The phenomenon driving emerging markets is... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The phenomenon driving emerging markets is... 

A  A  A
In this issue:
» Oil demand in India, China set to soar
» India needs to change its labour laws
» Asia is contemplating imposing capital controls
» India to be the third largest economy by 2050
» ...and more!

----------------- Defeat SPAM! -------------------
A lot of readers have been complaining that they have not been getting their regular Equitymaster e-mailers. So, if you feel that you are not getting your 5 Minute WrapUp daily or you missed out on the recent Equitymaster WebSummit or our great subscription offers, please whitelist us. This is the only way to make sure that Equitymaster mail does not go into your SPAM box and that you stay well informed about our events and the world of investing... regularly.


If your money doubles every five years, the compounded return that you are earning on your investment is somewhere close to 15%. Similarly, if it is doubling in every four years, the compounded return is in the vicinity of 19%. Have you ever wondered how long it will take to double your money if the interest rate is as low as 0.01%? Well, you don't have to do the math. We will save you the effort and let you know that it will take all of 6,932 years! Yes, you've read that right. It will take a mammoth 6,932 years to double your money if you are earning a return of 0.01%. While this may seem like a joke to you, people invested in the US money market instruments currently are earning just that, a paltry return of 0.01%.

Bill Gross, who runs the world's biggest bond fund at PIMCO, believes that it is the measly return in the US that is driving investors towards higher yielding asset classes like gold and emerging markets. But can the US Fed continue maintaining short term interest rates at such low levels, especially given the fact that the specter of bubbles is being raised in most high yielding asset classes? Indeed, says Bill Gross. According to him, Fed's foremost worry is the recovery of the US economy. Unless the US economy recovers and its employment scenario improves dramatically, Fed will continue to hold interest rates close to zero, asset bubbles or no asset bubbles.

Gross is also of the opinion that once China starts letting its currency appreciate, which it would in about six months time, asset prices might come down and hence, the US Fed should not be hasty in its decision to tighten monetary policies and put the fledgling recovery under further pressure.

Gross' prognosis also has implications for Indian investors. Since easy liquidity policy is likely to continue for some time to come, we believe that Indian markets might witness renewed surge from current levels and may even start resembling a bubble. Hence, the temptation to make that quick buck has to be avoided. Please bear in mind that in an effort to increase the return on money, investors should not put themselves in a situation where they have to forego the return of their money!

01:10  Chart of the day
Crude oil prices are a play of various factors both on the demand and the supply side. On the demand side, energy requirements of Asia, particularly India and China, are set to soar over the next 20 years. As today's chart shows, the difference between what the oil demand will be in 2030 and what it was in 1980 in the case of China and India is huge. Thus, even if the US is the largest consumer of oil and will be continue to be so even in 2030, it is the incremental demand for this black gold that will have an important bearing on oil production and prices. Infact, the developed nations namely the US and Europe are set to witness a drop in the demand for oil by 2030.

Data Source: The Economist

While India continues to strive to become the next biggest capitalist economy after the US, it seems that policymakers need to do some introspection. Can India be a capitalist economy that has socialist labour laws? As per Wall Street Journal, the President of Automotive Component Manufacturers Association of India thinks otherwise.

The recent spate of unrest in auto component manufacturing industries has served as a reminder that India needs to realign its policy decisions with its economic goals. Its widening middle class and growing base of rural consumers may have been a boon for the economy so far. But unless the economic prosperity is well distributed, India may have grave problems ahead. India is expected to lead the global economic recovery. But first, it must show that it can ride out booms and slowdowns alike.

The country's manufacturing sector grew by about 7% annually for the past 16 years. However, it logged just 2.4% YoY growth in FY09. This slowdown pressed manufacturers to make some unpopular cutbacks spurring labour actions that slowed production further and suppressed growth. As per the Ministry of Labour, strikes at India's manufacturing and service companies rose by a startling 48% in 2008. While labour actions are not restricted to this country alone, the same could become a huge barrier to growth unless controlled in time.

In a move that that has the potential to further intensify pricing competition in the world's fastest-growing telecom market, India will introduce mobile number portability on December 31, 2009. This move will further push call charges lower. Mobile Number Portability (MNP) will allow users to retain their number even if they switch operators. As per TRAI, the scheme will first be introduced only in the metro and tier I cities. The regulator has also notified that switching charges for users must not exceed Rs 19. While MNP is expected to act as a catalyst for the service providers to improve their quality of service, it may also set the ball rolling for consolidation in the sector.

With foreign inflows flooding emerging markets, central bankers of these nations are a worried lot. Fearing that 'hot money' inflows may stoke asset bubbles and force their currencies to appreciate Asian policy makers are contemplating imposing capital controls. Asia is leading the world's economic recovery and policymakers fear that rising capital inflows would stoke inflation which in turn would necessitate raising interest rates. High interest rates would then thwart growth; a scenario which nobody will be enthused about given that the recovery has just started. For India, the dilemma is that even if the government does raise interest rates, the differential between the US rates, which are near zero, will widen further fuelling more capital inflows. No wonder then, the RBI finds itself in a quandary.

The steep decline in commodity prices earlier during the year created opportunities for entering this space and diversifying investment portfolios. As per Barclays Bank as reported on Bloomberg, that is exactly what seems to have happened. Inflows into - so far this year are almost US$ 55 bn, and are expected to reach US$60 bn. The earlier record was in 2006 at US$ 51 bn. These figures relate to the inflows into exchange-traded products, US commodity-index-linked mutual funds etc. In our opinion, commodities- especially gold - are likely to remain strong especially at a time when governments around the world have pumped in US$ 12 trillion to stimulate their economies.

Nobody has doubted India's might in that it will become a force to reckon with along with its BRIC peers as far as the size of the economy is concerned. Infact, as reported in a leading business daily, a US based foreign-policy think tank Carnegie Endowment opines that India will be the third largest economy by 2050 after China and the US. The report states that the total GDP of China, India and the US, in real US dollar terms, will be over 70% more than that of the other G20 countries combined.

The interesting thing to note here is that in per capita terms, however, these emerging nations will not be able to match up to their developed peers. Infact, in 2050 the average income will still be 40% below that of the G7 nations at present. While one will have to wait and see whether this scenario actually materializes, nobody can doubt that India's growth story remains intact.

Continuing with the positive run over the past two weeks, the Indian markets ended on a firm note during the week ending 20th November, 2009. Closing just above the 17,000 points mark on Friday, India's benchmark index, the BSE-Sensex recorded a week on week gain of about 1%. This was due to the strong buying activity witnessed during the second half of Friday's trading supposedly on the back of the deputy chief of India's Planning Commission, Mr. Montek Singh Ahluwalia indicating that the government has no intentions of imposing a tax to curb the inflow of foreign funds.

Moving on to global markets, China (up 4%), Brazil (2%) and Singapore (1%) were the top performers this week. Amongst the top losers were Japan and France, which ended lower by about 3% and 2% respectively. UK and Hong Kong, on the other hand, ended lower by about 0.5% each. The US markets ended the week on a positive note, with the Dow ending higher by about 0.5%.

Source: Yahoo Finance, Kitco

04:58  Weekend investing mantra
"The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values." - Warren Buffett
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...

Equitymaster requests your view! Post a comment on "The phenomenon driving emerging markets is...". Click here!

7 Responses to "The phenomenon driving emerging markets is..."


Nov 22, 2009

it's good.


gopal sharma

Nov 22, 2009

I have started reading your 5 minute wrap up since last few days and am already loving it for it's sheer simplicity as well as absolutely unbiased opinion. I also like the concluding investment mantras. They carry very valuable advice for those who care to read and heed.


santosh nimbargi

Nov 22, 2009

Dear Sir,
the wrapup is very informative, from that we come to know
the world market scenerio.



Nov 22, 2009

Dear Sir,

Your weekly wrapup is very informative covering stocks and commodities. It also covers movement of foreign funds into develping countries and worry of central banks of these countries to manage the funds and controlling of inflation.

My sincere thanks for your wrapup note.



Nov 21, 2009

Dear Sir/Madam,
Your 5 minutes wrapup is really very good----I enjoy reading it.Now the comment on---The phenomenon driving emerging markets is - FII inflows combined with improving fundamentals of good companies.
Thanking you,



Nov 21, 2009

I love your wrap-up conclusions simply because they are simple. Its very simple to create something difficult but very difficult to create something simple.


dr sharad gupta

Nov 21, 2009

About the crude oil demand to soar in next 10 yrs. what should an invester do ? shall start accumulating oil stocks?

Equitymaster requests your view! Post a comment on "The phenomenon driving emerging markets is...". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407