Is the relevance of stock markets reducing? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is the relevance of stock markets reducing? 

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In this issue:
» October 2011 was a poor month for auto
» Will legalizing bribes lead to better efficiency?
» The bane that is the private sector-government nexus
» Indian banks have seen bad loans rise
» ...and more!

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00:00
 
Stock markets over the years have played an integral part in enabling businesses raise capital to expand and grow their businesses. But this basic function has increasingly come into question in the aftermath of the global financial crisis. As an article in Financial Times (FT) reports, claims are now being made that the biggest stock markets are no longer helping companies raise money efficiently. With the US and Europe mired in recession, high unemployment and deep debt, European and US stock markets also seem unable to mobilise investments in corporate growth and innovation that has in the past created employment for millions.

The trend is also apparent when one looks at the number of Initial Public Offerings (IPOs) that have hit the markets. In Europe and the US certainly, the number of fresh companies listing has dropped sharply in the past five years. Since 1999, there have been on average 192 IPOs a year, a start contrast compared with 547 a year in the 1990s. IPOs have played a role in employment creation too. According to FT, it is estimated that of all jobs created by public companies since the 1970s, 92% came after the floatation of shares. Further estimates point out that if IPO frequency had remained constant as a percentage of US gross domestic product, at least 22 m more jobs would have been created. And so many lament that the IPO is no longer performing its classic function of channelling capital to small start-up companies because of its high costs and the insistence of institutions on high liquidity.

There are other things too. For starters, post the crisis quite a few companies are probably focusing on being cash rich and are looking to fund any capex plans through internal accruals thereby obviating the need to raise capital from the stock markets. Irrational expectations from IPOs also abound. Many companies come out with IPOs at astronomical valuations which do not make it an attractive proposition for serious long term investors to invest in. A short term and speculative outlook also creates unnecessary volatility thereby detracting serious businesses from going in for a listing.

The IPO story in India is no different either. The heydeys before the global crisis saw IPOs emerging by the dozen in the markets. But post the crisis, many companies withdrew their listing plans citing market volatility. Another ill that afflicts Indian IPOs is the unrealistic price and the focus on 'listing gains' which hardly do much in rewarding shareholders in the long run. In fact, some of the IPOs in recent times (many of them being that of PSUs) have actually seen positive responses because of strong fundamentals and reasonable valuations. This in an economic environment that continues to remain uncertain. Indeed, if businesses are confident of what they want to do and remain realistic about the price that they hope for their shares, there is no reason why they will not garner investor interest even in such volatile times.

01:28  Chart of the day
 
Nothing seems to be going right for the Indian auto industry at present. While the period April-September 2011 saw auto volumes take a hit, the scenario was no different in October either. As today's chart of the day shows, passenger vehicle volumes have plunged in October 2011. Indeed, rise in petrol prices and interest rates combined with the crippling strike at Maruti's Manesar plant caused the deterioration in performance. The silver lining in the cloud was the healthy growth in commercial vehicles and exports.

*Commercial Vehicles
Data Source: SIAM


02:08
 
'Speed money' is a term that seems to make the act of offering bribes more respectable and facilitative. But if offering bribes would indeed make an organization or economy more efficient, the trait would be restricted only to the affluent. What that means is small organizations or individuals with limited monetary means can never hope to get their things done on time! But our policy makers and corporate heads ironically seem to find nothing wrong with this! Chief economic advisor Kaushik Basu's suggestion on legalizing bribes has been supported by Godrej Industries chief Adi Godrej. In fact he even suggested an amount of Rs 5,000 to 10,000 to be fixed for such accelerated deliveries of services. However, not all industry leaders are in concurrence with the view. Most believe that legalizing bribes, however small the amount, would only make the menace all-pervading. Also the sum of Rs 5,000 or 10,000 may be affordable or unaffordable to different classes of individuals. Hence legalizing it may subject some corporate or individuals to inordinate delays in case of nonpayment of the speed money. Whatever said and done, the very concept of paying extra to get things done on time seems flawed.

Do you think bribery / speed money in smaller amounts should be legalized? Share with us or post your comments on our Facebook page / Google+ page.

02:45
 
Over the past few months, the Indian economy has had to undergo a harsh reality check. From an entity where GDP growth in the region of 9% was almost baked in the cake, the estimates had to be brought down by a whopping couple of percentage points. So, what is it that is slicing away at the India growth story? Quite a few factors are responsible we believe. However, a report posted by Firstpost.com has tried to highlight the top four of these. It has argued that the nexus between the private sector and the Government is the one that is tearing apart the India growth story the most. It couldn't be more accurate we believe. Improving productivity is at the heart of any progressive economy. And if decisions are taken that favour a select few at the expense of most others, then the concept of productivity improvement does go for a toss. One need not look beyond important sectors like infrastructure, energy and power to know what we are saying. Other factors that find a mention fall in the realm of growing competition from foreign players, grossly inadequate channeling of domestic savings and neglect of labor at the expense of capital. The report has certainly hit all the right notes as far as we are concerned. And what it is trying to say is that while the long term India growth story may be intact; there are quite a few medium term demons that need some very urgent slaying.

03:31
 
Although India has benefited from rapid and substantial economic growth over the past decade, the country remains blighted by poverty and stark income inequalities. The state of India's food security is worsening by the year. The cost of food items is increasing rapidly, making them unaffordable to a majority of the people. According to experts at the World Economic Forum (WEF) India summit, the government should liberalise farming to improve country's food security. They suggested three measures India should adopt in order to achieve this. First, government planning has to become more decentralised. Currently, a lot of key decisions on resources and finances are made at the central government level, which fail to consider the needs of the people for whom these resources are meant. Second, cropping patterns need to be changed and farmers must be given more facilities to store, market, process and export most of their produce. Third, consumer awareness needs to be raised. People need to be aware of their consumption, especially of water and electricity. Providing food security to ever growing population is a formidable challenge. But will the government listen to these suggestions and try to tackle the problem head on? Or will it indulge in politics once again and shy away from reforms?

04:17
 
Rising interest rates and a slowing economy is a recipe for disaster. Thirteen rate hikes by the Reserve Bank of India (RBI), have led to a sharp increase in non-performing assets (NPAs) for banks. Bad loans of all the listed banks in country have crossed the trillion rupees mark. They have climbed by over 33.5% in the first half of this fiscal. A shift to a technological system for NPA recognition has also led to an increase in bad loans for public sector banks.

Banks are under pressure from various sectors like power and infrastructure which are seeing delays in execution. Export related sectors have also seen a slowdown on account of global uncertainty. The mining and aviation sector, which are big borrowers are also facing a cash crunch. However the RBI is confident that the banking sector is not facing any systemic threat. We hope that Indian banks can come out of this crisis as well as they did in 2008.

04:47
 
The Indian stock markets shed some of their early morning gains but were trading in the green. At the time of writing, the benchmark BSE Sensex was up by 52 points (0.3%). There was a mixed show among the sectoral indices. While Metals and Consumer Durables were the top gainers, IT and Healthcare stocks were on the losing side. Asian stock markets too reflected a positive mood.

04:56  Today's investing mantra
"If you're an investor, you're looking on what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game." - Warren Buffett
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23 Responses to "Is the relevance of stock markets reducing?"

Vish

Nov 15, 2011

Unless we change the attitude, we can't achieve much by legalising anything. Today, people who are willing to pay Rs. 5,000 or 10,000 will be forced to shell out more and more as the queue there becomes longer, as we see it in Tatkal scheme of Railways. Fear is the key. Unless, the culprit is caught and punished, nothing will ever work. Moneyed people will keep on thinking that they can get on with this stupidity, till life catches up with them!!!!

Like 

J R Chhabra

Nov 15, 2011

Speed money is part of life in India.Even to have quick Darshan of God at many temples speed money is given legally or illegally.In Tirupati temple you can have Darshan in minutes by paying fee legally at Bank couters.
Thus bribery should be legalised by specifying fee for Tatkas Sewa.At the same time, there should a time frame for completion of ones work without any speed money.For Tatkal Sewa the staff should work extra time and paid over time out of fee collected legally by the depatrment or institute.

Like 

C.M.PANICKER

Nov 14, 2011

We have grown to the level of developed countries.So we can think of legaliasing bribe and prostitution.The courts will rid of thousands of cases.What an idea saitjee.All citizens to voice their opinion on this.Stop paying salaries for the public servents.Why not keep a TIP BOX in all public officec in the model of hotels etc with a notice that anyone satisfied with the service of the concerned office can deposit a tip in appreciation of the fast service rendered.Let the sahibs decide how to divide the amount among themselves.

Like 

Selva

Nov 14, 2011

What nonsense is this idea? Whether it is CEA or Godrej, have they lost their minds? This is highly deplorable. They first needs to be punished for making such suggestions.

Please remember, The Transparancy International report made a remark that whatever that India has achieved today, through government initiatives, could have been achieved some 30 years ago and with 35% of what the government had spent. Where did the rest of 65% vanish, speed money, corruption, syphoning off. Damn this. Are we not ahamed of this. And these corporate head suggest that we make it legal. Whose money are you suggesting to pay as speed money? Because he suggests that the public money belongs to government officials. Nonsense this is.

Come on, come to reality, we are living in a world where financial scamsters are punished heavily. Where is Enron CEO, where is Enron CFO, where are their auditors, where are those who have robbed public money in the US? That is democracy, that law enforcement agency and government's action and resolve guarantees citizens that their monies would be handled efficiently, whoever it is given to, be it Government or Stock Market or any Financial Institution. That is the efficiency of governance by the Government.

And here is a corporate head who suggests that we transform this country from democracy to demonic country. Insane he is.

We are not far away that this corporate head would suggest that we legalize decoity, looting, pilferage, thefts and terrorism, etc. That way government would have solved all these problems.

Now we know where Anna hazare's movement is heading towards. First government wants to scuttle every effort of this social movement, now this corporate thief wants to vitiate the entire process.

God save this country!! God save these people suggesting to legalize corruption from their insanity.

-Selva

Like 

S.K.Damani

Nov 14, 2011

Dear Sir,

It is highly irrational on the part of a big 'PARSI' industrialist like Mr. Godrej to speak of legalising bribery. On the contrary, both the person the giver and the receiver, should first be sent to Jail for a minimum of six months, thereafter the investigations be started. And while doing this if the police is found indulging in bribery than such policemen should be publicly lashed with equivalent to the amount of bribery demanded.

In short the offence of bribery should invite tremendously harsh penalities and punishment, that others will have to think a million times to indulge in bribery.

The pitfalls of democracy are the bane in our country and politicians have made the most of it. The amount of monies made by ministers themselves require an indepth investigations. In order for smooth investigations they and their cronies must be put behind maximum prison bars, and then everything investigated in time bound period.

This are all wishful thinking of the indian public. Sincerley wish it could be fulfilled. But then in acountry which has known terriorist been provided maximu security a la kasab, what can you expect. Except FRUSTRATION.

God help my country !!!!!!!!!!!!!!!!!!

Damani.

Like 

Alok

Nov 14, 2011

Government can charge more for better quality of services by introducing differential pricing system but legalising bribe is an idea of insane people who do not understand the pain of poor people of the country.

Like 

manoharkantak

Nov 14, 2011

Legalising bribes will not reduce corruption. Human greed is such that, even in theory of economics wealth accumulation has become an exception. There is no end to it. There are still honest people, we will be making them corrupt. Corruption and bribery has entered in Private sector also, how to control that.Punishment for bribe taker must be severe and should be in proportion to the amount accepted like slabs of Income tax.

Like 

Santanu Sen

Nov 14, 2011

Heard that German has got such sort of system with some CHECKS. Intention to bring the speed money in Mainstreamed Economy. But problem with India is that after introduction of such relaxation, persons will start manipulating those CHECKS.Then ONLY PLACE TO BE LEFT FOR US SHALL BE THE hell.
So stop this idea to build on in INDIA

Like 

GOPAL KOKAL

Nov 14, 2011

SMALL OR BIG AMOUNT BRIBE IS BRIBE IT IS NOT ACCEPTABLE. THOSE WHO RECOMMEND SPEED MONEY OR SMALL BRIBE REFLECT THEIR CHARACTER. EVEN SUGGESTING LEGALISING BRIBE NEEDS TO BE CONDEMNED. IT MAY BE ACCEPTABLE IN MATERIALISTIC WORLD NOT IN INDIA WHERE MORAL STANDARDS OF LARGE POPULATION IS VERY HIGH AS THEY BELIEVE IN RELIGION, TRUTH AND PURITY.

Like 

Amit Sengupta

Nov 14, 2011

Legalised bribery - no way. What control will Mr. Kaushik Basu have on the proceedings or is it that he suggests that it will be an addition to the service sector? Either way, submission to the social menace will be distrous for the people of India. Mr. Kaushik Basu would better revisit his school days & retrieve what all he had then been taught as all time virtues for the mankind.

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