The biggest upside for long term investors

May 15, 2010

In this issue:
» Greece may once again get back to crisis
» Inflation back to double digits
» A fiscal windfall for the government
» The threat looming over Chinese banks
» ...and more!

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At the outset US$ 11 bn may sound paltry for building the infrastructure of a trillion dollar economy. But as they say, a job well begun is half done. And this could be the beginning of building the infrastructure that the Indian economy is longing for. One that can remove the shackles holding back long term growth plans of Indian businesses. And more importantly, one that can channelise serious long term money to productive use. Headed by a veteran credited for making homes affordable to Indians, this initiative has the potential of offering tremendous upsides to long term investors in India.

Are you still wondering what is it that we are so enthused about? It's the government's plan to set up a Rs 500 bn (US$ 11 bn) fund for Indian infrastructure. 40% of the corpus will be raised from overseas long term investors like pension, insurance and sovereign wealth funds. And Mr Deepak Parekh, the chairman of HDFC, will be leading the initiative. Mr Ratan Tata, the chairman of Tata Group, is also expected to be one of the key minds guiding the mobilization of this fund.

Agreed the figure of US 11 bn pales against the US$ 500 bn outlay for the 11th 5-year plan. But this is just the beginning. We believe that that the success of this fund will be paramount to bringing Indian businesses at par with their global peers. The absence of a strong bond market, worries about project delays and poor returns have been holding back private investment in infrastructure. Power generation, road building, port construction and airport modernisation have fallen behind targets for years. Poor infrastructure has been the bone of contention for the best of Indian businesses. A dedicated long term fund headed by visionaries could do wonders to the Indian economy, its businesses and investor returns.

 Chart of the day
As China and India shoulder the responsibility of being the engines of global growth, there are a couple of factors that could hold them back. Most important of them being inflation. As seen in today's chart, The Economist predicts both India and China to have a lingering problem of inflation in excess of 4% over the next 4 to 5 years. Unless the respective central banks continue to remain proactive, the price rises could easily take the economies into a bubble territory.

Data source: The Economist

European policymakers did not want the Euro to collapse. And so with the backing of the IMF they announced a US$ 1 trillion bailout package for Greece and other weaker economies in the Eurozone. But this is only expected to exacerbate Europe's recession. "In 3 years, Greece will be back to crisis", says Mark Weisbrot co-director of the US based Center for Economic and Policy Research (CEPR). He believes the conditions stated in the bailout package to reduce debt will compel Greece, Spain, Portugal and Italy to raise taxes and curtail public expenditure. This will only plunge these economies deeper into the recession.

Weisbrot believes that if the IMF-EU programme works, Greece's debt will rise from 115% of GDP today to 149% in 2013. This means that in less than three years, and most likely sooner, Greece will be facing the same crisis that it faces today. The only feasible option then is that of leaving the Euro. Whether the EU officials will see reason in this regard seems pretty remote at present!

The last time inflation (WPI) touched the double digit mark was in October 2008. Now after a 16 month gap, inflation once again breached the double digit mark. The wholesale price index (WPI) stood at 10.06% in February 2010. In April too, food inflation stood at 16.87% as against 16.65% in the previous month. The government maintains that inflation is on the decline after the fresh rabi crop season. A good monsoon this year will also go a long way in easing food prices. The RBI has forecasted that the annual inflation will be around 5% by the end of March 2011. It remains to be seen whether this target is met and what further measures the central bank chooses to take to bring it under control.

Chinese banks have had a brilliant run so far. The nation of aggressive savers has been pouring more than a third of its GDP into banks. This has made some of them the largest globally in terms of balance sheet size. The government's mandate to lend aggressively has also helped these banks grow at a scorching pace when their global peers, including some in India, were cutting down exposure to risky businesses. However, analysts in the dragon economy see red from here on. The banks' heavy exposure to real estate could wreck havoc to their asset quality. One that could transpire from home loans to personal loans, as seen in the US. About 30% correction in housing prices is all that will take the Chinese banks to acknowledge that so far they were supporting a bubble. We will not be surprised if China too follows the 'Too Big To Fail' mantra.

India's fiscal deficit widening is one of the biggest risks to a stable business environment for companies in the country. Thus it may have come as pleasant surprise to many that the government looks set for a windfall gain in the sale of 3G spectrum. Against the budget estimate of Rs 350 bn, the 3G auction is now being expected to fetch over Rs 600 bn for the exchequer. This is thanks to aggressive bidding by telecom companies. In the wake of government's disinvestment plans going awry this has come in as a major savior.

The Finance Minister (FM) in his budget for FY11 had proposed to bring down the fiscal deficit to 5.5% of the GDP. Down from 6.7% a year ago. Thus significantly higher revenues from 3G will help India narrow her fiscal deficit. It will also help in giving the FM more legroom to execute growth measures for the economy. Without the fear of pushing up interest rates by resorting to higher borrowings to achieve this.

Indian stock market closed the week with a moderate gain of 1.3% while China was the lowest gainer in Asia with gains of just 0.3%. The week began with a bang for markets across the world. The reason was a huge attempt by the European policymakers to prevent the collapse of Greece and the aftershocks thereon. European policymakers unveiled a gargantuan loan package worth US$ 1 trillion. As a result, after last week's bloodbath, Europe saw the highest gains this week. Germany was the biggest gainer of the week (up 6%) globally while France and the UK came close on its heels with gains of 4.9% and 2.7% respectively. The US markets too closed with gains of 2.3%. Oil prices tumbled this week due to high US crude stockpiles, stubborn Eurozone economic concerns and a strong dollar.

Source: Yahoo finance, Kitco, cnnfn

 Weekend investing mantra
"The speed at which a business success is recognized, furthermore, is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price." - Warren Buffett

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10 Responses to "The biggest upside for long term investors"


Nov 17, 2010

Rubco co-operative is the
nokkucoolie destroyer of
co-operative banks in kerala


sudhanshu sinha

Nov 16, 2010

long term investment


Adi Daruwalla

May 16, 2010

Kudos to Mr. Parekh for leading the initiative to get the USD 11bn fund for infrastructure in India. Also to Mr. Ratan Tata who will be a guiding force here.
1)Firstly they need to classify what sector of infrastructure the allocations are going to be. Roadways, Housing etc.
2)In India we are in the habit of macro managing, not micro managing. This results in leakages of funds that were meant for a good purpose. (Hence a siphoning off from where the funds were really needed to someones pockets) It is high time and we can do without this.
3)Lack of planning and guidance from day 1 resulting in exponentail escalations of costs in the mid way of projects. (Hence a reduction of funds from where they were really to be deployed.)
4)Substandard audit mechanisms that don't track the events mentioned in points 2 and 3 above. (Or auditors being hand in glove with the perpetrators and stating "All is WELL, till the bubble bursts.)
5)Dilution of the directives of the Head honchos who govern and e-govern the processes, when it reaches officers at the implementation levels.
6)Corruption, people who indulge in it what do they tell thier children, "I struck a sureptious deal so I can pay your fees and run the house and get many more flats,cars and fly round the world etc."


bimla s. chander

May 16, 2010

beautiful,thought provoking & innovative ideas! keep it up, GOD BLESS!



May 16, 2010

dear sir, what is velocity ratio, how to calculate velocityratio of a give solved examples of rel.cap & l&t. thank you.


Dilip Sarda

May 16, 2010

It is an analytical and user's friendly information.



May 15, 2010

I really can't understand why so much exaggeration being done Euro Zone crisis. With so little population and very effective tax compliance, the issues what Euro zone now facing will be wiped out in no time. Especially, Spain, Portugal, Italy. People are talking about Euro disintegration. Euro is just 20 months low. Euro was artificially overvalued for the past 2 years without any growth in fundamentals (just for US benefit) and it is reversing. Everybody should understand that Europe has only 65% of India's population and GDP is 6 times that of India. Why people forgetting this simple arithmetic. we are sitting on a time bomb with 1.2 Billion people to survive. We are surviving only because of very blow base effect. But how long??. Only thing we are not borrowing outside. But how long??. With rising inflation, India also has to borrow from outside to survive.



May 15, 2010

the biggest issue facing the country today is rampant the question is how much of 500 million is really going to be used for infrastructure and how much to make the rich richer.



May 15, 2010

yes that was a good one


yashmeet singh

May 15, 2010

Great work..I must appreciate the efforts of your team...congratulations

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