Will India waste the 3G bounty?

Mon, 17 May Pre-Open

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If the goings on in the past few weeks is any indication, Mr. Pranab Mukherjee, the country's finance minister, should be one happy man. In all likelihood, the country's tax payers are likely to earn a potential windfall from the ongoing 3G auctions in the Indian telecom industry. Infact, by the time the whole affair wraps up, the taxpayers would be richer by some Rs 700 bn. And this may not be all. What with the divestment program once again receiving a shot in the arm, the likelihood of the Government earning another Rs 400 bn from the same has become stronger than ever. Thus, with Rs 1.1 trillion almost certain to be in the bag, the country's dilapidated finances do have a very good chance of getting back on their feet.

However, this is easier said than done. The government's track record in spending such one off non-tax revenues does not inspire a lot of confidence. With big money will come demands from various ministries to go slow on certain reforms like the fuel price deregulation and fertilizer subsidies. And don't be surprised if the Government is all too willing to oblige. Let us just hope that better sense prevails this time around. After all, they don't have to look beyond their European counterparts to gauge the consequences of keeping on kicking the can down the road.

Are emerging markets still cheap?

There are two things more important than any other in the field of investing. First, the asset under consideration should have above average growth prospects for many years to come. And secondly, the asset should not be bought at expensive valuations. It goes without saying that the emerging economies like India and China will be able to comfortably grow at above average world GDP growth rates for many years into the future. Hence, they satisfy first of the two conditions highlighted above.

However, what about the valuations of their respective stock market indices. It is here where a few doubts start to creep in. About a year back, very few people would have bet against the fact that emerging markets were indeed cheap relative to their growth prospects. But not anymore. Thanks to the huge rally that they have witnessed since the March of 2009, the valuations at most emerging markets have really shot up. Infact, as per some estimates, they seem to be ruling at the same levels as just before the sub prime crisis. This then begs the question of whether a fresh exposure can be taken in these markets.

While we cannot talk about other markets, we certainly feel that investing in Indian stocks even at the current levels can prove to be quite profitable provided one takes a long term view of 3-5 years. However, we would like to caution about the fact that most of the low hanging fruits have already been picked up and hence, investors should seriously guard against the fact that the stock that they buy into does not turn out to be some sort of a value trap. In other words, there are strong chances that an investor buys into a cheap stock that remains forever cheap! While this is true across market cycles, the tendency to commit such a mistake is at its highest during the peak of a bull run. And we believe that the present scenario is one such scenario. Thus, we advice investors to be that much more cautious during stock picking.