»5 Minute Wrap Up by Equitymaster

On This Day - 27 DECEMBER 2010
India's top wealth creators of the decade

In this issue:
» Best performing stock markets over the past ten years
» Silver - Where to from here?
» Indian promoters bypassing bankers to strike own deals
» Food crisis set to worsen
» ...and more!!

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The Indian markets have seen a strong rise over the past ten years. This has been in line with the Indian economy's rapid progress over this period. The BSE-Sensex - the most-quoted representative of the Indian markets - has risen by around 400% during this period (2001-2010).

From within the Sensex, there have been companies that have risen even more. We can call them the wealth creators of this decade - blue-chip stocks that returned the most during 2001-2010. And here are the top five of them.

Data Source: CMIE Prowess

For identifying these wealth creators, we have considered the 10-year performance of only those companies that were part of the Sensex in January 2001 and are still there now. As the chart above shows, two of the best performers have been from the industrial/manufacturing sector (BHEL and L&T), while the remaining three are from the consumption space (M&M, Tata Motors, and SBI).

This just goes to show the mindshare these two themes - consumption and industrial - have received from Indian investors over the past ten years. These stocks' performance also throws much light on the relevance of India's domestic story, which just seems to be unfolding.

As far as the wealth creators of the next ten years are concerned, we are keeping our eyes and ears open to identify the same.

 Chart of the day
Let's keep on with the analysis of the decade that will end in a few days from now. Today's chart shows the performance of key global markets over these ten years. And interestingly, the Indian markets, represented by the BSE-Sensex, have trampled all other markets by far. The only other good performer has been Brazil, which came in second to India. Now the question is - can the Indian markets maintain its brilliant run over the next ten years as well? Going by the law of averages, it looks like the next ten years will be good for Japan and not so good for India. But then!

Data source: Yahoo Finance

It is just a few days left for the year to end and the biggest New Year party is already being held for silver. The metal has witnessed a surge in prices in recent times. Prices have gone up by a whopping 74% this year, making it the second best performer in the commodity space after palladium. With a 26% rise, gold came in the fourth place just below copper which rose by 28% during the year.

At such a time, we wonder as to what is driving up the price of silver. Is it real demand? Well that has remained low. And supply? There is over supply in the markets. So what has been the reason behind the sudden interest in silver?

The answer is - investor interest. Investors looking for a share of the commodity cake are pouring money into silver which is driving the gains. So will this continue? Till such time as investors find better investment opportunities, metals will continue to go up. So maybe silver will continue to shine for some time to come.

Anyways, Indian markets had a volatile day today. After being in the positive for most part of the session, the BSE-Sensex was trading with losses of around 35 points (0.2%) at the time of writing this. Today's selling was led by stocks from the metal and realty sectors.

As for the other key Asian markets, while China closed down by 1.9%, Japan and Singapore were up 0.8% and 0.5% respectively.

Investment bankers overseas may have an important role to play in striking deals. But in India, the role of such bankers is gradually getting limited. This is simply because promoters of companies are directly negotiating with the management of the other parties. Their rationale is that since both the partners know their businesses inside out, they are in a better position to negotiate the right terms.

It is not just that. Confidentiality is also another key reason why bankers are being left out of the equation. Promoters are concerned that involving a banker in the deal making process would lead to some information getting leaked. This would then hurt the deal. On a pure monetary basis, bankers' fees are also done away with. One needs to look no further than some of the big corporate deals struck over the past few years. Ranbaxy-Daiichi, Piramal Healthcare-Abbott, Tata Steel-Corus to name a few are all examples of deals struck between the top honchos with no banker involved. Plus promoters of companies have become savvier. They have made it a point to have knowledge of all aspects of the business that they are running. Indeed, we believe that investment bankers would have to bring something new on the table. If they do not want to be left out of such big corporate deals that is.

There are few predictions that one can make with certainty for 2011. One of them is that the US Fed will continue to stay away from liquidity tightening. Both economic growth and high employment rates have forsaken the US economy for a while now. This was despite trillions of cheap dollars being pumped into the economy. The scenario is hardly better for the new year. But given the affinity to using the printing press, Uncle Sam may keep rational economic policies under the carpet even in 2011.

Meanwhile, central banks in Asia will have to work overtime to keep cheap dollars at bay. India's RBI raised interest rates six times in 2010. With China looking at a firmer trend in interest rates, the RBI's job is far from done. Growth rates in both China and India may get tempered with borrowing costs getting dearer. But we believe that inviting hot money with the lure of higher growth rates to emerging economies in Asia will do more evil. We would be better off with more rational central banks.

Rising prices of fuel and food in India have again revived the inflationary monster. In the year to Dec. 11, India's food price index rose 12.13%, while the fuel price index climbed 10.74%. Onions have recently brought us a lot of tears after prices jumped nearly 350% early this month. The current spike in onion prices reflects the spiraling costs of vegetables in general. India's central bank blames the rise in food inflation on a shift to higher protein diets among Indians. True, we are earning more and thus spending more on food. But that is not all!

Take for example the numerous policy imbalances. Farmers complain of the gradual change in land use patterns for not growing staple crops. Maharashtra, which meets more than 30% of national onion demand, is a major culprit. Since 2002, farmers who traditionally grew onion have moved to sugarcane and grapes. The high minimum support price for sugarcane and huge domestic and export demand for grapes is a big cause for the shift. The story is similar in many other states as well.

On the other hand, international crude oil prices are hovering around US$ 90 per barrel. This is close to its two-year high. Earlier this month state-run fuel retailers had lifted the price of petrol. Now, the government is expected to decide this week whether to increase state-set fuel prices. We believe this move will have a much broader inflationary impact. It remains to be seen how wage pressures and high input costs shape corporate profitability in 2011.

 Today's investing mantra
"Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars." - Warren Buffett

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