Of lower inflation and higher FDI - Views on News from Equitymaster

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Of lower inflation and higher FDI

Dec 24, 2008

The reality of lower economic growth for India this year seems to have finally dawned upon the policymakers. The country's midyear economic review was tabled in parliament last evening. "We should be prepared for growth in 2008-09 as a whole to be around 7%." This is how the people concerned chose to put it across as the issue of GDP growth came up.The tone was however not subdued throughout. Knowing quite well that prices of commodities have been in a free fall for quite some time now, and are likely to remain in the medium term, the policymakers expressed confidence that inflation should reach "normal levels" by March 2009. The increase in FDI (foreign direct investment) and the prospect of strong remittances were also some of the other positives that one can take away from the review.

Talking of FDI, another development took place in the parliament yesterday that could well help swell the total FDI tally. It was the introduction of the Insurance Amendment Bill, a legislation that strives to increase the maximum permissible foreign investment in insurance companies to 49% from the current level of 26%.

Industry players welcomed the move as it would result in more equity flowing into the sector, which at present is massively under-penetrated and in some real need of fund inflows. Another bill, the LIC Bill was also introduced in the parliament yesterday. This bill seeks to put a cap on the government guarantees on LIC's (Life Insurance Corporation) obligations. This in effect means that not all your LIC insurance policies will be guaranteed by the government and is now likely to be a function of the solvency of LIC. The move is likely to deal a big blow to the competitive position of LIC as it will create more of a level playing field between the public sector behemoth and private insurers.

Mixed economic indicators
Now we know why investment titans like Warren Buffett and Peter Lynch never made investment decisions after taking into consideration macroeconomic indicators. Because if they did so, they probably would have held cash all their lives. Sample this. Yesterday, two leading macroeconomic indicators came out in the US. Both pointing towards opposite directions. Since we are already hearing a lot of news of gloom and doom, let us consider the positive one first.

It was the Michigan Index of Consumer Sentiment and it showed a marked improvement from the lows of November, a 28-year low to be precise. An improvement in consumer sentiment means good news for consumer spending and since it accounts for a bulk of US GDP, it translates into good news for the country's economic growth. The rise in index was believed to be a result of sharp fall in crude oil prices, which would now enable the US consumer to divert the savings from the same to other items of consumption.

But before one starts reading too much into the same, it's time for the bad news. And it comes from that very predictable quarter - the US housing market. As per reports, sales of existing homes in the US fell nearly 9% as continued job losses and stricter lending standards crimped demand. What more, the median home prices fell a little more than 13%, its worst ever decline since 1968 when the data was published first time ever. So, there you are. Two indicators pointing in two opposite directions!

We guess analyzing companies and trying to arrive at its intrinsic value looks like a much better proposition, isn't it? Sooner or later, the price will meet value. And you will save a lot of stress in the process.

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