Real estate comes crashing down... again - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Real estate comes crashing down... again 

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In this issue:
» The week that was
» India to grow at 6%...8%
» Cash is king, says Mr. Tata
» ...and more!

00:00  Global economy on shaky ground
Bankruptcies, layoffs and plunging sales. These are the words that are increasingly starting to enter the lexicon of investors across the globe as problems in the credit markets have well and truly started leaking into the real economy. Infact, the leak has now turned into a gusher. Quite expectedly then, mood across the global markets was pretty somber and profit booking emerged as the dominant theme. Stock markets in the US edged lower for four days out of five, with the Dow edging 5% lower.

Things did not look rosy elsewhere either as industry and even economic specific positive stories were completely ignored by the markets, choosing to view the world as one single economic entity. The extent of pessimism could be gauged by the fact that all the markets that we cover in our story ended the week deep in the red. Sensex, the Indian benchmark, emerged as one of the worst performers, coming off by nearly 6% in the course of the week. The realty sector once again came in for some severe punishment with the sector index falling by as much as 14%. Year to date, the sector index has lost a gut wrenching 84% of its total value.

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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 came 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!

Crude oil declined by 7% during the week to US$ 57 a barrel. Gold prices edged 1% higher to US$ 742 an ounce. Crude oil has now come off more than 60% from its all time highs, sending huge shivers down the spine of oil exporting countries. Sensing the recent round of production cuts are not doing enough, OPEC is planning to reduce production still further.

Leaders of the world's leading economies have already descended upon Washington for the G-20 summit. Over the course of the next couple of days, one more attempt, and mind you the biggest one in recent times, will be made to help bring confidence back into the global markets. However considering the fact that the US, the nation that many believe to be the key culprit behind the crisis will be represented by a 'lame duck' president, anything worthwhile is unlikely to be achieved. It can only be thought of as a small step towards a long and critical journey.

02:52  The week's biggest news - India to grow at 6%...8%
Predictions about the growth rate of the second fastest growing economy have drawn myriad views from several agencies and experts. This is particularly in the wake of the fact that the Western world is not expected to grow at all and the fastest growing economy, China, has unveiled a mega package to keep its growth rate above 8% in FY09.

While the predictions of most agencies and experts stand in the periphery of 6.5%, which has been India's average growth rate over the last decade, our Prime Minister begs to differ. He believes that India's growth in this fiscal will continue to edge closer to 8%. And in fact, his views have been supported by a leading economic research agency that tracks the country's economic data. The Centre for Monitoring Indian Economy (CMIE) believes that that even in a worst-case scenario, the country's growth is unlikely to dip below 8%.

The basis of this conclusion has been the demand for key infrastructure facilities like electricity and sustained consumption on the back of higher disposable income and higher savings. The CMIE believes that the biggest sector attracting investment currently is electricity, where there is no lack of demand. Hence infrastructure investment is set to continue, albeit at a marginally slower rate. Similarly, the tax relief offered to individuals and farmers in the last Budget coupled with the benefits of revised salaries under the Sixth Pay Commission recommendation and increased employment in rural areas will help in keeping consumption demand and savings undisturbed by the global meltdown. Amen!

03:30  Best of this week's 5 Min. WrapUp - Cash is king, says Mr Tata
Austerity is a virtue. Who else can vouch for that than Mr. Ratan Tata, whose group companies have made a couple of expensive acquisitions in recent times only to find out later that these were probably mistimed?

Now, in communicating to his group companies that the global crisis will continue for the next 12 months, Mr. Tata has advised them to go slow on spending - either for acquisitions or for daily operations.

In a letter he shot off to his senior managers earlier this week, Mr. Tata asked for improving operational efficiencies, implementing aggressive cost control measures, reducing operating expenses considerably and postponing non-essential capital expenditure and capacity expansion. He has also asked for freezing all acquisition plans except those that are considered highly critical. "Failure to manage this crisis could result in irretrievable positions," he said.

"Some of our companies with substantial foreign operations or those which have made substantial acquisitions are already facing major problems in raising capital or establishing lines of credit for their operations," Mr. Tata said and Business Line reported.

He was most probably hinting at his two lead companies - Tata Motors and Tata Steel - which have faced serious troubles in recent times. The former, for instance, has faced delays in the planned launch of 'Nano', considerable decline in sales of commercial and passenger vehicles, and heavy financial burden on its acquisition of the Jaguar and Land Rover brands.

The latter, on the other hand has witnessed considerable pressure in its international operations (Corus) as steel prices continue to fall amidst slowdown in demand.

Interestingly, while Mr. Tata's call for austerity might seem to be the right voice in these troubled times, Warren Buffett has something interesting to say on such initiatives. He says, "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."

04:45  Weekend 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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