Just wanting to keep India on your radar sweeps. | |
In this issue:
» The 'Big Lie' about US banks
» Are NPAs causing systemic risks to Indian banks?
» 2/3rd of properties in Mumbai cost more than Rs 10 m
» India's billion dollar IT babies
» ...and more!
| 00:00 |
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When we speak of economies at the brink of sovereign default, Greece, Italy, Spain and Portugal are at the top of our minds. Unprecedented proportion of debt risks on the sovereign balance sheets of these economies has impacted their ratings and investor perception alike. In fact the government bonds in these countries are treated worse than junk bonds. But what took us by surprise was the ranking of Indian bonds on Blackrock Sovereign Risk Index. The index suggests that
Indian bonds are amongst the 10 riskiest in the world. So much so that they are pretty much in the same league as bonds of Spain, Argentina, Hungary, Italy, Ireland, Venezuela, Egypt, Portugal and Greece.
Now, we understand that the
Indian economy is currently not in the best of health. Lingering inflation problem, high fiscal deficit and slowing GDP growth have taken a toll on the country's sovereign rating. The country remains vulnerable due to its dollar linkage and dependence on oil prices. But the same cannot build up the case for such relegation. Economic experts opine that economic fundamentals in India are far better than in European nations. Running a fiscal deficit is not considered abnormal for a growing economy. Moreover, the reserves and maturity profile of debt are reasonable. In fact the short-term debt is backed by adequate reserves. Most of the debt is held internally and it is unlikely to be a worry so long as nominal GDP growth is higher than interest-rate growth. Thus we believe that just like India's sovereign ratings, the risk profile of Indian bonds too are an incorrect reflection of the economy's true potential. What is for sure is that the ratings fail to take into account the long term risks and upsides.
Meanwhile like most other rankings and ratings, this one too may cause investors in global markets to avoid Indian corporate debt. This certainly will impact borrowing costs for Indian corporates in the near term. But as the domestic bond market matures and domestic interest rates cool off, we do not think these ratings will be of much relevance. Having said that, we believe that investors should never take such ratings and ranking on face value without understanding the underlying logic for the same.
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Most emerging economies including India and China have accumulated large sums of foreign exchange over the past decade. China's hoard exceeds US$ 3.2 trillion. But this equation changed sharply over the past three months, with the spike in oil prices and foreign investors deserting emerging markets. Although China's forex reserves fell by less than 2% since August, the country saw its reserves depleting by a massive US$ 61 bn within a matter of 2 months. Also
India saw one of the biggest drops in forex reserves. Meanwhile Saudi Arabia reaped its oil riches in dollar terms.
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| Data source: Economist |
| 01:50 |
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Imagine what would happen if the founding principles of your life, the ones that you used to survive until now are all proven wrong all of a sudden. Your world may come crashing down. A wave of massive uncertainty will occupy your brain, leaving your heart pounding and your pulse racing at far above their normal levels. Scary stuff, isn't it? This is perhaps the reason why despite numerous evidences to the contrary, a person tends to cling on to his deeply held beliefs. He just doesn't want to take the risk of changing his mind and falling prey to the uncertainty involved.
Labeled cognitive dissonance in the field of neuroscience, this is the exact same illness that is afflicting US banks and investment houses right now. They are just not willing to accept that they had a big role to play in the financial crisis of 2008/09 courtesy their lax practices. They have instead chosen to put the blame on the Government, arguing that it was the one who seemed to have forced everybody to go and give mortgages to people.
Barry Ritholz, a famous columnist has come down heavily on this blame shifting tactic of the banks. He believes that they are as much responsible for the crisis as the Government if not more. He has termed this as the Big Lie and has implored people to ignore the same and instead, try and implement the Big Truth as early as possible. The Big Truth being that the world definitely needs more regulation and the banks do indeed need to be cut to size.
| 02:30 |
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Global ratings firm Moody's today downgraded the outlook of the Indian banking system to 'negative' from 'stable' amid concerns over asset quality, capitalisation and profitability. Ironically it comes at a time when key
Reserve Bank of India (RBI) officials have attempted to ease concerns over systemic risks to the banking system. Recently, the gross NPA to advance ratio amongst PSU banks in India increased from 2.2% last year to 2.3% in March this year. However, the
RBI believes that the NPA level has not reached a point where it threatens the banking system. We concur that the high provision levels amongst Indian banks is what offers such comfort to the central bank. Nevertheless the NPAs are a drain on profits and shareholder returns. While the current NPA levels might not have reached alarming levels yet, it will be prudent if banks keep a careful tab on them considering the slowing growth rates, high inflation and expectations for further rate hikes.
| 03:10 |
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If a recent study is to be believed,
buying a home in Mumbai would continue to remain out of reach for an average citizen. Affordability factor is a proving to be a major hindrance for home buyers.
Property prices have increased by about 10 times in the last decade, with 68% of the flats in the city now costing over Rs 10 m. This has kept majority of the buyers at bay. As a result, there has been a substantial rise in unsold inventory. However, considering the shortage of land parcels in Mumbai, builders are holding on to the prices rather than liquidating the inventory. They are confident that the real estate transactions would increase once the overall credit environment improves. Emergence of nuclear families and migration from tier 1-2 cities will also ensure that demand outstrips supply. However, we believe that prices in Mumbai are already near a bubble territory. Thus, unless the prices correct to a meaningful levels the evident strong demand argument would just remain on paper rather than materialize.
| 03:40 |
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Rising food prices have been a bane for quite some time now for consumers across India. Despite monsoons being good this year, there has hardly been any meaningful relief for the average Indian. What has made matters worse is that
the gap between the wholesale and retail prices of every day food items has only widened. And the reason for this has been attributed to higher transaction costs and labour charges. To cite an instance, wheat prices were down 1.62% from a year earlier in the wholesale markets in Delhi, but the retail prices were ruling 7.14% higher. The same trend has been observed for other essential food items as well.
What this means is that while the demand-supply mismatch has reduced on account of good harvests, profiteering has kept prices higher. Expecting a sharp decline in retail prices any time soon seems quite difficult. In fact, one of the issues is that most retailers are unorganised and operate on a small scale as a result of which the temptation to indulge in profiteering is great. The obvious solution would be to bring organised retailers and farmers on a common platform and thus get rid of intermediaries. When this will become a reality though is anybody's guess.
| 04:15 |
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Outsourced services or business process outsourcing has been strength of Indian Information Technology (IT) companies. But of late, software products are also witnessing some interesting signs. Many Indian companies in this space have been doing well for quite some time. On the back of strong future growth prospects,
now these niche IT companies have started fetching valuations upto US$ 1 bn. Online travel company Makemytrip, Mobile ad network company InMobi, online retailer company Flipkart are examples to name a few. Companies in data protection space such as Druva, in Customer Relationship Management (CRM) space such as Zoho and many others in different software products space are coming up fast as well. This will definitely not change the image of the Indian software sector, at least not in the near future. However, this shift is a good sign for the sector as a whole. After all, it is adding one more dimension to the future growth prospects of the sector.
| 04:40 |
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In what has been an extremely volatile session, the indices in
Indian stock markets today oscillated to either side of yesterday's close. At the time of writing, the
BSE Sensex was flat hovering close to the dotted line. While FMCG and software stocks are in favour, banking and energy stocks are leading the losers. Other key Asian markets are trading a mixed bag while Europe has opened on a positive note.
| 04:56 | | Today's investing mantra |
"While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology." - Seth Klarman
source:
EquityMaster - 5MinWrap-Up
