The best defense against asset bubbles - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The best defense against asset bubbles 

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In this issue:
» Dollar falls to a 14-year low against the Yen
» Indian companies to look at more foreign acquisitions
» Strong growth ahead for the Indian healthcare industry
» India and China most likely successors to US, says Bill Gates
» ...and more!

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The term 'asset bubble' must be surely getting onto your nerves by now, isn't it? Agreed that it is a phenomenon that we should guard against, but the fact remains that most people come to know of it only when it ends up bursting. Hence, the best defense against these so called bubbles may not be in trying to predict the timing of its bursting. Instead it would be making an attempt to minimize one's damage from it. And this is where a nice write up from can come in handy. As per the write up, there are a few fairly simple defenses that can come to investor's rescue. Two of the most important ones are diversification and portfolio rebalancing.

While the first one refers to building a balanced portfolio so that one does not get carried away and bet big on a single asset class, the second one involves selling a portion of investments that have outperformed and plowing the proceeds into those that have lagged to bring one's portfolio back to its correct proportions every year or so.

Let us see how the above crash course will help you. If someone tells you that India is in a bubble territory right now, you will certainly not lose your sleep over it. This is so because you have invested in Indian equities for the right reasons, which is to ensure more diversification and in the right manner so that if someone would have invested in these markets a year back, he would have obviously done the rebalancing needed by buying into these assets at a time when their prices were low and selling it now, when they have really run up a lot. You can try this with other asset classes as well, without ever having to worry a great deal about bubbles.

00:54  Chart of the day
If Morgan Stanley India head, Narayan Ramachandran is to believed, Indian companies are expected to raise more than Rs 3 lakh crores (US$ 70 bn) through share sales over the next three years. Speaking at the Reuters India investment summit, Ramachandran, an investment banking veteran, opined that a long list of firms are waiting in the wings, hoping to come out with IPOs and secondary offerings in Asia's third largest economy.

This brings us to our chart of the day. As per data available with CMIE, total funds mobilized through primary markets had reached in the vicinity of US$ 12 bn for the first seven months of the fiscal. And given the healthy pipeline, looks like we could exceed the highs of the past few years pretty comfortably. Soon, it will be like the crisis never happened!

Source: CMIE, SEBI

After it hit a 15-month low against a basket of currencies yesterday, the US dollar touched a new low against another currency, the Japanese Yen. A 14-year low to be precise. These fresh, multi-year lows are being hit due to what looks like a deliberate depreciation of the greenback. It should be noted that just a couple of days back, the US Fed had mentioned that the drop is 'orderly'. This means that the US authorities are in no mood to prop up the value of the US dollar and this has given traders the opening they were looking for to undertake a fresh selling of the greenback. Of course, this cannot continue forever and at some point in time, the Fed will have to intervene to provide some support or it could risk letting inflation get out of control. Just how will it manage to achieve it remains to be seen.

It's not just traders who would benefit from a weak dollar. It appears that India Inc will also try to rake it in and rake it in really big. A combination of strong currency and cheaper valuations will make the temptation of going in for foreign acquisitions too hard to resist for the Indian companies. Reliance's interest in acquiring petrochemicals maker LyondellBasell and Essar Oil's overtures to Royal Shell Dutch's three European refineries are a case in point. However, the companies could do well to not stretch themselves a great deal and make use of a judicious mix of debt and equity to fund their acquisitions.

There is tremendous potential for the Indian healthcare sector to grow going forward. As per a report jointly prepared by Assocham and Yes Bank, the country's healthcare sector is expected to grow at 23% annually. This means that it will become a US$ 77 bn industry by 2012. This would include pharmaceuticals, hospitals and diagnostics. What will drive this growth will be increasing population, rising incomes, changing demographics and illness profile. Not just that, with an increasing demand for affordable quality healthcare, the penetration of health insurance is poised to emerge as a US$ 3 bn industry in the next three years.

However, there are many challenges that the healthcare sector faces. First, the government expenditure on healthcare is not much as compared to other nations. As a result, private spending accounts for most of the healthcare expenditure in the country. Secondly, the healthcare infrastructure leaves a lot to be desired. For instance, the present number of 9 beds per 10,000 people in India is far behind the world average of 40 beds per 10,000. There is also the shortage of skilled doctors and nurses. No one can doubt the growth potential that abounds in this sector. But a ramp up in healthcare infrastructure will certainly work wonders.

China's GDP growth may be much faster than India's. But according to our benevolent and mild mannered Prime Minister Mr. Manmohan Singh, that is not all that is there to it. In a recent visit to the US, he has been quick to point out that respect for fundamental human rights, respect for the rule of law, respect for multi-cultural, multi-ethnic, multi-religious rights are important values that one also has to consider. And this is why even though India's GDP growth might not be as good as the Chinese, Mr. Singh would certainly not like to choose the Chinese model which doesn't mind compromising on the above. He may have a point there. As they say, 'Money is not everything!'

It is well known that the financial crisis was overcome with unprecedented dosages of liquidity. The US, which was the epicenter of the crisis, was also the country which pumped in the most amount of liquidity into its economy. As Warren Buffett recently mentioned in a talk at the Columbia University, it was the right thing to do. But we must now gear up for the consequences - chiefly inflation. It is also important to realize that at some point the dosage of liquidity must be stopped. However, none of this takes away from the long term fundamentals of the US economy as per the Oracle of Omaha. It is still the best functioning capitalistic economy that unleashes human potential. That itself counts for a lot.

Interestingly, Bill Gates, who was present on the occasion, believes China and India are also following that path. We certainly hope so. There is little doubt that India would do itself a great favour by encouraging its citizens to live up to their potential. That means - more reforms in education and the business environment. Who knows the next Bill Gates and Warren Buffett could come out of India. We certainly have the talent.

Banks in India and globally have a lot at stake. Not just in terms of cleaning up their stained reputation. But also in terms of acting as the backbone of global economic potency. There are several economic thought leaders who support this view. The RBI governor Dr. D. Subbarao believes that way banks mange their business is going to be the key to accelerated economic growth. Nobel Laureate Paul Krugman's theory propagates a very interesting solution. It says that banks cannot reform themselves from their erstwhile aggressive stance by just becoming 'boring'. This may not be good for the economic progress of the nation. It is important to support economic growth without going lax on risk. For Indian banks it means ensuring better risk management, and higher efficiency.

Banks in India so far have responded very well to the call for economic reforms. The regulatory bodies like RBI, SEBI and IRDA have ensured the stability of the individual sectors. But they now have the added responsibility to preserve macroeconomic stability and aid economic growth.

Meanwhile, after trading close to the break even for first half of the day, the BSE-Sensex took a turn for the worse and was trading lower by around 290 points at the time of writing. Banking and auto heavyweights were seen to be exerting the maximum selling pressure. Most Asian stocks also closed lower today while European stocks have also opened on a negative note.

04:52  Today's investing mantra
"We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person." - Warren Buffett

Note: Yesterday's edition carried the wrong investment mantra of the day. The error has been rectified and readers can now read the correct quote in our online edition for yesterday. The inconvenience is deeply regretted.
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12 Responses to "The best defense against asset bubbles"


Nov 27, 2009

This article open up one's vision to think over the nowdays asset management.


kiran Mankame

Nov 27, 2009

The write up gives us the more power & direction in our thinking .
kiran Mankame



Nov 26, 2009



Anupal Bharali

Nov 26, 2009

Very well written, and, most appropriate at the present scenerio. The DOs and DO NOTs have been put forward in a subtle manner.



Nov 26, 2009

Generally, any nation's utmost care for the healthy generation is on the health care but, here it sleeps back with low budget allocation and that to with aim less and useless schemes on the names of the ruling parties, if this goes how can the health care sector achieve the target. Run a survey on how many patients are being treated a day, doctors/nurse strike, shortage of medicines, beds, staff, the results would break the thought of any penetration and growth of the this business on economical scale. Investment in this field had attained a slow growth for last few years and now with the $ sick low) I believe a short time is sure a dormancy period of 1 or 1 and 1/2 years.
Have a good day, Secunderabad.



Nov 26, 2009

good manner



Nov 26, 2009

It is interesting & covering good current economic micro knowledge which certainly gives up date to decide for any future planning . I congratulate & wish to continue lighten the spirit up & UP !!!!!!! strengthen our knowledge bank. Regards Hari



Nov 26, 2009

it is only a story pratical it does not happen take the case of big american compaines who are at loss


Arjan Jagtiani

Nov 26, 2009

It would be helpful to show the value of US$ in Rupees when discusiing performance of US$.


Vinod Goel

Nov 26, 2009

I like reading 5 min. Its amazing, summing up the most important things.

Keep it up guys!


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