»5 Minute Wrap Up by Equitymaster

On This Day - 26 MAY 2009
Will the rally last?

In this issue:
» Will this rally last?
» Krugman says world economy is stabilising
» Saudi Arabia predicts US$ 200 crude in 2 years
» The disinvestment ministry is back
» ...and more!

Debates about whether we are in a long term bull market or a bear market abound in the media after the recent upswing in stock markets around the world. An interesting article on Newsweek speaks of the supposed 'deleveraging' process in the US that the government claims to be attempting. Debt is not being paid down, but is only being swapped - a striking parallel with Japan in the 1990s.

In the subsequent decade, Japanese stocks participated in some significant rallies including three jumps of about 50%, all of which coincided with a temporary economic upturn. One of the big reasons for these short rallies was nothing but the now all so familiar 'government spending packages'. That's similar to the present situation where the effects of the US stimulus plans are expected to be the strongest in the third and fourth quarters of 2009.

----------- Time is running out -----------
"Multi-bagger MidCaps", our latest research offering is now available to a privileged group of investors...
...and that too for Free!
To know more about the investment ideas discussed in the "Multi-bagger MidCaps" report and how you can get a copy of it for Free, click here!

Source: Trend
The question is what happens at the end of the year, when the impact of the stimulus may begin to fade? Any new spending plan will be severely restricted due to governments being crushed under rising fiscal deficits and mounting debt. Conditions far from favorable for the beginning of a new bull market. But then, it doesn't automatically imply a bear market. Maybe the US markets will end up like their Japanese counterparts in the mid 1990s. The question is, can we truly expect Indian markets to remain unaffected or will they follow suit?

Indian real estate companies may be grinning from ear to ear. And they have every reason to do so. After enduring a tough 12 months or so, the fund raising window has been re-opened and re-opened rather wide. Deals worth hundreds of millions of dollars are being snapped up within no time with qualified institutional placement (qip-in-stock-market?utm_campaign=SEO-K'>QIP) emerging as the favorite route. However, if an article from the Economist is to be believed, these companies could well be setting themselves up for a much drier fund raising spell in the near future. Here's how it works. By going in for a QIP, these companies are soaking up funds that could well have been used to invest in the stock markets and make them go up even higher. Furthermore, the supply of their own equity goes up dramatically with the placement process, thus leading to a fall in stock prices. A lower stock price means a lower market cap and thus reduced ability to raise funds.

Image source: The Economist
The Economist has called this process the feedback loop and argues that it helps reinforce both bull and the bear markets. And since this process helped take the last bull market to dizzying heights, the fall is also likely to be painful; perhaps more than the world has endured so for. And for this very reason, the magazine is not convinced that the current rally in the global equity markets is sustainable after all. "There will have to be a lot more evidence than a couple of months of rising share prices before one can say that a new bull market is under way", is how the magazine chose to conclude.

As per a leading business daily, the new government plans to revive the disinvestment ministry. It may be noted that the ministry was first formed under the NDA government but later converted into a department under the finance ministry when the UPA came to power in 2004. The main reason was the pressure from the left parties who were their major allies. This time around, there is no such pressure, although there might be opposition from the Trinamool Congress, an important ally.

The government is likely to sell stakes in around 40 public sector companies in order to address the fiscal deficit situation, which stands at 6% of the GDP. It is estimated that the government could raise more than Rs 500 bn from the process. The ministry is likely to be headed by a minister of a cabinet rank and Montek Singh Ahluwalia is said to be the front runner for the post.

Although the exact details will emerge in due course, it is heartening to note that there remains a common thread of reforms even when the government moves to a rival political formation. To that extent, we must celebrate the Indian democracy, which is the best bet political system for unleashing the human potential in our country.

In these troubled times gold is fast becoming a preferred asset class. Ever since governments across the world have resorted to printing money to bailout banks from the worst financial crisis ever since the Great Depression, the prospect of inflation has unnerved many investors and spurred them to run to gold for cover. For instance, as reported in the Telegraph, the world's top hedge fund manager John Paulson has built a gold position of at least US$ 5.5 bn.

Having said that, how important is gold in the current scenario where there is neither inflation nor serious deflation? While many are not probably purchasing gold with the same frenzy that was witnessed post the collapse of Lehman, its importance in no way has been diminished and this is amply demonstrated by two of the biggest holders of foreign reserves namely Russia and China buying gold. Whatever the case in the near term, if inflation does rear its ugly head in the longer term gold might just have the last laugh.

From someone who has been saying that the banking business should be made boring and also cautioning us that the current stock market rally will not sustain, now comes some words of respite. We are talking of the 2008 Economics Nobel laureate Paul Krugman, who believes that the world economy has started showing signs of stabilizing.

"I will not be surprised to see world trade stabilise, world industrial production stabilise and start to grow two months from now," Krugman said at a conference in Abu Dhabi yesterday. "In some sense we may be past the worst but there is a big difference between stabilising and actually making up the lost ground," he said. And how can the world economy actually recover? Krugman says it can happen when major corporations around the world invest more for future growth, when a major technological innovation to match the IT revolution of the 1990s emerges, or when the government moves on climate change.

In yesterday's edition, we mentioned how some experts believe that crude will touch US$ 200 per barrel in the next 5 years. Now the world's largest producer of the commodity, Saudi Arabia, has said crude oil could reach the US$ 200 per barrel mark in 2 years if investments are not made to increase capacity.

The Indian markets were the top losers in Asia today as the BSE-Sensex ended lower by around 320 points or 2.3%, while the NSE-Nifty ended lower by about 120 points or 2.9%. Stocks from the realty and capital goods space bore the brunt of profit booking today, while stocks from the IT space found favour. Other Asian markets ended the day on a weak note as well. The European indices were trading lower at the time of writing.

 Today's investing mantra
"There's a clarity that comes with great ideas: You can explain why something's a great business, how and why it's cheap, why it's cheap for temporary reasons and how, on a normal basis, it should be trading at a much higher level. You're never sitting there on the 40th page of your spreadsheet, as Buffett would say, agonizing over whether you should buy or not. " - Joel Greenblatt

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst) 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