"India will rise from this and prosper" - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

"India will rise from this and prosper" 

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In this issue:
» Mark Mobius confident on India despite terrorist attacks
» Demand for oil to shrink
» S&P 500 stocks offer higher dividend yield than the US Treasury
» India's tourism industry expects 25% fall in business
» ... and more!

India's financial capital has come in the firing line of terrorists once again. This could also be termed as perhaps the biggest and the boldest attacks ever. But even the attacks of this magnitude have not done enough to dent investor confidence in the Indian stock markets. The biggest stamp of approval has come from none other than the guru of emerging markets himself, Mark Mobius. Speaking to Bloomberg, Mobius was of the opinion that although stock might take a beating on the resumption of trading on the Sensex, the economy was still quite "vibrant" and the stocks were trading at some of the cheapest valuation levels in years vis-a-vis the earnings. "India will rise from this and prosper" was how the savvy investor chose to put it across.

Indeed, the recent terrorist attacks are not new to this subcontinent nation of more than a billion people. But it has taken very little away from the rapid strides the country has taken towards growing its economy and pulling millions of people out of poverty. Infact, despite the global financial turmoil, its GDP is expected to grow at a very attractive rate of 7% in the current fiscal, the terror attacks notwithstanding, backed by its strong consumption demand and investments in fresh capacities. And it is these fundamentals that are likely to bring foreign investors back to the Indian stock markets. One leading business daily put it best when it said, "It is the fundamentals that drive markets and not guns". We hope the terrorists are listening.

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In recent times, we have been hearing and analyzing stats with regards to the financial markets that only about months ago we felt we will never be able to do in our lifetimes. Well, the list has just swelled. According to a poll of analysts published in one of India's leading business dailies, worldwide demand for oil is going to shrink-yes, you've heard it right-by 20,000 bpd (barrels per day) both in 2008 as well as 2009. It has to be noted that not since the early 1980s, following the severe recession in the US has there been a decline in oil demand. It has taken another severe recession in the US for the phenomenon to repeat itself. Worldwide demand for oil usually lags global GDP growth, which following the outbreak of the US credit crisis and the subsequent failure of Lehman Brothers, is expected to log in a mere 1.2% growth rate. As per the daily, members of the Organisation for Economic Co-operation and Development (OECD) will account for the maximum decline in demand as this is the region where the impact of the credit crisis will be felt the most. Infact, even developing countries like China and India, which were being accused of causing the record rise in crude prices earlier this year, are likely to see their demand for oil grow at a lower pace than before thanks to GDP growth slowdown. Indeed, the only thing certain in this world is change.

"I expect the situation to start improving, but it won't come back to the pre-crisis levels. I do not see peak levels of July, not in the immediate future." These are the words of Mr. S K Roongta, the Chairman of India's largest public sector steel undertaking, SAIL. Speaking in an interview with a leading business daily, Mr. Roongta commented that although he expects the pricing situation to improve in the near term, he did not expect steel prices to touch record levels of July anytime in the near future. While this may not be good news for steel producers, especially the ones that do not have integrated plants, it definitely is music to the years of extensive steel users like the auto industry and the white goods industry. Players from these industries have been hurt by rising commodity prices as these had starting to eat into their already thin operating margins, especially the auto industry, which also had high interest rates to contend with. But with both commodity prices as well as the interest rate scenario starting to look better, the auto majors would likely see some good times ahead. As far as SAIL is concerned, the company's expansion plans until 2011-12 are well on track but it will have to review plans, which it had made till 2020.

The impact of unemployment and lack of job opportunities has begun to be seen on the consumer spending levels in Europe.European retail sales fell the most in at least five years in November as a recession eroded consumer confidence and spending. While the lower take offs have impacted the sales targets of retailers in this region, their profit margins have also been impacted as stores are offering discounts to attract customers. As per OECD (Organisation for Economic Co-operation and Development), unemployment in the euro area is set to rise to 9% in 2010 from 7.4% this year. Retailers are also highly pessimistic about the prospects for sales during next month's crucial Christmas period, which is otherwise the peak season for retailing companies. Car manufacturing in Europe like Volkswagen AG (Europe's largest carmaker), and Porsche SE are expected to temporarily halt production to cope with shrinking demand.

This man has a history of sidestepping some of the biggest financial disasters of our times. Little wonder his company has been able to grow its market value by an impressive 21% each year over the past couple of decades. Contrast this with the 12% gain for the S&P 500 during the same period and his genius becomes all the more evident. Close followers of the man must have guessed by now that we are indeed talking of one Mr. Warren Buffett. And just like his previous escapades, the man has also largely been able to dodge recent the sub-prime crisis, which has reduced some of the biggest financial institutions in the world to nothing.

As per the Bloomberg, a weighted basket of Buffett's investment vehicle Berkshire Hathaway's financial stocks have risen at an average quarterly rate of 2.3% during the year through September. The S&P financials on the other hand had dropped 11.3% per quarter during the same period. Even after Sep 30, when the crisis sort of escalated, Buffett's financial investments have dropped 32% as against the S&P financials' 41% fall. Many experts attribute this outsized outperformance to the master's ability to remain patient and wait for an almost mouthwatering investment opportunity to present itself, something that a lot of other players simply cannot afford to do. The legend has himself called this trend among other players as 'the institutional imperative'. Even our minds hark back to the quote by the famous French mathematician, Blaise Pascal who is believe to have once said, "Most of man's miseries come from not being able to sit quietly in a room". Indeed.

High dividend payout ratio (dividend per share divided by earning per share) is an indication of the company generating surplus cash flow (in excess of what needs to be reinvested into the business). However, with signs of prolonged economic slump and poor profitability, companies are getting shy in terms of being generous with their dividend payouts to the shareholders. This is particularly the case with financial companies in the US.

As per Bloomberg, equity dividends are disappearing at the fastest rate in 50 years as the worsening recession is forcing US companies to conserve cash. Citigroup Inc. is leading the list of 91 companies listed on the US exchanges that are reducing or suspending payouts to shareholders this month, the most since May 1958, when 113 companies slashed dividends. Financial companies accounted for six of the eight dividend cuts.

However, what can bring some cheer to investors investing in US stocks is the fact that the dividend yield (dividend per share divided by price) of S&P 500 companies have touched a two-decade high and have infact crossed the yield on 10-year US treasury paper for the first time since 1950s. No wonder, astute investors like Mr Warren Buffett have got back to buying US equities!

However, what can bring some cheer to investors investing in US stocks is the fact that the dividend yield (dividend per share divided by price) of S&P 500 companies have touched a two-decade high and have infact crossed the yield on 10-year US treasury paper for the first time since 1950s. No wonder, astute investors like Mr Warren Buffett have got back to buying US equities!

Source: Bloomberg

Talking of escapes, if there is one Indian company that has been least impacted or has escaped with little damage from the carnage on Dalal Street in 2008, it is none other than the venerable FMCG giant, Hindustan Unilever. The blue chip that had been beaten black and blue by its commodity based as well as industrial rivals, all of whom had a quantum jump in their market caps, has now been able to extract sweet revenge of its underperformance. Since the start of the year, the company's market cap has moved up by 1% as opposed to the steep 56% drop that was witnessed by the benchmark Sensex. This huge outperformance in a short span of 10-11 months has even enabled the detergent maker to move several notches up in the market cap stake. Infact, after a long gap of four years, the company has once again been able to come in the top 10 rankings of companies with the biggest market caps. In such uncertain times, it is the non-discretionary nature of its products and its enormous reach that has kept the wheels of growth chugging for the FMCG major. And the reward from the stock markets has been quite apt.

Mumbai accounts for nearly 5% of the India's US$ 1 trillion (Rs 49.9 trillion) GDP and contributes one-third of its direct tax colletion. However, the recent terror attacks on the city (which as we write this is still underway) has jolted the confidence in the entire nation. The city of Mumbai is not new to terror attacks and has seen eight major terrorist attacks in the past 15 years. However, what makes matters worse in the latest case is the fact that it has come at a time when the economy is withstanding a global recession.

Already reeling under the impact of the economic meltdown, domestic as well as international travel to the country is set to take a huge impact of the terrorist assault on Mumbai, particularly on two of its most popular luxury hotels. Travel companies expect businesses to fall at least 25% to 30% in December, which is otherwise the peak of the busy travel season. To put things in perspective, November to January constitutes 50% of total inbound tourist flow into the country. Making matters worse is the fact that even business and work-related travel to the country is likely to get affected with most MNCs discouraging their employees from visiting the country in the near term.

In the meanwhile the Indian markets that started on an apprehensive mode made a sharp recovery on the latter half of the session. The benchmark BSE-Sensex closed higher by 1% led by software and financial stocks. India's GDP has grown by 7.6% in 2QY09, as against 9.3% in the corresponding period last year. The growth in the second quarter growth of this fiscal was also lower than the 7.9% growth clocked in the first quarter. The inflation numbers (measured by wholesale price index, WPI), however, brought some relief as it stood lower at 8.8% for the week ended November 15 2008, as compared to 8.9% in the previous week. While most Asian markets closed in the positive today, the European markets have opened on a negative note.

04:57  Today's investing mantra
Buffett on terrorism-"The probabilities are increasing, in an irregular and immeasurable manner, as knowledge and materials become available to those who wish us ill. Fear may recede with time, but the danger won't -- the war against terrorism can never be won. The best the nation can achieve is a long succession of stalemates. There can be no checkmate against hydra-headed foes."
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