Can these two dull economies trump the BRICs? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Can these two dull economies trump the BRICs? 

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In this issue:
» Chinese real estate investment trusts on the verge of shakeout
» Indian BPOs head to Vishakhapatnam and Indore
» Why is US Fed issuing debt at zero cost?
» Liquidity rules to force global banks to retreat
» ...and more!

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They have stable political structures. Good communication networks with mobile technology are transforming their societies. They have a growing middle class ready to save and spend. And most importantly, they hold a treasure trove of huge reserves of two precious commodities - oil and gold!

The two small economies that we are referring to are located in the western part of Africa, a continent often portrayed as unstable. The traditional powerhouses in Africa are Nigeria, South Africa and Kenya. But the possible oil and gold boom in Ghana and Uganda amidst favorable socio political climate is enticing investors like never before.

To put things in perspective, Ghana recorded a sterling GDP growth of 14% in the past fiscal. FMCG majors like Unilever and multinational banks like Standard Chartered are keeping fingers crossed. Their subsidiaries in Ghana could offer them the superlative returns over next few decades that no other can. Activity in construction, retail and consumer goods is driving the growth of these economies. The growth rates are well past that in the BRICs.

Now given the size of these tiny African nations, it would be unfair to compare them to Asian giants China and India. Or even to Brazil and Russia. However, it cannot be denied that any callousness on the part of BRICs would leave investors scurrying for new options. And given the 'golden' opportunities in the offing in Africa, investors would not hesitate to switch. So whether it is economic or political reforms, the BRICs have to get their act together. That too, without losing any more time.

The next three decades will definitely see a transformation in the world pecking order. Reports predict that China and India will overtake the US in economic might. But we must remember that Ghana and Uganda could feature as the new 'India - China' on the block. And investors will look for greener pastures.

Do you think dull African economies can give BRICs a run for their money? Let us know your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
The Reserve Bank of India (RBI) has regularly cited under penetration of loans and deposits in the country as reasons for issuing more bank licenses. However, as the data published by the central bank shows, as a share of GDP, the loans and deposits in Indian banks is 52% and 68% respectively. The same is fairly competitive to that in US, Brazil and France. Hence instead of issuing new bank licenses in a hurry, the RBI should vouch for the Indian banking sector's consolidation.

Data source: RBI, IMF

It's a frustratingly common pattern around the world. Interest rates are kept artificially low and the liquidity spigot is left open for a prolonged period of time. Entrepreneurs mistake this for real prosperity and thus invest in capacity building. But halfway into their projects they realize that the low interest rates were a mirage and the availability of funds a big illusion. The end result? Financial troubles or bankruptcy.

Use this framework and we bet you will be able to explain almost all the blowups in the financial sector in the past few years. And also the forthcoming ones for that matter. Like how Businessweek is pointing towards a trouble in the Chinese real estate investment trusts. These trusts that pool savings from investors and then invest the money into real estate could be on the verge of a major shakeout. And the genesis of the problem is the same. They have invested into huge real estate projects and midway into the same, funds have dried up. So big is the problem that as per estimates, around 1 out of every 6 of these trusts could default as early as next year. However, there does not seem to be any bailout in sight. And as always, thousands of investors will have to pay for mistakes committed by a few elites.

Low cost human resource has been the biggest driver of the Indian IT industry boom. Though the sector flourished in many major cities and metros across India, Bangalore has been at the forefront of this success story. It is for this reason that it is rightly called the Silicon Valley of India.

However, some new trends seem to be emerging in the sector. As per a leading financial journal, Indian business outsourcing companies are moving to smaller cities such as Vishakhapatnam and Indore. The main reason behind this move is the rising pressure on margins. As the developed countries are struggling with high debt and slowing growth, foreign companies are cutting down their IT spending. Moreover, competition is also increasing from rival outsourcing providers in countries such as Mexico and the Philippines. On the other hand, inflationary pressures have raised the cost of human capital in India. In major metros such as Mumbai, Delhi and Bangalore, wages are rising by about 10% annually. This is the reason that makes smaller Indian cities financially lucrative. As per some estimates, companies can save up to 30% on rent and wages in smaller towns.

Of course, this does not mean that IT companies are running away from big cities. In fact, the majority of hiring still happens there. But the contribution from smaller cities is set to increase.

The US Federal Reserve has decided to open yet another printing press. Earlier this week it has stated that the central bank will buy US$ 45 bn of Treasury securities per month. This round is expected to start in January. This will expand its asset purchase program. The general idea is still the same that this would lead to a flux of money in the system, thereby boosting economic growth. This has led to severe criticism from many including PIMCO's Bill Gross. He has stated that the Fed's latest move allows it to issue debt for no cost whatsoever. This is true given the near zero interest rates that exist in the US economy. Issuing debt for free has its own repercussions. This move makes it virtually costless for US to finance its fiscal deficit which will keep on growing. Eventually the flood of money will start to stoke inflation in US as well. This would eventually kill economic growth in the country rather than helping the same. From what we have seen in the previous rounds of monetary easing, this approach has not really been too successful. Therefore it would not be wrong to say that this round will not produce any spectacular result either.

When in Rome you have to do as the Romans do. As the crisis unfolded in 2008, European banks with American operations borrowed heavily from the US Federal Reserve discount window. At the time, these foreign banks did not play by the same rules as the American banks did although they competed and borrowed in the US. But, this may not hold true anymore. Federal Reserve Governor, Daniel Tarullo, recently announced plans to impose the same capital and liquidity rules on the American operations of foreign lenders that apply to US institutions. Having to allocate extra capital to overseas subsidiaries may force these banks to cut back their operations. Citi, UBS and Royal Bank of Scotland plan to cut thousands jobs worldwide over the next few years and shut down certain arms. Globalisation of banks took decades to build. But will increased regulations and economic uncertainty cause a rapid pullback? Well maybe so.

The week gone by was a positive one for the global markets. Except for US and India gains were seen across markets, with China's benchmark index leading the pack of gainers. Strong fund flows into China and speculation that new leadership will institute a number of reforms drove markets. The fact that China's manufacturing grew to a 14 month high also bolstered markets.

As for the rest of the regions, US markets were relatively flat with losses of 0.2% during the week. No progress over the deal to avoid fiscal cliff scheduled to start from January 01, 2013 was a dampener. While it is believed that both the sides (Republicans and Democrats) would reach a deal soon serious differences between them could lead to further negotiations thereby lengthening the time line.

With respect to Indian stock markets, the BSE Sensex was down 0.6% for the week. Markets are keenly eyeing the monetary policy scheduled on Tuesday. While the general consensus is that the rates would remain intact it would be interesting to see whether RBI has any surprise in store for the markets.

Source: Yahoo Finance, Kitco

04:50  Weekend investing mantra
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    1 Responses to "Can these two dull economies trump the BRICs?"

    Priyank Sancheti

    Dec 15, 2012

    Yes that is very much possible... But chances of being in the race of trump are greater for oil rich nations.

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