Bill Gates is all ears to this man. Even India should be. - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Bill Gates is all ears to this man. Even India should be. 

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In this issue:
» Chidambaram finally acknowledges the devil called inflation
» US stocks could correct by a huge 50%
» Are capital goods stocks back in favour?
» Why the 60/40 asset allocation rule could be dangerous
» ...and more!

Vaclav Smil. Chances are most of you are hearing this name for the first time. This should not take anything away from his reputation as a very good writer though. In fact, Bill Gates, the richest man in the world for many years now, seems to swear by Smil's books. quotes Bill Gates as saying 'There is no author whose books I look forward to more than Vaclav Smil'.

Well, given the rate at which he comes out with new books, Gates doesn't have to wait too long we reckon. This year alone, three of Smil's books have hit the stands. Ask him about his modus operandi and Smil retorts he has a habit of scanning all horizons. In other words, most people know everything about one thing while he tries to grasp the basic essence of everything.

Well, enough of the man. Let's try and listen to some of the advice he dished out in plenty in a recent interview. There was this one in particular that left a deep impression on us. And we believe it perfectly summed up the current political and economic environment in the country.

Smil is of the view that a country that stops manufacturing falls apart. Simply because manufacturing builds the lower middle class in a society. And if you give up manufacturing, there is huge income inequality to contend with which then gives rise to the total extinction of the lower middle class. And what remains is extreme polarisation.

Well, with the quality and the quantity of population that we have, India should already have been a manufacturing powerhouse. However, the reality is anything but this. So far, we have totally squandered away the population edge that we have. Things have come to such a pass that items like ganesh idols and rakhis can't be manufactured competitively despite the low value add involved and abundance of cheap labour. Thus, what has remained is the extreme capital intensive businesses at one end of the spectrum and a huge unorganised and a parallel economy on the other.

The policies that could lead to promotion and growth of labour intensive and lower-middle class creating ventures are totally absent. Not just that, whatever little is left of the organised economy is also being systematically taken away by high inflation and taxes. Is it any wonder that the economy that was growing at well over 8% till about a few years back is now literally huffing and puffing its way to the 5% mark. And if things are not sorted out soon enough, even this growth will be hard to come by.

Do you think the root cause of India's problems is because of the poor state of its manufacturing? Let us know your comments or post them on our Facebook page / Google+ page

01:23  Chart of the day
Given its stupendous price rise over the year, we can't help but resist the thought that Bitcoins could well be in bubble territory. However, this hasn't quite stopped people from buying it by the clickfuls. Infact, its popularity in India is also on a strong upward trajectory. As today's chart highlights, India is placed quite low when it comes to countries with highest bitcoin downloads since inception. But will it continue to steadily move up the charts? Well, we don't quite know. The idea behind Bitcoin, that of an alternate currency and the one whose value cannot be destroyed by the Government is indeed sound. But unlike stocks one can't have a firm grip on whether it's overvalued or undervalued. And this is one of its biggest disadvantages we reckon.

Countries with highest Bitcoin downloads

----------------- Introducing... Valuation Graphs -----------------

Now you can view P/E and P/BV graphs of India's leading corporates on Equitymaster...

Not just that... you can also see, for instance, how the valuations of Infosys compare with TCS over the last 3 years!

Start here with the valuation chart for Infosys...


As a rule of thumb, investment advisors and wealth managers say that an ideal portfolio allocation should be 60:40. This means that 60% of the portfolio should be in equities and the balance 40% in bonds. However Burton Malkiel, author of a book on investing called A Random Walk Down Wall Street, stated that investors following this rule would be "badly hurt". The reason is the change in scenario.

You see when the rule was written, bond yields were higher and interest rates were not close to zero in the US. The US had not started printing money and things were different. But now a lot has changed. And this change necessitates a change in asset allocation as well. The one size fits all idea no longer holds. This is something we agree with too. Just because one allocation strategy works for one person, does not necessarily mean it would be equally beneficial for another person. Each individual is different so an asset allocation plan will differ from person to person based on his or her personality traits, age, risk taking capacity and the ultimate investment objective in mind. One cannot take a 'one size fits all' approach.

Stock price movements are generally governed by future expectations. If you look at the BSE Capital Goods index, it has gone up 36.1% over the last three months. Compared to that, the BSE Sensex has gone up just 10.3% during this period.

Now, the financial performance of capital goods companies are directly linked to the investment cycle in the economy. And the investment cycle is again a function of the overall demand, interest rates and so on. So are investors hoping for a revival in the economy after the new government takes over post the 2014 general elections? As per an article in Financial Express, investors are looking forward to a new government that is business-friendly.

In our view, this is an extremely flawed approach to investing. We have highlighted earlier that a change of government alone cannot solve India's problems. All it could do is lift sentiments in the short run. On the fundamental side, we don't see any immediate revival in the investment cycle. The economy continues to remain subdued. Inflation is still very high to facilitate any easing of the interest rates. So do take into account these factors before falling prey to sentiment-driven investing.

'To correct by 50%'. No, this is not a dire prediction with regard to any over-heated stock. It in fact relates to one of the largest stock markets in the world. As per Daily Crux, Porter Stansberry, editor of a renowned newsletter S&A Digest, has made this prediction for the US stock market. Stansberry has not just contradicted Alan Greenspan's belief that the QE policy will bailout the US stock markets. He has also contended that the tapering of the QE could lead to stock markets falling by half! This could then trigger a tsunami of sorts in the global stock markets as global banks keep nearly 60% of their reserves in US dollars. For those who believe that China could bailout the US stock market in such a scenario are also wrong. For in such a scenario, China would unveil a complete convertibility of its currency, Yuan. And it would certainly not lose the opportunity to take the numero uno status in the global economy from the US. We believe that Stansberry's assessment of the risks to over-heated valuations of US stock markets is very logical and rational.

Inflation in India has been high for quite some time now. More so for the common man who has seen higher prices of items, especially food, burn a hole in his pockets. Despite some lean years on account of poor monsoons, large part of the food inflation has largely been due to several supply side issues. Lack of good infrastructure, inadequate storage facilities and the overall apathy of the government in fixing this has been the problem. Plus, it is also running on huge fiscal and current account deficits. The RBI on its part has been raising interest rates to bring inflation under control. But this has not really had the desired effect. Rather it has only made matters worse at a time when economic growth has also slowed down. The UPA has always been an advocate of the common man. One would have thought that from a political point at least it would do something to ease the pressure off the people. And yet it has not shown much initiative in this regard. This is something that seems to have now caught the attention of the Finance Minister Chidambaram. He recently stated that the UPA will pay a high political price if it does not tackle the problem of inflation. Now it appears that this may be a little too late.

Meanwhile, major global indices remained upbeat after the US-Iran peace deal was finally brokered. In a historic deadlock that spanned more than three decades, Iran and six world powers reached an agreement in Geneva, Switzerland over the former's nuclear program. In exchange for controlled nuclear enrichment, the grip of international sanctions against Iran would be loosened under the deal. India, being a large importer of crude from Iran after Saudi Arabia, would be the biggest beneficiary from the agreement. This coupled with an improved GDP growth for the September quarter saw the Indian stock markets clocking the biggest jump of 2.8% during the week. Majority of the Asian stock markets reported strong gains with the Japanese and Chinese indices clocking gains of 1.8% and 1.1%, respectively.

Even European markets posted strong gains on positive Eurozone economic data. The Eurozone unemployment rate dropped from 12.2% in September to 12.1% in October. Even inflation increased quelling concerns of deflation in the Eurozone. Stock indices in Germany and France gave handsome returns of 2% and 0.4%, respectively for the week. Even the US markets were marginally up by 0.1% on favourable Eurozone data.

Performance during week ended Nov 29
Data Source: Yahoo Finance

04:54  Weekend investing mantra
"Behind every stock is a company. Find out what it's doing" - Peter Lynch
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4 Responses to "Bill Gates is all ears to this man. Even India should be."


Dec 3, 2013

During the last decade there is hardly any addition of capacity in manufacturing. Thus limiting the job creation
in that economic sector. Most of the jobs created are white collar jobs(BPOs, finance, I-T, KPOs,etc.). To such an extent, that even the recruitment done in top engineering colleges are by banks, financial instituitions, and I-T companies. This trend is very dangerous and fritters away the costly educational resources in totally diverse and unrelated fields. Of course this is not just in India. This trend is allover the world. It only emphasises what we already know, that countries like China,Korea and Taiwan are the factories
of the world.Unfortunately, India has lost the opportunity to be included in this list. Unfortunately,I agree with the fact that change of government is not the solution. For the economic environment to change, we need a complete change of attitude in our politicians and a knowledgable group of economists to chart out the path of economic growth for the country. This group of economists should be free of any political influence. Our planning commission is too much under the control of our politicians. However, this is too good to be true. Hence, until the right sense prevails, we will have to live with the risk of India sliding down the economic ladder. Our only hope is a divine miracle.



Dec 1, 2013

We don't need a pundit to tell us this. This, IMHO, has been the singular bane of India (along with refusal to genuinely improve agricultural productivity).
We have 1.2 B mouths and our educated, egalitarian government heads sign-up FTA with countries... but don't move our manufacturing capability. It's hurting and will hurt us for a long time, the aam janatha, until we fix these two needs...

Like (1)

Kirandeep Atwal

Nov 30, 2013

Government policy is definitely one of the factors for poor state of manufacturing in India. But, it is not the only factor. If we see our history, we see that British Raj ruled India for more than 100 years. At that time, there was no organised manufacturing. Most of the businesspersons were traders. Still, in 2013, most of the businesspersons have trading mentality. They are extraordinary salesmen. Even, I learnt lot of tricks from them. But, they do not know how to manage manufacturing unit. For example, they will not understand importance of investing resources in R&D, business process improvement or six sigma.

Like (1)


Nov 30, 2013

foolish Indians- they have no wise men- only copying 2nd rate thoughts.India is corrupt lazy, swindling team.Nehru never brought honesty, hardwork,fairness to all.We are destined to be ruled top down, not planning down up.a nation of beggars-real beggars are hard marketers,mentally hard, and get more. govt begs( trade deficits-GOM visits to all nations for money) but taxes more. Give working means, reduce costs(interest rates)praise best men too.So nation blooms.manufacturing @ high interest rates is by PSUs safe not private sector- efficiency.

Like (1)
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