1 to 2 years for the next crisis? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

1 to 2 years for the next crisis? 

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In this issue:
» Petrol run vehicles to make a comeback?
» Exit polls' impact on stock market
» No takers for BOT road projects
» Is the OPEC's grip over oil prices slipping away?
» and more....

In July this year, we interviewed renowned investor Jim Rogers to get his views on all things investing, with discussions mainly revolving around India and the US. He was of the view that the world is living on a very artificial lake of money - printed money. Central banks of major economies across the world resorted to printing money to keep their respective engines running and in the process have taken on more debt. Be it Japan, the US, Europe, or UK, the story has been the same across. So as long as they get the money, it will not be a problem. But the real problems would arise when the money stops coming. And when it would, it would end badly!

Half a year down, Mr Rogers continues to hold on to the same view. "Eventually, the whole world is going to collapse," he said recently. Given the large debt levels in the books of the Western countries - with the US being the largest debtor nation in the history of the world - he expects things to end badly.

According to him, the next crisis, which is likely to hit in 2014 or 2015, is expected to be much worse when the one witnessed in 2008. And that is because the debt levels over the last five years have increased substantially.

Government debt to GDP is a very critical indicator of the massive fiscal cliff that the US and European economies are staring at. While the US seems to have applied a temporary band aid to the problem - by kicking the can down the road - Europe has yet to feel the jitters. In FY13 itself, the US' government debt to GDP ratio at 108%. While that of Germany stood at about 90% levels.

What can an investor do in such times? "Be prepared, be worried, and be careful" in the words of Mr Rogers.

We share the same views as Mr Rogers. The liquidity levels across the world seem to have reached many asset classes - especially real estate and stocks. Back home, the impact can be seen on equities as the markets tend to move sharply on any news related to the Fed tapering. Not to mention that Indian stocks have been on the radar of foreign investors in recent times.

We suggest investors to take a cautious approach towards investing during such troubled and uncertain times. Following the basic investing rule of not putting all eggs in one basket would be a good way to go about things, we believe. Also, it would be advisable to keep aside money that would be required to meet your short term requirements and only then invest the surplus into other asset classes.

What should an investor's game plan be during such troubled and uncertain times? Let us know your comments or post them on our Facebook page / Google+ page

01:25  Chart of the day
In the middle of 2010, the government decided to deregulate petrol prices thereby allowing market forces to determine the price of the fuel. The weak Rupee coupled with the mounting losses of the oil marketing companies and the government's subsidy burden were key reasons for this pricing action. Prices have already increased by more than Rs 25 since then. However, the move hardly brought much relief since diesel continued to be regulated for a long time. But now that the Government has decided to partially deregulate the same, the difference between the prices of the two fuels is narrowing, with significant implications for the auto market.

Movement in Petrol and Diesel Prices in Recent Past

In October 2012, diesel prices in Mumbai stood at about Rs 53 per litre. At the time, petrol prices were at Rs 75 per litre levels. However, as the above chart depicts, petrol and diesel prices have increased by about 4% and 15% on a point to point basis. With the same happening, discussions over the demand for diesel vehicles coming down have begun. As you would be aware, the sharp difference in prices between the two fuels, led to a surge in demand for diesel variants of passenger vehicles. As mentioned in Business Standard, only one in every five vehicles sold last year ran on petrol. But with the gap in the two fuels narrowing, the demand for petrol cars is expected to make a comeback. In fact, it is believed that the current demand for petrol to diesel variants of vehicles has already begun to favour the former. What will be the trend going forward? Which auto manufacturer will benefit from this development? Difficult to say at the moment. But one thing is for sure. Majority of the auto manufacturers - who invested to produce more diesel variants of their vehicles - seem to have got it wrong, thus indicating the high level of challenges in the auto market.

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Today the Indian stock markets opened with substantial gains. The BSE-Sensex once again crossed the 21k mark after a month's hiatus. What has lifted the market sentiments suddenly? The answer seems to be the strong signs of BJP emerging victorious in several state elections. And this seems to be the first yet critical step towards the upcoming general elections wherein the chorus in favour of Narendra Modi-led BJP has gained momentum owing to the overall anti-incumbency mood.

While the BJP is known to be more business-friendly than Congress, a change of government alone cannot change the fortunes of an economy. The problems that the Indian economy is bracing are long term in nature. There are no quick fix solutions that can suddenly put us back to our growth path.

What is really happening in the markets then? We believe the answer lies in human psychology. India has been facing myriads of problems on the socio-economic and political front. In recent years, they seem to have further magnified particularly because of government apathy, widespread corruption and lack of meaningful reforms. When such problems persist for extended periods, it builds a lot of anger and stress among the people.

In such a scenario, a likely change of government is some kind of retribution. It becomes a mood changer. In its naivete, the human mind treats the change of government as a proxy for change of economic conditions in the country. Whether the new government will bring in any real changes is a different matter altogether. But in the meanwhile, the human mind finds temporary relief in celebrating anything that hints at a probable change in the macro environment.

Inserting a non-compete clause in M&A deals is common in business. The idea is that once the acquirer has acquired a target company, the seller cannot enter the same line of business for a certain period of time. But this might change at least for the pharmaceutical sector. The last few years have seen big ticket acquisitions taking place in the domestic pharma space. These have largely been by big multinationals acquiring big stakes in Indian companies. So we have the Japanese drug maker Daiichi Sankyo acquiring majority stake in Ranbaxy. And Abbott acquiring the domestic drug business of the erstwhile Piramal Healthcare.

This had raised fears of MNCs getting a monopoly which in turn would lead to higher drug prices. Hence, there was a call to change the current 100% FDI in pharma policy. That, however, will not be changed. But the government has decided to do away with the non-compete clause in pharma M&A deals. This means that sellers can once again enter the same field after the sale to an MNC takes place. MNCs fear that such a move is disadvantageous to them. Because the seller can use his knowledge and expertise to foray into the same line of business. Such a move would not be in the MNC's interest. However, whether there will actually be a big impact of this clause remains to be seen.

Government's dream to expand the road sector through private partnership has met a disappointing end. With muted response from private developers, government has decided to shelve its plan of awarding projects on build, own & operate (BOT) basis. Instead, the road ministry will now award projects under engineering, procurement & construction (EPC) basis. There is an important difference in the way the projects get funded under either route. Under BOT route, the private developer invests his capital and operates the project. In return, he collects the toll money for a certain period of time. Later, he hands over the project to the government after the end of its concession period. Under the EPC route, government funds the project. The developer just constructs it.

The government had decided to award projects on BOT basis due to funding constraints. However, this has had little success. Presently, no private developer is showing interest in bidding for projects on a BOT basis. And it is the government itself to blame for this. Failing to get the necessary approvals on time has made BOT projects unviable from the developers' standpoint. BOT projects are leveraged projects. Thus, delay in approvals or execution result in piling up of interest costs. As a result, developers are no longer interested in BOT projects. Thereby leading the government to award projects on EPC basis. It is estimated that government will have to spend Rs 400 bn for awarding such projects. However, considering the poor health of the government's balance sheet we wonder how government would manage to fund the same. The road sector does appear to be in for a tough time.

Is the vice like grip of OPEC over oil prices slipping away? Not so soon we believe, but the group will have to be wary of growing threat called Iran. Emboldened by its recent agreement on its nuclear programme, Iran looks to go all out to propel its economy. And what better way to do this than try and increase its production of crude oil.

And consequently the rhetoric from it that it doesn't care if the crude oil prices go to US$ 20 per barrel, it remains committed to increasing its production by more than 1 m barrels per day. However, any such disruption is likely to be some time away. For its production growth is not likely to materialise any time soon. Over the long term though, the threat of greater production from Iran as well as Iraq does loom large. And OPEC will have to put on its thinking cap well before the move starts exerting downward pressure on crude prices.

In the meanwhile, Indian stock markets continued to trade in the positive territory. At the time of writing this, the benchmark BSE-Sensex was up by 220 points (1.1%). Barring healthcare, software and FMCG, all sectoral indices were trading in the green led by the stocks in the banking and capital goods sector. Asian stocks were trading weak with Japan and Singapore leading the losses. The European markets have also opened on a negative note.

04:55  Today's investing mantra
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4 Responses to "1 to 2 years for the next crisis?"

satish s dabholkar

Dec 7, 2013

As per Jim Roger's indication the crisis will happen within one or two year. We wish clear direction from equity master whether we should sell all the stock which has given us reasonable return and stay in liquid mode by Bank's fixed deposits, cash and Gold so that we will be be affected minimum and then find out the class of asset for purchase, whose prices have fallen down considerably due to economic crises, which is going to happen due to cheap money supply by developed nation.


jatinder s.

Dec 6, 2013

On Jim Rogers. this man has been bearish since the time that i have heard him on tv channels. does anyone listen to him ???? and why should we ??? does one think that all the economist around the world sitting in the govts dont know about this piling of huge debt . so whats new. what is something that we all dont know that he knows. nothing. mkt has gone up.....up since last 24 months. investors have made money .corporates have raised money , given dividend etc. now in rising mkt investors make money ....in falling mkt also investors make money in derivatives...etc.so if he is talking of mkts then lets not listen to him. nothing new from him, he just wants to be a tv start . yes i will listen carefully to those who matter in the govts , the RBI and FED , to know whats happening in the economy , inflation , employment growth and opportunities etc. ther are very few who on tv channels give us insight about economy ....they just blabber on mkt will fall..........oh mkt will go up.........thats all that are bothered about....i suggest lets ignore such kind of analysts like jim rogers....instead make efforts to ride the bull wave , make enough money to survive at the times of crisis..best of luck.



Dec 5, 2013

it is very interesting and educative for average investors



Dec 5, 2013

Diversification among asset classes and adequate liquidity to last atleast a year is the only possible solution.

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