»5 Minute Wrap Up by Equitymaster

On This Day - 1 JULY 2009
Asia to be a big disappointment

In this issue:
» Stephen Roach is not as bullish on Asia as others
» Look who's calling Ben Bernanke a hero
» Marc Faber's favorite investment themes
» Minor embarrassment for TCS top brass at its AGM
» ...and more!!

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While a lot of experts are pinning their hopes on the Asian economies to pull the world out of the worst recession since the 'Great Depression', one Mr. Stephen Roach thinks otherwise. And the Chairman of Morgan Stanley Asia could well have some very valid points after all. Speaking to CNBC, the strategist par excellence opined that just one look at the export numbers of the Asian economies, both in the aftermath of the Asian financial crisis and when the latest crisis broke out and the hollowness of the claim that Asia would be the next engine of growth would be evident to all. Indeed, from exports constituting 37% of the region's GDP in 1997-98, by the time the year 2007 ended, it had gone up to as high as 47%. And since he does not expect the developed economies to recover any time soon, it also made him conclude that the over reliance on exports to the developed world will be a big challenge for Asia in the second half of 2009 and the whole of 2010 as well. Although India is not as heavily dependent on exports as other countries, its economic growth will have no meaningful impact in the global arena on account of its relatively insignificant contribution to the world GDP.

If the chairman of the Prime Minister's Economic Advisory Council is to be believed, the Indian economy has the potential to grow at 7% during the current fiscal FY10. However, his prediction has come with a caveat that the monsoons should not fail. If they do fail, then the growth might come in considerably lower. A point of view that we cannot help but agree with.

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.

Source: CMIE, Govt. of India

It seems like the big boys of private equity are on a comeback trail in India and China. As per The Wall Street Journal, Carlyle Group, one of the world's biggest private equity firms has stated that it has raised around US$ 1 bn for a new fund that will invest in fast growing companies in the emerging markets of India and China. It has further said that the appetite among pension funds and financial institutions for these two economies is on the rise. And there could be perhaps no better time to start a dedicated fund of this sort.

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.

Who do you think should be blamed for the worst ever financial crisis since the Great Depression, the subprime borrowers, the complex derivative instruments or the greedy investment bankers? Interestingly, a poll conducted in the US by Evolution Securities and published on Moneynews with around 200 fund managers participating seems to have picked out a clear winner. And according to them this dubious distinction belongs to Alan Greenspan. Yes, Alan Greenspan has been blamed for the eruption for the global financial crisis.

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.

However, not all Fed Chiefs are being thrown to the wolves. There are some like Ben Bernanke who are winning accolades from people with feisty track records of their own. Jack Welch, former CEO of GE is one such man. "Federal Reserve Chairman Ben Bernanke is a national hero and should absolutely be reappointed to another term," Jack Welch has been quoted saying to Bloomberg. From the man who is heralded as one of the best CEOs the world has ever seen, these words might carry some weight. Welch has in fact credited Bernanke and his team for saving the US economy from going into depression. As he says, "We are not going down right now. We're out of the crisis mode."

Veteran investor Marc Faber in a recent interview has been quick to point out how the current economic conditions (including fiscal deficits and stimulus packages, both of which will be very hard to restrain) in the US can directly lead to some very inflationary times for the country. There's no political will in the US to reduce the deficits and keep money supply tight. That, combined with a lot of cash that is still on the sidelines, is going to lead to a scenario in the US where all that cash is going to need some place to flow into.

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.

TCS management had a hard time fighting the green-eyed monster of envy when investors attending its 14th AGM went ga-ga over its arch-rival Infosys. The investors questioned many of the company's policies regarding employee productivity and EPS and compared them with those of Infosys, making Mr. Tata and the top management a little uncomfortable. Not all the questions were relevant and well-founded though. Nevertheless, kudos to the management for clarifying doubts to the best extent possible. After all that's what AGMs are held for, aren't they?

In the meanwhile, Indian benchmark BSE-Sensex was seen trading 1% higher at the time of writing in what could be termed as a pretty volatile session. Other major Asian indices traded mixed today while most markets in Europe are trading in the positive currently.

 Today's investing mantra
"Easy does it. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers" - Warren Buffett

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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