Waste not, want not - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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14 APRIL 2014

Two of humankind's biggest problems are looming shortages of energy, as fossil fuels run out, and of food, to feed an ever increasing population with ever rising standards of living.

Given this, it is surprising to see the wastage in use of both.

Last week's column had mentioned that the design of the automobile is such that it uses up less than 5% of the energy contained in crude oil is actually used to move the passenger (the primary purpose of the automobile) whilst most of it goes to moving the vehicle, in proportion to their respective weights. So the design of the car has basically remained unchanged in this respect, a colossal waste of a natural resource which is being fast depleted.

The auto industry is finally addressing this issue, as this TED talk on by Larry Burns, VP of General Motors points out 'the future of cars'. Cars would need to be made of lighter materials, and, preferably be smaller, so that the ratio of weight of vehicle: weight of passenger is lowered. That, in turn, would impact industries like steel.

India should take steps, but is not, to discourage wastage of fuel. One is to mandate fuel efficiency norms, which are progressively tightened. Another is to have differential excise duties for lighter, more fuel efficient vehicles, and punitive ones of the gas guzzlers. It can also contemplate a 'cash for guzzlers' scheme to encourage people having older vehicles to trade them in.

Feeding an ever increasing population is another global concern. One of the solutions being thrown up is to have genetically modified food (GM food). This, however, is throwing up its own set of controversies, and critics warn of big dangers if people mess with food genetics. It is very distressing that over 40% of fruits and vegetables are spoilt due to poor transport facilities and some 21 m. tonnes of wheat rots due to inadequate storage facilities! This is a criminal neglect.

If we can find ways to reduce this wastage of crude oil, through a better design of the automobile, and of food, through improved roads and better storage, then we can essentially achieve a huge saving, and also obviate the need to explore untested technologies like GM foods.

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The energy crunch had led some countries like Japan and Germany, to diversify their energy basket by setting up nuclear power plants. This power is more costly than thermal, hydel, or even renewable energy sources, but is more environmentally friendly than coal. Post the Fukushima nuclear meltdown in 2011 in Japan, there was a rethink, and both Japan and Germany shut down the nuclear power plants.

But such is the growth imperative that Germany is having another rethink, about re starting the nuclear plants. The increasing subsidies for distributed solar power are forcing this rethink. Also, there is a threat of a cut back by Russia of its natural gas supplies, on which Europe is hugely dependent, after some Western countries, led by the US, imposed sanctions on Russia after it annexed Crimea. Such a revert to nuclear power would be an unfortunate development. The saga of the nuclear accident at Fukushima is far from over (see the fourth video titled 'Experts Discuss State of Fukushima Daiichi' on the site ) and should, God forbid, another earthquake of an equal magnitude were to hit Japan, it would be curtains for the northern hemisphere.

Some large investors are concerned about the levels to which global markets have risen, and expect a sharp fall. Mark Faber has made an interesting chart, plotting the S & P 500 index for the five years to 2014 against the five years to 1987, just prior to a sharp fall. The two 5-year charts show a remarkable trajectory, and it looks as if we are poised for a sharp fall.

Another famous investor, Carl Icahn, also believes that we are in for a sharp correction because the Fed can't keep printing money forever. For the Indian market, foreign brokerages expect a fall because the poll results, expecting a stronger Government, have already been factored in

The world is awash with excess liquidity after various countries have printed money to pump into their economies in a bid to shore up growth. More of this excess liquidity has gone into buying assets than into investment, or into consumption. And because there is so much liquidity, strange things are happening.

Global investors have queued up to buy a $ 4b. 4.75% Greek bond, which was oversubscribed 5 times. Now the Greek economy is nowhere near healed, and there is a huge risk of default for these bonds. The economy contracted 20% and has a 27% unemployment rate, with youth unemployment for under 25yo exceeding 50%. Yet the bond was oversubscribed 5 times.

Compare this with the $ 750 m. issue of 5 year bonds by SBI priced at 4.8%, better than the Greek bond. It was oversubscribed 6 times. But SBI is a financially sound bank with an unprecedented and uninterrupted dividend history of over 150 years! There are not many companies in the world which have lasted for 150 years. Still fewer which have a profit record for that long. And less than a handful which have an uninterrupted dividend record for 150 years. Yet it had to pay more than a sovereign bond of a country which has a minus 20% GDP growth rate (India's is 4.6%) and where unemployment is at an untenably high 27%. The only reason institutional investors buy into such poor quality bonds as the Greek bonds is because they believe that the EU will bail them out. This is a moral hazard.

Another concern that these investors may be looking at when anticipating a collapse is the possibility of the US $ losing its reserve status to the Chinese Yuan. At least 40 Central banks have moved part of their reserves into the latter currency, and more are expected to follow. In retaliation against imposition of sanctions, Russia is denominating some of its gas contracts in currencies other than the US $.

In fact, the showdown between the US and Russia over Crimea is reaching alarming proportions, and Paul Craig Roberts anticipates that either the US $ will lose its reserve currency status or that the two nations would go to war over it. Heaven forbid!

Nonetheless, Foreign Institutional Investors (FIIs) continued to pour in money into the Indian stock market, which continued its rally. The BSE sensex gained 269 points last week, to end at 22,628, whilst the NSE-Nifty added 61 points, to close at 6,776.

In corporate news, Sun Pharma did a deal to acquire Ranbaxy in an all share transaction, valuing the company at $ 3.2 b. This is significantly lower than the price at which Dai Ichi acquired a controlling stake in Ranbaxy from the Singh brothers.

The other interesting corporate news was that Vodafone has acquired 100% ownership of its India operations, buying out two minority shareholders, Ajay Piramal and Analjit Singh. Piramal has made a return of a whopping 52% in just two years, when he acquired an 11% stake in the company. Kudos to his ability for deal making!

Reliance Jio, the telecom arm of Reliance Industries, has signed a deal with Reliance Communications (of Anil Ambani group) to use the latter's optic fibre network. The market is awaiting the launch of Reliance Jio's 4G offering, which could be a game changer.

Recent poll forecasts show a near majority being given by the electorate to the NDA Alliance. This, however, has been factored in, so ought not to result in a further big rally, unless the tally results in a significant majority. The problems the new Government will have to tackle are, however, structural, for which there are few quick-fix solutions. So the market should correct, on profit taking, before stabilising, to evaluate the performance of the next Government.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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2 Responses to "Waste not, want not"
Tejas
Apr 17, 2014
Mr Mulraj,

You have ignored the option of an efficient public transport systems. If proper and well connected and less crowded, people would use public transport instead of cars.

Like 
Purnima Toolsidass
Apr 15, 2014
I really appreciate J.Mulraj's including vital issues like the need to conserve our natural resources and find ways of curtailing the damage done by our present lifestyle. After all, money is useful only if we can use it to live happier lives; and not all the money in the world will be of any use if we destroy our natural resources, environment, and the basics of a happy life. Like 
  
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