Facebook investor's cues on smart money - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Facebook investor's cues on smart money 

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In this issue:
» US dollar's reign under threat
» India's gold imports unperturbed
» Noble Foundation relying on hedge funds
» Moody's warning on Indian banks' asset quality
» ...and more!

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Do you recall the names of some of wealthiest people on this planet? Is a gentleman called Alisher Usmanov one of them? Quite a few readers might reply in the negative. Don't blame your ignorance! For until recently even a Spanish man who answers to the name of Amancio Ortega was unknown to many. That is until the billionaire founder of the fashion chain Zara tipped the legendary Warren Buffett. With that, Ortega became the third richest person in the world behind Carlos Slim and Bill Gates. Today we focus on another entrepreneur Alisher Usmanov, whose shrewd investment skills have won him a coveted place in the Forbes richest list. Mr Usmanov is the world's 28th richest person.

The Uzbek-born Russian businessman has earned his net worth from mining, lumber and investment. According to the 2012 edition of Forbes magazine, the oligarch is Russia's richest man, with a fortune estimated at US$ 18.1 bn. More recently, Usmanov made more than US$ 1 bn investing in Facebook Inc. According to Bloomberg, his company, USM Advisors, holds stakes in several other online-commerce companies. However Usmanov clearly advocates a shift in investment focus from the US to China. According to him, the valuations of US technology companies are too high to justify fundamentals. On the contrary he finds investments in Chinese technology space very lucrative from long term perspective.

It is a pity that no company in India has been able to elicit the interest of discerning investors like Usmanov. Moreover the red tapism, policy bottlenecks and lack of infrastructure have hindered the growth of start ups in the country.

Needless to say that smart investors like Usmanov are moving away from developed markets like US and Europe. These regions are likely to suffer from low growth and offer low returns for a prolonged period. Hence smart money is looking for opportunities in emerging markets. If India cannot live up to its reputation of a high growth economy, a lot of smart money might turn away. Thus the government, banks and entrepreneurs in India should read more into the views of investors like Usmanov. The Facebook investor's cues could offer India some solid wealth building companies.

Do you think we should take cues from Mr Usmanov's moves as to where smart money is headed? Share your comments with us or post your views on our Facebook page / Google+ page

01:36  Chart of the day
Remember early 2000 when entities like ICICI and IDBI were development finance institutions (DFIs)? Mandated with the task of lending to infrastructure building projects, these entities lent to companies at exorbitant rates. Sooner than later, the companies that borrowed from them, defaulted on debt payments. And the FIs had to be bailed out from their NPA burdens and transformed into banking entities. However, since 2002, non banking financial companies (NBFCs) have been under the strict vigilance of the RBI. Particularly the deposit taking ones. Hence we were intrigued to notice that for the first time in 10 years the gross NPAs of NBFCs have risen on year on year basis. We hope they do not repeat the mistakes of 2002!

Data source: RBI

Is the US dollar's reign of being the sole reserve currency of the world under threat? Here's another indication that it could well be the case. As per FT, the Bank of England, Britain's central bank is facing calls to support renminbi trading in London. Agreed that China's currency is still a tightly controlled one. But experts argue that opening a swap line with the People's Bank of China could lead to an increase in confidence amongst investors. For the ignorant, a swap line is nothing but an agreement between two central banks to exchange each other's currency which can then be lent out to domestic banks to improve liquidity.

Whether the proposal actually materializes is not for us to guess. But going by pure logic, it does make sense for central banks around the world to dabble more and more in the Chinese currency. This because fiscally, it is in much better shape than the US and the European Union and also has an economy large enough to command attention of the rest of the world. A new world order is only a matter of time we believe.

It is very well known by now that India has an insatiable appetite for gold. The reasons for this are twofold. First, the yellow metal enjoys considerable social status so that weddings and festive occasions are deemed as opportunities to buy more of the same. Second, it acts as a hedge against inflation at a time when there is considerable uncertainty in the global economic environment. As a result, gold imports in India have been soaring. So much so that the government claims this to have an adverse impact on its fiscal balance. It responded first by imposing import duty on gold. And now it has asked banks not to lend with gold as collateral to dealers and traders in gold.

The problem with prohibitive measures of this kind is that it does nothing to curb demand. Indeed, there has not been any noticeable slowdown in gold imports. On the other hand, gold smuggling has been on the rise. And it does not make much sense to reduce demand for the metal, when central banks including RBI have been buying more of the same. If the government is serious about cutting down its deficit, it will have to focus more on ramping up infrastructure and reducing unproductive expenditures such as subsidies.

One of the most prestigious awards that one can receive is the Nobel Prize. But awards are not just about prestige. They are about the money too. Unfortunately the Nobel Foundation had to cut down its cash prize this year. The reason was the global crisis. Over the period from 2007 to 2011 the fund's investment corpus has earned a meager 0.6% in returns. In its equity portfolio it suffered a loss of 2.4%. As a result, the foundation plans to invest a larger portion of its corpus in hedge funds to boost its returns.

Unfortunately for the foundation though the hedge fund industry has not been doing too well either. The HFRX Hedge Fund Index, which measures hedge fund performance, has gone up by just 2.4% since January this year. At the same time, MSCI World Index which measures global equity performance has gone up by 11% during the same time. This clearly indicates that equities have outperformed hedge funds. Given the riskier nature of hedge funds as compared to equities, ideally the returns should be higher. But that does not seem to be true in this case.

The birthplace of the Industrial Revolution is in trouble. Yes, we are referring to Britain. In a recent interview, Indian doyen Ratan Tata pointed out the troubles plaguing the British industry. It has been become very costly to undertake manufacturing in the country. And a direct consequence of this has been a dying supply chain. Such factors are causing investors to shy away from making investments in the manufacturing sector. It must be noted that the Tata Group operates in Britain through Jaguar Land Rover, Tata Steel and Tetley Tea.

Manufacturing in Britain continued to contract in November 2012. It can be said that the problems engulfing Britain are to a good extent common to several developed economies. It is explains why manufacturing has been increasingly shifting to emerging and developing economies. Unfortunately, India has not been able to tap its full potential in the manufacturing sector. Poor infrastructure and lack of policy reforms are the main culprits for it.

Banks are under the hammer. Big name defaults such as Kingfisher Airlines, Air India, and various State Electricity Boards have already burdened their books. But, according to global rating agency Moody's, Indian banks' asset quality is far worse than reported. Provisioning norms prescribed to them are weak compared to global standards. The current classification, especially of restructured loans is inadequate and masks the extent of the damages. The rating agency predicts that both NPAs and restructured loans will rise further. Moody's has maintained its outlook on the banking system as 'negative'. It says that the combined NPA + restructured loan ratio of 7.63% at the end of FY12 more accurately reflects the economic position of banks. This is as opposed to the reported 2.95% NPA ratio. This is a huge disparity. An internal group of the central bank is reworking provisioning norms for restructured assets, but this may still not be enough. Indian banks need additional capital to finance loan growth, meet higher credit costs and maintain new adequacy norms. This will be a major challenge for banks going forward. 70% of India's banking system is controlled by government owned public sector banks. With the government's finances also in disarray it will be tough to mobilize capital.

Buying interest in commodity, auto and construction sectors led the benchmark indices in Indian equity markets to remain firmly in the positive throughout the session today. The BSE Sensex was trading higher by around 83 points at the time of writing. Other major Asian markets closed higher today while Europe also opened on a positive note.

04:50  Today's Investing Mantra
"There is no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock or worse to buy more of it when the fundamentals are deteriorating." - Peter Lynch
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