»5 Minute Wrap Up by Equitymaster

On This Day - 21 NOVEMBER 2012
Will global markets see better times in 2013?

In this issue:
» Unemployment in Europe higher than the official rate?
» Banks banned from giving loans for gold purchases
» China is throwing good money after bad
» Hydropower projects in India in a state of limbo
» ...and more!

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It has been four years since Lehman Brothers collapsed in October 2008, but is the global economy better off than what it was then? Not really and chances are that there is not likely to be much improvement in 2013 as well.

Major economies such as the US, Japan and Europe are grappling with recession and massive debt. On top of that, reckless money printing by governments in these countries have not done much other than raise the risk of paper currencies losing value. In the meanwhile, there is a storm brewing in the US with respect to the fiscal cliff (a combination of tax hikes and spending cuts which will strike next year).

Emerging economies, which were expected to rebalance global growth, are not doing too well themselves. True, they are not mired in recession like their developed peers are. But there are very visible signs of slowdown as can be seen in China and India. On top of that, the Arab uprisings are proof enough of what can happen if corruption, unemployment and lack of reforms are allowed to go on for too long.

That is why noted economist Nouriel Roubini believes that 2013 could very well shape up to be a very volatile year. US stocks are another case in point. Paradoxically, US stocks have rallied in recent times what with the US Fed introducing stimulus measures at the drop of a hat. But since fundamentals continue to erode, it would hardly be surprising if stocks in the country plunge next year.

Given that global financial markets are highly interconnected, all of these events are bound to have an impact on stock markets across the world. India, too, is not immune from what is happening abroad. The steep fall in the Indian stock markets post Lehman debacle is ample proof of the fact. But the difference between then and now is that India Inc. was still posting healthy profit growth as compared to now where the slowdown and policy inaction by the government has taken its toll on profitability. Nevertheless, while the volatility in global markets may continue, Indian stocks still hold value for investors who choose to invest in stocks with good business fundamentals and sound management. Indeed, these are the companies that will be able to weather any storm and reward shareholders in the longer term. And volatile times such as these certainly provide an opportunity to pick up such companies at attractive prices.

Do you think that 2013 could turn out to be much more volatile for the global economy and stockmarkets than what it has been now?Do share your comments with us or post your views on our Facebook page / Google+ page

 Chart of the day
Unemployment typically means those people who are looking for work but are not finding jobs. But this may not necessarily reflect the true picture. For instance there could be people who are not actively looking for employment but might be available for work if required. Or there could be some who are looking for work but for certain reasons are not able to start right away. All of this means that the unemployment figures could be higher than envisaged. And if that is the case, what does it mean for Europe? Indeed, as today's chart of the day shops, Spain tops the list on both counts: the broader unemployment rate and the official rate. Not surprisingly, Germany fares better than most of its European counterparts.

*15-64 year olds
Data Source: The Economist

Gold has provided shine to many an investor portfolio. But it has also tainted the country's current account deficit position. In fact after oil, gold imports form the largest part of the current account deficit. As a result, the government has been taking several steps to discourage the purchase of gold in the country. One was to raise the import duty on gold to 4% earlier this year. But that has not really affected the dynamics of gold buying in the country.

Now the Reserve Bank of India (RBI) has banned banks from giving loans for gold purchase. As a result, banks would be unable to lend funds for buying gold in physical form or in the form of ETFs. However, banks would still be able to lend to genuine jewelers and jewellery manufacturers. This move is expected to sieve out the speculators from entering the gold market and thus curb volatility in the prices of the metal. It must be remembered that India is one of the largest gold importing country in the world. As a result, its gold purchases have also contributed to the increase in global prices to some extent.

Here's another reason why we feel India could be better off than its northern counterpart China in the long run. Because in India, if a company runs into losses, there are strong chances bank lending would come to a halt or at least slow down significantly. Simply because there is no sense in throwing good money after bad. Since capital is a precious resource and in short supply, it is better off being deployed elsewhere, in a profit making firm perhaps. However, this does not seem to be the case in China. There are reports doing the rounds of how Chinese Government is forcing lenders to keep giving debt to large corporates even if they are facing severe losses.

A leading daily has reported that loan books at private firms are bulging despite the operating losses that these companies are facing. The Chinese Government fears that if banks stop giving out loans, companies could start dumping inventories. This would then lower commodity prices and in turn, threaten the viability of strong players. All of this would ultimately culminate into a systemic failure. This could well be true. But what these people don't realise is that the longer they take to accept the harsh reality, the bigger the problem will become. In other words, an implosion cannot be avoided; it can only be prolonged with even more dreadful consequences down the road we believe.

When you're between the devil and the deep blue sea, what do you do? That's exactly the situation that major central banks across the world are facing as far as currencies are concerned. Printing money is like taking a narcotic drug. It provides momentary relief. But it's highly addictive. Pumping paper money into the economy not only delays the real problem, but magnifies it. And history has shown how experiments in paper money have repeatedly failed.

What if the US Fed decides to discontinue its third quantitative easing program? It will give a severe jolt to the US economic and financial system and push the already ailing economy into a downward spiral. Alternatively, what if the central bank continues with several more rounds of money printing? This would be an even more deadly choice. Eventually, it could even lead to a total currency collapse. So it's a catch-22 situation. You get hurt either ways.

Economist and author of the book 'Paper Money Collapse' Detlev Schlichter argues that central banks have created a paper money crisis. And given this backdrop, his favourite asset is none other than gold. We are completely in agreement with this gentleman.

Scarcity of coal and natural gas has mounted India's power deficit. But there is one resource of power which is pretty abundant yet unutilized to its full potential. Yes, we are taking about water as a source of power. You may be surprised to know that hydro power projects worth 42,000 MW in various states are in a complete limbo. Delays in environmental clearances and rehabilitation issues are the prime concerns plaguing hydro power projects. Apart from that, high interest rates and inability to secure long term funding is also hurting them. Many banks have turned wary in lending to the hydro power projects as there have been slippages in the past. It should be remembered that the business is capital intensive. So, if bank lending is turned down, hydro power projects can fail to take off.
Right now, hydro power contributes just 20% to India's total capacity compared to at least 50% in other countries. Also, it is a cheap and clean source of power. India also has huge water reservoirs. So, unless the government takes some concrete steps, India will have to forego the huge hydro power potential that is on hand.

In the meanwhile, the Indian equity markets traded in the green today. At the time of writing, BSE Sensex was up by 82 points (0.4%). Barring power and capital goods stocks, all sectoral indices witnessed gains. Asian stock markets traded mixed with Hong Kong as the top gainer and Taiwan as the top loser.

 Today's Investing Mantra
"Investing is laying out money today to receive more money tomorrow." - Warren Buffett

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