'Next Dubai' could be closer than you think - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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'Next Dubai' could be closer than you think 

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In this issue:
» Mark Mobius' candidates for the 'Next Dubai'
» Autos on a tear
» Gold could touch US$ 2,000 per ounce, says turnaround specialist
» PSU Banks have written off a lot of money
» ...and more!!


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00:00
 
Poor Dubai. Ever since the news that one of the investment arms of the Dubai government has sought an extension for loan repayment broke out, the Emirate kingdom has sort of become a favorite whipping boy of the financial media. But the fact remains that there are plenty of 'Dubais' lying hidden around the world right now, especially in places, which are awash with liquidity. And if Mark Mobius, the famed emerging markets' guru is to be believed, some areas in China and right here in India could well become the 'next Dubai'. Talking to Bloomberg, Mobius asserted that given the liquidity in the two Asian nations, there could be isolated pockets of disaster on account of over-spending and over-leveraging. However, he also added that it may not happen tomorrow but with the kind of money supply that's coming in and with the IPO activity that's underway, a Dubai like situation is definitely on the cards.

We couldn't have agreed more. The last time the Indian equities touched their all time highs back in January 2008, bubble formation was clearly being seen in select pockets like real estate and power sector stocks. Infact, it would not be out of place to say that the entire equities market looked like a bubble with valuations going ahead of fundamentals. So, have the Indian stock markets started to resemble a bubble again? We do not think so for the valuations do not seem way too out of whack with fundamentals. However, other asset classes like real estate in places like Mumbai and Pune do look like they have entered bubble territory. Hence, they seem like strong contenders for being the 'Next Dubai'.

00:52  Chart of the day
Today's chart of the day is another reason why we think emerging markets are the next candidates for a sighting of asset bubbles. It is being believed that public debt (the debt that the government of a country owes to its creditors) in developed economies could keep rising well into the future, forcing them to keep interest rates artificially low so that interest costs could be kept at minimum. Hence, investors in search of higher yields could flock to growth economies like the emerging markets where not only would public debts be lower, thus allowing government to spend more on productive activities but the GDP growth could also be higher.

Source: IMF

01:24
 
Barely did the dust settle on India's excellent economic performance for the quarter ended September 2009, India's auto sector also seems to have come out all guns blazing. Maruti and Hero Honda, market leaders in their respective segments, have witnessed record shattering sales for the month of November 2009. While sales at Maruti were higher by an impressive 60% YoY in the domestic market, Hero Honda recorded its best November monthly sales ever, with volumes witnessing a strong growth of 31% YoY.

Besides being market leaders, sales at both these companies are also good indicators of where the rural demand is headed given their well entrenched rural presence. Thus, if the numbers are anything to go by, rural demand also seems to have come in pretty strong for both the companies. And this does bode well for India's economy as there are concerns that following drought like situation in certain pockets, rural demand may not hold up during the third quarter. The latest auto numbers must have surely gone some distance in putting those concerns to rest.

02:01
 
The yellow metal Gold is really finding a lot of backers these days. Latest to join the bandwagon is the billionaire investor and turnaround specialist Wilbur Ross. Ross is of the opinion that with top investors increasing their gold related holdings, the precious metal could keep rising to US$ 2,000 an ounce. However, Ross has not based his arguments on the demand supply theory. Instead, he believes that gold is more of a psychological commodity than an industrial commodity and hence, it is a momentum trade on a global scale rather than anything that has intrinsic value.

While Ross may be true that the intrinsic value of gold is not readily ascertainable, it should be noted that even the intrinsic value of a currency cannot be determined with a great degree of accuracy. One can only have a fair degree of confidence that it will not get significantly devalued. But that confidence is being increasingly shattered these days by governments who seem to be on a reckless money printing spree. And since unlike currencies gold cannot be printed, people are seeking the relative safety of gold. Thus, while on an absolute basis gold may not have any intrinsic value, on a relative basis, it seems far safer than its alternative, the paper currency.

02:45
 
The attempt by PSU banks to clean up their books in a hurry does not seem to have gone well with investors and the media alike. Writing off bad debts with the help of treasury profits has not been a first instance this time. The same ritual was followed in the previous low interest rate cycle (FY03 - FY04). However, many believe that the one-time settlement (OTS) scheme is being used by banks to collude with willful defaulters. A leading business daily reports that as per the Finance Ministry, PSU banks have together written off recoverable assets worth Rs 250 bn since 2007.

The same should have been lower considering the annual recovery rate. However, readers must view these numbers in the light of loan waivers and settlement schemes announced by the government. Further, storing the 'doubtful' assets in their books and not providing for them would anyways not reflect the outstanding risks. Thankfully, defaults in credit cards and personal loans are not yet a sizeable proportion of PSU banks' NPAs. What remains is largely agri and corporate loans. Here, whether it is the bank or the government colluding with the willful defaulters needs to be answered.

03:23
 
The future has a way of catching people by surprise. That makes forecasting a tricky business. So, little wonder forecasters have to be a little tricky themselves. Most forecasts seem to be exercises in hindsight rather than acts of any great vision. Take one of the most popular forecasting exercises in economics - predicting the GDP. After India's surprising 7.9% GDP performance in the second quarter, there is a rush of economic forecasts by financial institutions. Nomura has upgraded its FY10 GDP forecast to 7%, up from 6%. Morgan Stanley upped its estimates from 6.4% to 6.7% for FY10. We find it amazing how precise forecasts tend to be and how authoritative they sound. As Benjamin Graham said, "The demand (for forecasts) being there, it must be supplied".

03:48
 
"My money is on both", says another admirer of both India as well as China. "I do not think the question is India or China", he goes on to add, "I think there is a really good chance that it could be India and China. These are different models, different systems, different challenges, and the stars are in pretty good alignment for both of these huge economies provided they deal with some of their structural issues." The man in question is none other than Stephen Roach, one of the world's pre-eminent economists. Speaking to a leading daily, Roach also observed that rising job losses, unemployment and shrinking incomes meant that Americans were wary to resume their consumption binge. This is why Roach believes consumption in the US will take a long time to recover.

Talking of India, what makes Roach optimistic is that the micro story is still good. The country has a large collection of world class companies and a well educated English speaking and IT enabled workforce. Relatively stable financial institutions and a world known democracy are added feathers in India's cap. He has also lauded the independence of the RBI and believes that India can realise pretty impressive growth rates over the next 3-5 years barring any political shocks.

While all of these factors do receive a thumbs up from us as well, we believe that there still a lot of obstacles that need to be overcome if India has to come anywhere close to challenging China, let alone the USA. Foremost among these would be infrastructure and education. Thankfully, the intention is there but it remains to be seen whether the execution follows suit or not.

04:41
 
Meanwhile, the Indian markets were trading rather volatile at the time of writing and the BSE-Sensex was seen positioned slightly above break even. While banking and real estate stocks were seen lending strength to the indices, software and FMCG heavyweights were pulling it in the other direction. Asian stocks closed strong on yet another occasion whereas strength is also being witnessed amongst European stocks currently.

04:55  Today's investing mantra
"One of the greatest pieces of economic wisdom is to know what you do not know." - John Kenneth Galbraith
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17 Responses to "'Next Dubai' could be closer than you think"

A.Mayilvaganan

Dec 11, 2009

I..........could not imagine

Like 

rakeshh narulaa

Dec 3, 2009

excellent reviews,gold review is mind blowing

Like 

rahul

Dec 3, 2009

it is really a high time that the act of renunciation should be implied on this economic forecasting,it's a high time to fill the loopholes with review of financial tools and derivatives and maintain the leverage ratio in referance to indian money market.it was a good analysis,india can't afford any poltical instability at this time.

Like 

Prejish

Dec 3, 2009

250 billion loan waiver from Banks....Ooops!!!

And who is going to finally benefit from this waiver?
Is it the poor farmers or the small scale industrialists? No...Never.

Politicians who have huge land of agriculture(like sugarcane and other big political lobbies with agricultural land) and the Big Corporates who could easily pay their loans but are being given waiver (since they supported during the elections with required funds) are the people who finally benefits in such process. Such waivers are often done at regular intervals and this makes the rich people more rich.

The political will to offer this waiver is just to increase the income of the politicians and the rich classes. Whose money are they taking into their personal treasuries/bank accoutns - Who pays for it - Common Man.

Like 

S K SINHA

Dec 3, 2009

thanx for word of caution on bubble. in fact, i am so impressed with your daily wrapup that i have made my daughters too to sign up with u. they are getting mail daily. thanx again.

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ramalingamnatarajan

Dec 3, 2009

Perhaps u are right. Particularly with the real estate prices in India looking unrealistic! Thanks. One has to be vigilant.

Like 

SK Mitroo

Dec 2, 2009

VERY USEFUL ANALYSIS

Like 

sajid

Dec 2, 2009

Very informative.....Thanks a lot...

Like 

jaskaran Teja

Dec 2, 2009

Good point. This discussion looks likely an "early warning system" and hopefully it might help prevent a Dubai like bubble.

Like 

D N kamath

Dec 2, 2009

what is this 250 Billion loan waiver by Nationalised Banks in just 2 years?Can we have more details?can't we take up with Judiciary this matter (PIL)to stop and recover this money from these willful defaulters?
Don't we have responsibilty towards this nation and its poor people and honest tax payers? we only discuss on academic platform and do nothing about it?

we struggle lifelong to make a few monies legally think twice before spending them even where it is absolutely needed but these manipulators enjoy without any effort painless monies lifelong and getaway with it.Is there any justice in this world?I am left wondering

we everyday read about without any feelings and emotions suicides by farmers all over India.Tens of thousands of them perished for their inability to pay loans as low an amount as Rs.2500/-.
Where as their money being looted with state protection to the tune of hundreds of billions.
Poor of this country leave sub human and inhuman conditions for none of their fault.

Resources required for social security education health and employement are swindled by these crooks as their birthright since independence.Its singularly shameful that when a section of the society just wilts and perishes while other enjoys at their cost with immunity.Amongst us those who have coscience should not allow this nonsense to continue,Somewhere a stop has to be put this.

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