»5 Minute Wrap Up by Equitymaster

On This Day - 5 SEPTEMBER 2009
Are you 'also' chasing the Sensex?

In this issue:
» World economic order set to change
» Mumbai - long way to become alike Shanghai
» TBTF spreading wings again
» Another setback to infrastructure growth
» ...and more!!

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Perhaps no other number draws so much attention in middle and upper class India as the number on the Sensex. It just takes 1,000 points here and there for people to change their opinion about the equity markets. Like, when the Sensex declined to the 8,000 levels at the start of this year, everything about the stockmarkets looked uncomfortable and many believed that prices were headed even lower.

And now, when the Sensex is nearing the 16,000 level, the enthusiasm is back and experts are promoting stockmarkets as the place to be in.

See for instance the changing mood of one learned gentleman from a leading global investment house, with the change in Sensex since September last year. And there are many such experts appearing on business channel everyday trying to attract attention using their 'Sensex forecasting' skills, without any repentance for their past forecasting blunders!

Source of comments: Google News

For you, the investor, while it is human to go with the tide, some rules of investing don't change simply because the mood in the environment has undergone a change. For instance, equity will always be an asset which provides opportunity for earning but can never give you the comfort of safety. It holds well whether the Sensex is at 8,000 or at 16,000.

You need to ingrain in your mind what the legendary investment guru, Benjamin Graham once said, "In the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long-term, the market is a 'weighing' machine on which the value of each issue is recorded by an exact and impersonal mechanism."

So, stop chasing the Sensex. Live sensibly, and invest sensibly.

 Chart of the day
If you have checked in into a 5-star hotel in Mumbai in recent times, you may have already noticed the discounts being offered on room rates. The reason being poor occupancy rates witnessed by these hotels over the past few months. As if last year's economic crisis and terrorist attacks were not enough, this year's swine flu outbreak has definitely marred the fortune of the hotel sector for a few months. Today's chart shows how Mumbai has suffered one of the largest dips in hotel occupancy rate in 2009 amongst major cities across the globe.

Source: Economist

The global financial meltdown has left little doubt that there is a change in the world economic order. And this fact is about to get official.

The Group of 20 (G-20) industrialised and developing nations is debating how to reshape international institutions that still reflects the world order of over six decades ago. As per The Wall Street Journal, the US is pressing the traditional European powers to reduce their role at the International Monetary Fund in favour of China and India. Basically, the US wants Europe to hold lesser number of seats at the IMF than before. In our opinion, even if the US does not manage to get this proposal through, it will get brownie points from China and India whose support it increasingly needs at various international forums, including the G-20.

IMF to now recognise economic strength
CountriesOwnership Share of world
 share in IMF (%)GDP (2008, %)
US17.1 20.4
China 3.7 11.3
Japan 6.1 6.3
Russia 2.7 3.3
Brazil 1.4 2.8
India 1.9 4.9
EU total32.4 21.9
Source: The Wall Street Journal

Did someone say we want to make Mumbai like Shanghai? Also referred to as the financial capital of India, Mumbai is also the victim of one of the biggest ironies in the country. Besides accommodating some the biggest financial institutions in the country, the city also houses the world's largest slum. No wonder then that as per a recent UNDP report, one in every two persons in the city resides in a slum.

Yes, 54% of the city's population is made up of slum dwellers, and that compares to a global average of 33%. Even more distressing is the fact that this 54% of the population occupies just 6% of the land in the city, thus giving a glimpse of the conditions in which they live. While advocates of communism will be quick to point out that we need a change in the system, the fact that we need more wholesome economic development is more than evident by these statistics.


Looks like investment banks are on the prowl again. These 'too big to fail' institutions, who were the architects of the global financial crisis that unraveled in late 2007, laid low for a while as some prominent names in the industry collapsed. But now they are resurfacing and are moving to increase headcount in China and India anticipation of rising deal flows fuelled by strong growth rates in Asia's largest developing economies.

With capital markets weakening and merger activity being reduced to a trickle in 2008, investment banks at that time resorted to scaling back. This trend has now started reversing as India and China are expected to post strong growth rates in comparison to the developed world.

As reported in Financial Times, corporate equity and debt issuance in India has soared to US$ 26.6 bn with the massive rally in the markets also acting as a catalyst. Investment banks may be back in the game but we just hope that they have learnt a hard lesson and do not resort to ambiguous 'financial engineering' which perplexed the world and brought the global financial system down on its knees.

Confusing cues from global markets kept the benchmark Indian indices on a fragile footing this week only to marginally recover in the final session. The Indian markets trailed the pack of losers globally, with the BSE-Sensex recording a weekly loss of 1.5%. Proposal to increase natural gas prices, better rainfall and higher commodity prices also failed to bring in enough cheers until the last trading session.

As for other asset classes, while crude oil prices declined 6.5% on renewed concerns about the recession, gold moved up by 4.1%, again for the same reason.

Data Source: Yahoo Finance, Kitco, CNNfn

 Weekend investing mantra
"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." - Warren Buffett

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