Beware of holding too much cash

Nov 19, 2009

In this issue:
» Two sectors that are mature for consolidation
» Ratan Tata on key business decisions
» Mega road projects are underway
» There may be not 1 but 2 US economies
» ...and more!

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The man who was bullish on emerging markets at the end of last year, when hardly few others were, still maintains his view. We are talking about Mark Mobius, the Chairman of Templeton Asset Management. He has said that he is increasing holdings in all emerging markets.

Mobius is especially eyeing the BRIC markets, which he expects will rise by 30-40% over the next 3-4 years. High economic growth and corporate earnings is what he believes will make stocks rise in these markets.

The Economic Times reports Mobius saying that the biggest growth areas in emerging markets are in the consumer and commodity industries. He is also of the view that China and Brazil are among the cheapest markets worldwide.

Well, what's his best advice? It is important for people to be invested and not to hold too much cash at this stage of the game. While we completely agree with him on this count, we would like to add a word of caution. Being invested does not mean putting all eggs in one basket. It also does not mean buying anything and everything that is available. Investors must thus carefully make an attempt to diversify their portfolio and only buy at reasonable bargains.

 Chart of the day

Source: RBI Macroeconomic Development October 2009
Note: Stocks indicate the benchmark indices of the respective economies

There are few things that can contest the rationale that the BRIC nations have strong fundamentals to support the long-term rally in their stocks. The demographic dividend and earning power of corporate being the most vital amongst them. The distorted movement in stocks versus their currencies could, however, raise some doubts.

China is not a good example in this comparison. The economy has an artificial control over its currency for long.

However, comparison between Brazil, India and Russia, makes an interesting interpretation. This comparison is for the past 8 months. The movement in stocks versus that in their currency against the US dollar shows whether the valuations are reflective of economic strength. The stocks-currency movement has been most distorted in case of India. Thus, despite the long term prospects of Indian markets, the near term upsides seem to be well-priced.

The 200-year-old Rothschild group is the only multinational pure advisory investment banking firm. The firm generates most of its revenues from advising government and companies on fund-raising and M&A. The group has specialised in advising governments on disinvestments. It is now looking at similar opportunities in India. As per the advisory firm, there are two sectors in Indian economy that are mature for consolidation. You may have guessed it right that these are banking and telecom. In each of these sectors, the larger and more resilient players need to acquire scale. The smaller and less efficient players need to team up with the larger ones. This will also lead to considerable value creation for the shareholders of the players in these sectors as the quality and magnitude of the balance sheets grow.

"If we assume that the global meltdown is a phenomenon that will be over in the near term, I think we will look back and say that these are very strategic and worthwhile acquisitions." This response has come from none other than Ratan Tata, the Chairman of India's biggest conglomerate, the Tata group. He was asked whether he thinks that buying companies like Corus and Jaguar Land Rover was a mistake the group shouldn't have made. Clearly, the man doesn't think so.

Mr. Tata also let his views known on a wide variety of topics and there were plenty of signs that he has lost none of the 'business with compassion' attributes that the group he represents is so well known for. On being asked about the close India US business ties, he did say that all of us should look forward to closer ties. However, he also believed that we should be sensitive too to the pain that the US is going through and do nothing that would aggravate it.

Mr. Tata was also quizzed about the Singur episode and he answered that the episode had some important learnings. The most important one being the need to fairly and justly monetize the farmers for their lands. Else we will remain an agricultural country where industrialization takes second place. We hope the government of India is listening.

There is little doubt that India's road infrastructure needs a lot of attention. Thankfully, that's happening now. The transport ministry plans to offer contracts for six mega road projects in Rajasthan, Madhya Pradesh, Gujarat and Maharashtra at a total investment of Rs 300 bn. The first bid will be in December with a size of about Rs 45 bn. Given the land acquisition problems and disputes with contractors, the government plans to set up an alternate dispute tribunal to settle issues. It will also set up an Expressways Authority of India next year. We appreciate the fact that legal issues are being anticipated in advance. Let us hope that the plans translate into execution - something we need to learn and learn fast.

At a time when unemployment in the US has soared to 10.2%, Wall Street bankers are facing the wrath of Americans for the huge bonuses being meted out to them. What has fuelled public fury is that these bankers continue to get big salaries and bonuses even though they were one of the chief architects of the crisis. In this regard, Bill Gates the founder of Microsoft has an interesting perspective. He has blamed a 1993 US law that capped executive salaries at US$ 1 m and warned that further bids to try limiting Wall Street pay could also backfire. Gates believes that because of the US$ 1 m cap, companies found other ways of rewarding their employees. Namely, lucrative stock options. And this is what sent the pay scales to soaring heights. For the time being however, Wall Street bankers are not going to get any brownie points for the salaries that they amass. This is especially when the not so fortunate average American is struggling to keep head above water.

Renowned economist Nouriel Roubini has an interesting take on the US economy. He is of the view that the official figures that point towards a slow recovery in the US are completely misleading to say the least. Infact, he prefers calling it two economies instead of one. The first one is the picture of the US economy as is painted by the official government figures. The second is the one that is still languishing in recession.

The reasons for this divergence are many. For example, official measures of GDP may grossly overstate growth in the economy. This is because they don't capture the fact that business sentiment among small firms is abysmal. As also the fact that their output is still falling sharply. The country's third quarter GDP growth if corrected for these factors may have been 2% rather than 3.5% opines Roubini. America's official unemployment rate is 10.2%. Now add in discouraged workers and partially employed workers. This figure will jump to a whopping 17.5%. Even this is excluding many other factors. Cuts in working hours, temporary forced leaves and lower wages being the key. All this and more adds to the depression in the economy that the official figures do a very bad job of capturing.

Investors have long suffered on account of the application money being blocked up for several weeks in initial public offerings (IPOs). But this is soon to change. Securities and Exchange Board of India (SEBI) plans to reduce the time of listing from 20 days to 7. While this will be good news for the IPO applicants, the issuers and their bankers will be sorely disappointed. Banks were able to make a quick buck on the money collected in the escrow account and this went towards the expense of the IPO. With this new regulation, the cost of an IPO is expected to increase for the issuers. In future, we may see most IPOs accounting for this increase in costs.

Meanwhile, Indian markets witnessed a muted trading session today and the BSE-Sensex was down nearly 120 points at the time of writing. Stocks from the realty and metal sectors were amongst the major contributors towards the weakness. Amongst global indices, while the Asian markets were trading a mixed bag, Europe has opened mostly in the negative.

 Today's investing mantra
"The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price." - Warren Buffett

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7 Responses to "Beware of holding too much cash"


Dec 5, 2009

i feel your advice on holding cash is not per chart presentation indian stocks are priced the most among bric nations hence it is better to hold atleast 50% of the total portfolio as cash


Sanchita Ghosal

Nov 19, 2009

The overall perspective , crispness and span of coverage of the features is excellent, Please keep up the standards.



Nov 19, 2009

Official figures regarding inflation in India is a glaring example of economy. Normally we at the ground level uses to feel pinched when the inflation was high, but now a days with minus inflation figures on board we feel bitter disregard to the socalled offical figures. Leaders use to talk of controllting the inflation to single digit but with minus inflation what are their future discourses to the public, I wonder.


jignesh thakkar

Nov 19, 2009

I have a question about OVERHEATING of indian stocks..which is like this according to the graph indian stocks have soared more than appreciation of Rs against $ but it might be also due to the participation of domestic players & investors...i am not clear about this point..if anybody could just help me out with this



Nov 19, 2009

nice comments and advice


Jayesh Gandhi

Nov 19, 2009

When we talk of wrong economic data of US.. What about India?? If we include the "Black" (cash) economy with "White" economy then i am sure the growth rate will be much higher.. but we are happy with disguised inflation and disguised growth.. strange..



Nov 19, 2009

I am a late entrant to the financial market area, but Equitymaster is teaching and coaching me well everyday. All your wrap ups have been have been excellent. Thanks and keep up the good work.

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