|»5 Minute Wrap Up by Equitymaster|
On This Day - 27 JULY 2009
Are you mesmerized by rising stock prices?
In this issue:
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Anyways, the words that best describe their (brokers') explanation of India Inc's June quarter results are - "Better than expected!" What they are simply saying is that they are happier than they had been before the start of the result season.
But you know this community has always been in the business of cheer leading, even when there's really not much to cheer about. And in these times, it wants you - the investor, and its client - to think positively, on the assumption that positive thinking can be a self-fulfilling prophesy. After all, isn't it that if investors begin putting more money into the markets, the markets will automatically rise, leading more investors to put in more money? While the rally might end subsequently because nothing has fundamentally changed in the real economy, the brokers would have made their commissions by then?
See, we understand that if the economy improves, corporate earnings will follow. It is also true that stocks will turn up before businesses do. But it is very important for you to understand carefully what you are advised in the form of a stock/company whose earnings are said to have been 'better than expected'.
As we have seen from corporate results so far, what's pushing earnings is not really a growth in sales, but largely cost cutting - be it from cutting staff, or shutdown of capacities, or general cost rationalisation. If a firm cuts its costs enough, it can show a profit even if its sales are still in the doldrums.
But you might not be made to see through this as you remain mesmerized by rising stock prices. If yes, our suggestion to you is - Keep your eye on the real economy and companies' businesses and valuations before taking the plunge. It's dangerous to buy stocks just because everyone else is buying, and because the entire market is rising!
What is more, IPOs in these nations too have come back with a bang. China State Construction Engineering Corp. recently raised US$ 7.3 bn, making it the largest IPO in the dragon nation in the last 16 months. In Brazil, VisaNet pulled in US$ 4.3 bn in June this year. India too seems to be warming up with Adani Power's IPO (starting tomorrow) planning to raise about US$ 681 m.
Barton Biggs, former chief global strategist for Morgan Stanley, feels that the world's two biggest IPOs this year coming from China and Brazil are nothing less than a reflection of the 'growing power' of the BRIC nations. Seems like being a developing country is fast becoming more of a positive than a negative in the face of this global crisis.
In our opinion, the wise men at the Reserve Bank of India (RBI) and not Indira Gandhi should be given the credit for India escaping the financial meltdown. They made sure that the lending practices of Indian banks were not hijacked by fancy 'financial innovations'. The difference in praising the regulator and not the government through its presence in the banking sector is vital because India needs well regulated free enterprise and not the disaster that the license permit raj and mai-baap sarkaar was.
We will not try to hazard a guess on what Dr. Subbarao will say tomorrow. These are difficult times for guesses anyways!
Whatever the Indian economic experts say, the Indian economy remains highly dependent on the vagaries of monsoons. With more than 60% of population dependent on agriculture and allied activities for their livelihood, it will take a long time for the country to decouple its economy from agricultural performance.
See the chart below for reference - the years when India's food grain production has declined, the GDP has taken a knock. While the impact has reduced over the years due to pickup in other sectors of the economy - services and manufacturing - the Indian economy has still not reached a level of a major decoupling from the growth in agriculture. Now, with weak monsoons and subsequent fear of lower agricultural production this year, will GDP grow by 5-6% as is being widely predicted? We don't have the answer!
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