Should we welcome this investor? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Should we welcome this investor? 

A  A  A
In this issue:
» Foreign institutional investors love emerging markets
» Food price inflation touches 20%
» Goldman Sachs stops cash bonuses, opts for long term stock
» Chinese stimulus could endanger the world economy
» ...and more!!


------- FREE Newsletter -------
Dont't get tempted to gamble your savings on some 'hot tips'
Get The Honest Truth, the e-letter by Ajit Dayal, directly in your mailbox.
It's FREE. Sign Up Today.

---------------------------------------

00:00
 
Everyone loves attention. So we can't blame the emerging economies if they are flattered by all the attention they have been receiving of late from institutional investors from the developed world. They are attracted by the growing middle class in the emerging nations. This middle class has the habit of saving and taking on very little debt. That's in sharp contrast to their counterparts in the developed nations. Small wonder then that the institutional investors believe they should park their funds in emerging markets. Despite the steep recovery from their lows earlier this year. In fact, as per Reuters, emerging market equity funds have attracted a net inflow of US$ 60 bn in 2009, much higher than earlier record of US$ 54.3 bn in 2007.

But not all attention is good. Foreign institutional investors are notoriously fickle. They were the same set of investors who dumped assets in the emerging markets in 2008 to move into US Treasuries. Some emerging economies realise this fact. Brazil has recently slapped a 2% tax on foreign equity and fixed-income purchases. The question is - does India realise the same? Seems not. The RBI believes the recent inflows cannot be compared to those of 2006 to 2008. They are not creating any asset bubble.

We are not so sure. Net foreign institutional investment is estimated at US$ 18 bn this year. When we look around for the great businesses in India, we find they are now trading at rich valuations. Many of them are at their all time highs. We tend to not get very happy with steep valuations. Especially when we know the large but fickle foreign investor has the power to pull the carpet under our feet. When that happens, those with the stomach to look for a bargain have a field day. But the vast majority of retail investors get severely burnt.

01:10  Chart of the day

Note: US Patents granted by country of origin
Source: New York Times

Today Indians are admired for their technological prowess. Academicians believe we have the potential to create trend setting products. But we have not lived up to the expectation. To use the cliche, India has not really moved up the value chain. Today's chart of the day shows how Indian citizens and firms have fallen way behind their Chinese counterparts in the recent years when it comes to obtaining patents for inventions in the US. The reason is the lack of funding for ideas. Government and corporate research & development expenditure lags behind other nations. Venture capital finance is also hard to come by. It also has to do with a culture that promotes rote learning and frowns on unconventional career choices. While there are historical reasons - colonial rule and central planning thereafter - for this culture, we believe it is high time we moved on.

01:46
 
Did you ever imagine that the price of the humble potato would have an effect on the monetary policy of the country? Very soon it could. Food price index has risen by nearly 20% YoY this week. But the Reserve Bank of India (RBI) is finding it hard to implement measures to control it. This is because the RBI is seeking to strike a balance between supporting a nascent economic recovery and controlling inflation. RBI governor, Mr. Subbarao has indicated that tightening the monetary policy may not be very effective in controlling food inflation. However, it may be used for preventing a spillover from high food prices. For this purpose, Mr. Subbarao started withdrawing the economic stimulus in October. He did this by directing the lenders to deposit more money in government bonds while maintaining the reverse repurchase rate. We believe that RBI will soon have to raise interest rates to control inflation. However, it will have to be cautious so as not to disturb the fledging economic recovery.

02:23
 
'How can you mend a broken heart' is a song that was released by the Bee Gees in early 70s and went on to become an instant hit. But guess who's taking it very seriously these days? It is the investment bankers. Goldman Sachs to be more specific. The world's most powerful investment bank seems to have had a sudden change of heart as it has announced that its most senior executives would forgo cash bonuses this year and would instead be paid in the form of long-term stock, which are shares that cannot be sold for five years and can be retracted if the executive does something that hurts the firm.

Although it looks like better sense has finally prevailed this time around, we don't know for sure how much of a help the current measure is going to be. Goldman's tendency in recent times to make some outrageous, arrogant remarks and then to retract it is already well known. All this makes one wonder are these people really apologetic of their mistakes. If the answer is in the negative as we believe, then the game of excessive risk taking may continue to play on in the future as well and the financial system will continue to remain vulnerable.

03:11
 
We had recently warned you that the 'Next Dubai' could be closer than you think. Ironically there are a few others who share this opinion. The European Union Chamber of Commerce in China is one of them. It believes that the country's overcapacity situation could finally lead the dragon nation to its doom. Besides, many are willing to bet on the possibility of China throwing up a Dubai-like shock. Of course, of a much bigger proportion. Much of China's 'overcapacity' has been driven by excessive capital spending and the artificial peg of the Chinese currency to the US dollar. These measures protect China's export-led manufacturing industry.

But that is not the end of the story. China's famous saving and investment history also has many critics. It seems China's investment to GDP ratio of 50% has broken all records. That of Germany's 27% in 1964, Japan's 36% in 1973, and South Korea's 39% in 1991. Also, the longest any country has sustained an investment to GDP ratio of over 33% was nine years. They were Thailand and Singapore. China is well into its 12th year of heavy investments. In fact a business daily has cited an interesting quote of a Chinese economist. "China's mega-stimulus programme is like drinking poison to quench a thirst'." Do we need to say more?

04:00
 
If there is one asset class that holds the potential to earn really strong returns in the future then that is commodities. That is what legendary investor Jim Rogers firmly believes. In fact, Rogers is of the opinion that agricultural commodities are the place to be in because the prices are still depressed. This is despite the fact that prices have risen at a fast pace of late. His rationale is that there is an imminent prospect of food shortage. Be it rice, sugar or wheat, inventories of food as a whole are the lowest in decades and he expects a food crisis to loom large in the next 5 to 6 years. And while the speculators will be blamed for prices soaring, the fact is that no farmer will be ready to cultivate crops unless he gets a higher price for it. So all in all, while Rogers is bullish on commodities as a whole, agricultural commodities is that one class on which he seems to be the most positive.

04:39
 
Meanwhile, Indian markets witnessed a relatively choppy trading session today after a positive start and the BSE-Sensex was down nearly 26 points at the time of writing. Stocks from the banking and telecom sectors were among the ones that failed to garner investors' interest. Asian markets are trading a mixed bag, while Europe is in the green currently.

04:53  Today's investing mantra
"Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return." - Warren Buffett
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "Should we welcome this investor?". Click here!

8 Responses to "Should we welcome this investor?"

Prem Singh Dhankar

Dec 13, 2009

Excellent-food prices.

I have decided to go back to fields for honning my agro- skills which I lost 39 years back- this will be a small +ve contribution. Our politicians have let us down- since the chair is with them for next few years, only a clever talk is showing results. I hope someone wake up to the facts.

Like 

S. Banerjee

Dec 11, 2009

Govt should take the following steps to control the price of some essential commodities :
1. Agricultural land should not be converted into Industrial purposes and Housing purposes.
2. Original farmers interest are to be safe guarded by way of financing, insuring the crops, storage facilities, transportation, sewage etc.
3. Commodity market should be banned immediately.
4. At last but not the least Social Audit system is to be introduced for all essential commodities and the auditor's appointment must be made by the Govt and rotationally.
Welcome for any suggestions,
Thanks, S. Banerjee

Like 

r d arora

Dec 11, 2009

keep it up, for someone as greedy as me and as fearfull as wet cat, these clips provide very rational/fast approach to both long term and short term investment startergies . thanks

Like 

gadi

Dec 11, 2009

foriegn investment in stock market should be totally banned.as i wrote earlier their investment of 18 billion has raised the market cap by 500 billion.this money is the hard earned and savings of INDIANS.THAT MEANS WE ARE CAPABLE OF DRIVING OUR MARKETS.LET THE STOCK EXCHANGE DISCLOSE THE MONEY DRAINED OUT BY FIIS AGAINST THEIR INVESTMENT.THAT SHALL BE THE EYE OPNER FOR THE COUNTRY.THEY ARE RESPONSIBLE FOR THE BUBBLE BLAST.ONCE THEY ARE BANNED THEN HOPE WE SHALL HAVE TO FACE SMALLER EVILS IN THE GUISE OF DIIS.

Like 

Bhanu

Dec 11, 2009

Indian Innovation: Falling Behind
I think the reasons cited are not the real reasons for the innovation falling behind. While money, funding is important, culturally we care very less for intellect and innovation and do not respect it. It is also not protected or least protected. Innovation and intellectual property are also not monetized and commercialized enough. So no. of patents granted is one graph and the monetization and return on those patents will altogether be a different story (even in the US). I feel this perspective is more important than merely pumping in more money into research. Once these are there, then more organizations will come forward to invest into this (R&D, sponsoring PhDs etc.).

Like 

K.D.Viswanaathan

Dec 11, 2009

"Should we welcome this investor?" made interesting read. The topics discussed are varied and of immense interest to every investor, existing as well as prospective. Indians have enough talent and they can compete with any other in the matter of inventions. What they need is adequate funding by the government.

Like 

Joseph

Dec 11, 2009

Why the food prices are shooting up? Government always said not to worry about bad monsoon, we have enough stock. If there is stock, then it is not reaching the people reason poor distribution and infrastructure. In between the middlemen are profiting. Can the government come up with a good distribution system removing the middlemen?

Like 

girish shah

Dec 11, 2009

more than 80 % of the popu is affected by high food prices and 2 % by stock market movemnts the rest are screwed by both

Like 
  
Equitymaster requests your view! Post a comment on "Should we welcome this investor?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407