Will this fuel the next emerging market rally? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this fuel the next emerging market rally? 

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In this issue:
» The money losing business called IPOs
» This most hated asset is also one of the best performing
» Teaser rate home loans could be a thing of the past
» From one software czar to another
» ...and more!!

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Positive economic news coming out from the US has become a rarity. Thus, we were surprised when not one, not two but a handful of them came out in recent days. And all of these point to the same thing. The US, it appears, may not double dip after all. The world's largest economy is finally showing some signs of revival across a wide variety of sectors. And the US consumer, easily the biggest driver of the global economy even now, is lowering debt and hoarding cash at a slower rate than before.

This is certainly good news for the US stocks as they will benefit from higher corporate earnings. But if Mark Mobius is to believed, rising confidence among US consumers will spur a 'secular bull market' in one more asset class. And that asset class answers to the name of equities in emerging nations. "I've never believed in a double dip. It is just not in the cards," Mobius opined in an interview with Moneynews.

Indeed. There is an incredible amount of economic activity that is taking place in emerging markets currently. And now, even the US seems to have jumped onto the bandwagon. However, one gets euphoric about this at his own peril. It should be noted that there are very strong chances that the economic recovery that is underway in the US currently could well be more illusory than real. This is because it is a result of near zero interest rates and a hell lot of money printing. This illusion could easily collapse once interest rates rise and money printing stops. Thus, one should ideally try and wait for a lot more evidence before one buys into the story of emerging market rally on the back of US economic recovery.

01:18  Chart of the day
Today's chart of the day is an indicator of how far the gold mania seems to have come. It lists the countries whose Governments have the largest gold holdings in the world. Lying on the fifth spot is the SPDR Gold fund, the world's biggest gold ETF. It should be noted that this fund was launched only a few years back and hence, the same becoming the world's fifth largest holder of gold is a pointer towards the incredible popularity of the yellow metal in recent years. The fund may not be done just yet. It is soaking up fresh gold demand to the tune of US$ 30 m annually and hence, there is a strong chance that the fund would be perched even higher on the chart a few months from now.

Source: The WSJ

The US dollar proved to be last month's best investment. The capricious greenback outperformed stocks, bonds and commodities. This too despite criticism that the US was pursuing a weak-dollar policy through its "quantitative easing" measures (read uncontrolled money printing). The US Dollar Index, which tracks the currency against those of six major U.S. trading partners including the euro, yen, and pound, rose 5.2% in November. Of the 16 most-traded currencies, the greenback had its steepest gain against the euro, strengthening 7.43%. The gain in the Dollar Index brought its advance for the year to 4.4%, trailing the 5.3% rally in bonds, 5.5% for stocks, and 6.4% jump in commodities prices.

The rise in the dollar has come on the back of rising bond yields and signs of economic recovery which increased the allure of U.S. assets. So while critics keep spelling out doom for the despised currency, the fact remains that the world economy still finds it a relatively safe haven. You hate it. You avoid it. But you cannot live without it. That's the dollar!

The buoyancy in the Indian stockmarkets led many companies to announce a flurry of IPOs. The perception was that since it's a bullish market, investors would lap up these IPOs even if the valuations were not attractive enough. And many investors now seem to have paid a heavy price for the same. For out of 62 IPOs that hit the market this year, investors have lost money in 37 of them. That's more than half. Obviously the recent spate of scandals and the consequent volatility in the markets has pushed down the prices of many IPOs. But these developments are not the only the reason why many of these IPOs are languishing at lower prices.

The investing rationale for IPOs is the same as investments in any other listed entity. And if a company with not so great business fundamentals comes out with an IPO at not so great valuations, investors stand to lose out in the long run. Another reason why so many IPOs have not done too well is that investors put in money in them for listing gains. Then booked profits as soon as the IPOs got listed as concerns over quality and pricing of issues heightened. Thus, investors would do well to do some homework before they go in for IPOs and not put money into them just for listing gains.

This is not exactly a case of compliance. The RBI has been insisting on banks to withdraw their rock bottom 'teaser rate' home loans for several months now. But is only this week that some of the largest players in the sector have bowed to the regulator's appeal. As we said, the risk of poor margins for the initial period always existed on such loans. But what the banks seem to be more worried about is the likelihood of slippages.

The recent cases of NPAs in microfinance sector have already dealt a blow to the banks as well. Realty and telecom sectors continue to be classified in the 'doubtful' category of loans. Amidst this, bankers are shying away from attracting borrowers with cheap rates. The low rates have the likelihood of luring borrowers with low loan servicing ability and ignorant of the upward trend in interest rates. Although the bankers' move has come in a bit late, nevertheless, it may them save them some blushes on asset quality.

We recently heard Bill Gates and Warren Buffett travelling across countries asking corporate chiefs and other rich people to contribute a part of their wealth to charities. They did not come to India. But a charitable act by one of the country's leading businessmen would make Gates and Buffett proud.

We are talking about Wipro's chief Azim Premji who has transferred Rs 88 bn from his personal wealth for philanthropic purposes. Premji has donated this much value of his shareholding in Wipro to Azim Premji Foundation. While this will bring down his stake in Wipro from 79.4% to 68.4%, it's heartening to know that it will be for a worthwhile cause. We hope some of the high flying Indian corporate chiefs take a lesson or two from Premji's act.

Meanwhile, the benchmark indices came off the day's highs but were still trading strongly in the positive at the time of writing. At the time of writing this, the BSE-Sensex was higher by about 90 points led by strength in bellwethers like ICICI Bank and Reliance Industries. Other Asian indices also closed strongly today and Europe too has opened on a positive note.

04:45  Today's investing mantra
"A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past." - Charlie Munger
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7 Responses to "Will this fuel the next emerging market rally?"

Adi Daruwalla

Jan 4, 2011

It sounds a bit corny but it should be like this

To WIPRO foundation from Azim with a tag attached Prem Chopra there is something fishy about the man with his salt hair.


Adi Daruwalla

Jan 4, 2011

In addition to my previous comment, the efforts of mr. Anand Mahindra of M & M should be lauded for giving back to society, cause he has done huge amounts at a time when he himself did not have so much funds for charity. Charity has become show biz in todays world. Premji's chrity is like he is being forced to part with his money. Well is better to give rather that have all taht cash stashed in your mattress or your seat cushion.



Dec 6, 2010

your views are very prompt & up to the mark.



Dec 6, 2010



Adi Daruwalla

Dec 2, 2010

Appreciate that Premji has donated to a trust fund that is going to do good philanthrophic work. But as reported the stake has not gone down to 68%. He still holds the voting rights for the 10% he has transferred. The situation is still status quo. He has to reduce (his)promoter stake to 75%, which menas he has to still offload 4.8 r 4.9% of stock at current market price as per the govt norms. This has to happen by year end. Anyways his photos appearing in the press don't show any sign of happiness at this act of his. I dont think Premji ever does it from his heart. It looks more like a manipulated move. Well no ones complaining as long as litreacy and education programs improve NATIONWIDE under the leadership of Mr. Anurag Behar who along with another gentleman is the COO of the trust.


Ganapathy Sastri

Dec 2, 2010

To WIPRO foundation from Azim with Prem.


Agnel Pereira

Dec 2, 2010

When we read about the philanthropic motives of Bill Gates, Warren Buffett and our own, Azim Premji (salute to them all) sharing their wealth judiciously, I bow in shame that another billionaire, Mukesh Ambani decided to build an unnecessary edifice of love to his wife, the biggest residence in the world ever. The fact that he has chosen to build this in an area surrounded by slums where kids have no education or health, fathers spend their daily earnings in alcohol and women suffer relentlessly, makes one crawl on the earth. Well, goes to prove there are such opposites in this world.
If the top 10 rich guys donate 10% of their wealth, they will not be paupers, but for sure, more than 10% of the world's poor will at least manage one meal a day for few years. Why the rich world does not understand this simple arithmetic?

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