few weeks to elect a new state assembly. And Chattisgarh, a state that came into existence only in 2000 is the first to go off the blocks. However, unlike the US polls, there seems to be nothing new. It is the same 'freebies' strategy that the two main parties in the fray seem to be adopting. The 'freebies' are nothing but exactly how cheap the staple diet in Chattisgarh, rice, can be provided to the poor of the state. It's time the parties learn something from the phrase, "Teach a man to eat fish and you feed him for a day, teach a man how to fish and you feed him for a lifetime". The state boasts of the largest concentration of scheduled tribes in India. Perhaps, they will be better off with certain skill sets, education and jobs than just cheap rice.

00:29  India's forex reserves down by US$ 50 bn
India's forex coffers are depleting and depleting fast. RBI, the country's central bank has released its monthly bulletin. And it does not make for a very good reading. The country's forex reserves have come down by US$ 50 bn for the first six months of the current fiscal year. A widening trade deficit, slowdown in net foreign investments and virtual drying up of external commercial borrowings have been the key reasons behind the drop. Furthermore, revaluation of its non-dollar reserves has also caused a significant amount of heartbreak. However, not all is lost despite the huge erosion. India's forex reserves still stand at a healthy US$ 253 bn, good enough to finance several months of imports. And by then, hopefully, the inflows scenario should start looking up.

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00:51  2QFY09: Performance scorecard
The quarterly results season has virtually come to an end with most of India Inc having made public their 2QFY09 performance. So, how has India Inc performed on an aggregate basis? As per the data compiled by us on more than 550 listed companies, the energy sector, Oil PSUs in particular, have turned out to be big party poopers for the quarter ended September 2008. With most of them recording losses during the quarter on account of their inability to fully pass on price increases, the aggregate net profits have come down by 23% YoY. Once you take the energy sector out of the equation, the picture looks a lot better with the bottomline showing a respectable 8% YoY growth. The biggest contributor has been the banking sector, contributing more than 40% of the total bottomline growth of 8% YoY. With interest rates rising and other source of funds drying up, the reason behind the sector's robust performance becomes quite evident. However, with the demon of higher NPAs haunting the sector, a big question mark will loom over the sector's continued performance.

Important to add that the overall decline of 23% in profits during the quarter has come despite a strong 39% growth in topline, once again led by the energy sector. Excluding the energy sector, although the topline growth has fallen, it has nevertheless remained impressive, managing to grow by 29% YoY, way above the 8% growth in profits. The huge difference in the topline and the bottomline growth is an indicator of the cost pressures facing India Inc. Fortunately, the worst seems to be behind us as far as cost pressures are concerned. But with the economies around the world shrinking, managing a topline growth of the magnitude seen in the current quarter will turn out to be a formidable challenge.

01:41  In the meanwhile
Most Asian indices edged higher today as investors chose to emulate their US counterparts and scooped up some beaten down stocks. The Indian benchmark emerged among the few exceptions and ended lower by a little more than 1.5%, but not before enduring a rather volatile session, where it threatened to go even lower. European markets are also trading in the green currently, backed by better than expected results of a large financial institution. In the US markets yesterday, a three-day losing streak where the benchmark Dow had tumbled more than 7%, came to an end as stocks jumped by a similar margin in just one trading day. This was seemingly on the back of some strong bargain hunting. The buoyancy also rubbed off on crude oil and gold, with both the commodities edging higher.

02:03  China's growing angst
If countries across the world were hopeful that China could make a meaningful contribution in terms of alleviating the global economic slowdown, they will have to think again. The slowdown has begun to take its toll on the Chinese manufacturing industry too and to such an extent that the CEO of a midsize shoe company just disappeared in view of the mounting debts. With many small and medium sized enterprises in China barely trying to survive, the increasing plight of workers has reduced them to a sorry state. Many of them are suddenly finding themselves without jobs with the prospects of riots hanging in the air. The chief culprit obviously has been the slowdown in exports.

With the developed nations most likely entering into a recession themselves and consumption having being curtailed, importing Chinese manufactured goods have lost their sheen. Infact as reported in the International Herald Tribune (IHT), because of exports slowing down, small factories that were already being hit hard by rising costs of labour, transportation and raw materials, not to forget the appreciating yuan, are closing in droves. Consider some numbers. While the export sector is still growing, it is only chugging along: growth in October stood at 9% YoY, while in September 2007 growth was robust at 26%. Not surprisingly then, there has been a flurry of activity among the government ranks with the Prime Minister looking to shift the focus on domestic consumption rather than exports. The government on its part has introduced a stimulus package of US$ 586 bn over the next two years to create jobs and build infrastructure. Having said that, implementation of the same will be the key. For the time being atleast, with mounting problems of its own, China is least likely to join hands with the developed world in tiding over the crisis especially when the latter sowed the seeds of the crisis in the first place.

02:57  BHEL faces discrimination
BHEL has been kept out of a bid by the Sharjah Electricity and Water Authority (SEWA) in the U.A.E. This is allegedly due to the curbs imposed on equipment manufactured in India and other developing countries. SEWA's tender for the project asserts that only 'renowned brands' from countries like Middle East, Europe, United Kingdom and United States would be accepted. This kind of discrimination comes at a time when BHEL is trying to aggressively increase the share of exports in their order book to Rs 103 bn by 2012, so that it can achieve a natural hedge for the raw material it imports. It is said that other public-sector units are also facing similar problems there. BHEL has requested the Indian government to take up issues of biased qualification clauses with governments in West Asia, but the extent to which that will help is limited.

03:21  The G20 and India's growing clout
Global leaders will make one more attempt to bring confidence back into the global economy when they meet for the G20 summit later tonight. And if our prime minister is to be believed, India is likely to have a bigger say in the summit on account of its growing economic clout. Infact, Mr. Singh has gone on to mention that the very fact that India is being invited to the summit marks a significant change in landscape of the global economy. And he has every reason to believe so. Along with China, the country has emerged as the fastest growing economy in the world, growing upwards of 9% over the past few years. Although the current crisis is likely to slow down the country's growth, it will still continue to grow at a rate that will remain the envy of the developed world. Hence, India's new found importance on the global economic map could only be expected. However, will the summit be able to come out with measures that will help soothe nerves in the financial markets? Only time will tell. It has nevertheless taken the first step of announcing to the world that both the developed as well the developing economies are indeed working as one towards a solution.

03:54  Hedge funds' unhedged trillions
They derive their name and evolution from the necessity to safeguard investments against risks. But ironically, over the years, hedge funds evolved to be the most aggressive and risk prone investment vehicles. So much so, that although governments, ratings agencies, bankers and regulators were blamed for rearing the viscous subprime crisis, the hedge funds were considered to be the main culprits.

George Soros, one of the most renowned hedge fund managers and chairman of Soros Fund Management along with four others of his cadre recently testified to the US Congress. The lawmakers sought to understand how much blame they could assign to the industry for the global economic collapse. Soros, who earned US$ 1 bn by betting against the British pound in 1992, opined that the hedge funds 'did play a role in the financial crisis and will suffer the consequences'. Infact, according to him, the industry has already lost US$ 0.3 trillion from nearly US$ 2 trillion a year ago and the amount of money being managed will shrink by between 50% and 75% going forward. In other words, they will more or less be destroyed.

04:26  Enlighten the child within you
"A hundred years from now it will not matter what my bank account was, the sort of house I lived in, or the kind of car I drove...but the world may be different because I was important in the life of a child," said the scholar and teacher Dr. Forest E. Witcraft. What other day to celebrate this thought than Children's Day, celebrated in India today and around the world on 20th November.

So what, you might be wondering? You, the reader, are not a child anymore. You have grown big and serious enough to learn, think and act like children do. You have seen the world drown in the vices of indiscipline, greed, gluttony, envy, hubris and finally anger. And you might have practiced these in some aspects of your life (not just investing).

But then, there is always a new start you can make...a start for the child within you, a start for your child. The virtues of discipline, independence of thought and patience are what you can teach him. These are important characteristics that might help him in becoming a better human being...and a better investor.

In a world that has drowned under the weight of excessive pride and greed, hope you remain the sane voice for yourself, and for someone who wishes to become like you - your child.

04:54  Today's investing mantra
The great majority of operating businesses have a limited upside potential unless more capital is continuously invested in them. That is so because most businesses are unable to significantly improve their average returns on equity - even under inflationary conditions, though these were once thought to automatically raise returns." - Warren Buffett
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