|»5 Minute Wrap Up by Equitymaster|
On This Day - 1 JULY 2009
Asia to be a big disappointment
In this issue:
------------------------ Blue-chip stocks available for dirt cheap ------------------------
Despite the fact that share of the agriculture sector in the country's GDP has been coming down over the years, we still have a huge chunk of our population depending on agriculture for its livelihood and hence, if monsoon plays truant, it might affect consumption patterns of this set of people thus leading to a cascading effect on the overall economy. It will be fair to say that a couple of percentage points could be easily shaved off India's GDP growth rate if monsoons come in way below the long-term average trend.
Although both the Asian nations under discussion did not get as badly impacted from the financial crisis as their western counterparts, it did test the mettle of quite a few companies and hence, the firms that have been able to pass what could be counted as one of their sternest tests in recent times, would be on the radar of investors like the Carlyle Group.
It is not as if Indian and Chinese capital markets did not have a brush with the mindset of foreign investment firms like those from the private equity group. During the peak of the last bull-run, easy money coming from hedge funds and investment banks had pushed valuations to very exorbitant levels and with this hot money being pulled out quickly in the aftermath of the crisis, valuations have once again started looking reasonable from a long-term perspective.
The criticism has been heaped upon him for following a loose monetary policy, namely keeping interest rates low and unleashing liquidity into the financial system all of which led to creation of bubbles across asset classes. Other interesting picks included the former President Bill Clinton, King Midas (who turned everything that he touched to gold), the current British Prime Minister Gordon Brown and the famous 18th century economist Adam Smith. But it is Alan Greenspan who clearly took the cake garnering 35% votes. What do we think? Well, once a crisis erupts, the blame game also begins and while Alan Greenspan may be the obvious person to point the finger at, it does not mean that all others who were directly or indirectly responsible for the crisis can go away scot free.
With treasury bonds and bank deposits yielding near zero interest rates, it has to be some of the other asset classes that will see huge inflows of money. According to Mr. Faber, the most probable places are precious metals (with gold being one of the preferred metals amongst that) and stocks. Thus, over the long term, he sees a weak US dollar, strength in commodities prices and an outperformance of Asian markets compared to US and European markets. That said, if gold prices indeed see a big spike in US dollar terms, for prices here in India, the dollar-rupee conversion rate may bring in an added layer of complexity into the situation. That said, we wouldn't be surprised to see the rupee appreciate relative to the dollar over the long term.
Clarification: In the 5 Min. WrapUp of June 29th, we missed out on giving credit to Jason Zweig for the full forms of 'IPO' given at the end of the first note. Zweig had included these in his commentary in the 2003 version of Benjamin Graham's 'Intelligent Investor'.
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