It is a matter of common knowledge that Swelect Energy Systems (formerly Numeric Power Solutions) listed on both BSE and NSE has sold its UPS business to affiliates of Legrand France S.A. for an aggregate consideration of INR 829 crores (including USD 4.5mn for the Singapore subsidiary). Pursuant to announcement of the sale in early Feb '12, the stock did run up for a couple of days, hitting a high of 308/309. However, given that the deal was subject to various approvals and more importantly, owing to concerns about how the promoters would use the cash, the stock corrected shortly thereafter and was later transferred to T group. The stock is languishing at 260 levels with thin trading volumes.
Before I share my views on the company and how I see the story going ahead, I'd like to issue a caveat that I have always liked the company, as most value investors have and I own the stock, therefore, my views should be considered as biased.
I believe this is a perfect time to buy the stock.
First the situation angle for the 'positional traders' - April 10th (tomorrow) is the last date of consummation of the transaction, mutually agreed upon between Numeric and Legrand. Therefore, I would assume an announcement on this front and receipt of cash is imminent. I would also assume that calling of a board meeting for declaration of a special dividend (which the promoters have been clear will be the mode used to distribute some of the cash) is also imminent. While no one knows how generous these guys would be in terms of distribution of the cash, my personal take is that the dividend would be 125-150 bucks a share. The above announcements should be sufficient to result in a 50-60 buck up-move in the stock. The fact that the stock was transferred to T group should in fact be looked as a blessing in disguise as the speculative element built into the stock is therefore low.
Now the more important fundamental call for 'investors'. I have a positive bias towards promoters based in Chennai; given that they more often than not have corporate governance standards better than those prevalent in Hyderabad or Delhi and err on the side of conservatism rather than being adventurous. More specifically, I have always liked the Numeric management, given that like many other Chennai based companies, they have never been 'capital market savvy' and have built the entire business organically from internal accruals, without any dilution whatsoever, besides the negligible sum they raised through an IPO. That's an enviable track record to have for a promoter for sure. Moreover, promoters do not have any unrelated business interests (to my knowledge) and have stayed away from the temptation to invest in real estate and such areas (which is often seen as the easiest way to deploy large pools of capital). If one looks around for parallels, we have seen how Chennai based Amrutanjan has created value for shareholders post sale of some of its surplus assets.
If one looks at the flipside, markets gave a thumbs down to Piramal when they announced the sale of their business to Abbott and hammered the stock down to 340 levels but as clarity has emerged on some of their plans to deploy the cash, the stock did bounce back almost 40% from those levels. In case of Piramal of course, while I believe they will create shareholder value over the long-term, some of the calls they have taken are quite adventurous, to say the least - be it the Vodafone deal or be it direct lending to real estate companies from the listed company. (Yes, the latter is indeed true, although they haven't publicly spoken about it - interactions with their NBFC subsidiary clearly point in this direction). The extreme case would be companies promoted by relatively obscure promoters like Geecee Ventures (formerly Gwalior Chemicals), which have decided to use the book to invest in third-party businesses using a PE approach.
Coming to Swelect Energy (market cap ~INR 260 crores), here's how I would look to value the business:
Consolidated net debt as of FY11 was INR 23 crores and post this transaction, the company would have net cash of INR 650+ crores.
Their residual (non-UPS) business did INR 111 crores in FY11 and while the business-wise split is not readily available, my sense is it would be largely the project management and LED lighting businesses. The skill sets that Numeric used in growing the UPS business should be quite handy in terms of growing the LED lighting business. I'm fairly bullish on this piece delivering steady growth. The solar project management business (EPC contracts and O&M services) is a fast growing business and has seen advent of many serious players in the last two years. There is also a steel foundry business, manufacturing mainly alloy steel castings and valves - specifically for the oil and gas industry, housed in a subsidiary Amex Alloys - expected to do a top line of INR 35 crores this fiscal. In a nutshell, I would conservatively peg the value of these residual businesses at INR 100 crores.
The company has sold only 3 of its 9 manufacturing facilities to Legrand as part of the deal - the real estate value of the remaining facilities could easily be another INR 50 crores. (but some of these could be used for the LED lighting business)
The green energy business looks particularly exciting, given that Tamil Nadu is probably the best place for setting up of wind farms and the company has plans to increase capacity from 1.5MW to 10MW. On the solar side, while they are again looking to invest in the generation side of the business, detailed business plans are still in the works. They are the 3rd company in India and 1st in Tamil Nadu to get REC accreditation for its two 1MW solar PV plants in Tamil Nadu. In other words, they will get market trade-able renewable energy certificates for the power this Coimbatore plant generates - it is expected to start pumping electricity into the grid as early as this month. The equity value of the existing business on the renewable side (based on up and running capacities) should be INR 20 crores.
The next generation seems to be adequately qualified to drive the renewable energy business and I believe Mirunalini Chellappan, the daughter of the promoter has been working on preparing a blue print for Numeric's foray in this space for over 3 years now, since her induction into the business.
I would continue to place my bet on the Management in terms of their execution capabilities on energy efficient lighting solutions and renewable side.
Over the next 1 year, I would expect the company to begin trading closer to cash value and depending on how the strategy plays itself out, over the next 3 years, investors could see more value accretion.
I'd conclude by saying that to my mind, the stock merits a 10% portfolio allocation with a buy and hold strategy for investors with an upside potential of 100% over a 12 month period.
Background
Based on a global survey of investment bankers, private equity companies, and financial analysts, Deloitte's study The Leadership Premium: How companies win the confidence of investors puts a quantitative metric on the effectiveness of leadership to help businesses understand the impact that leadership can have on their performance and market value.
Key findings
The report reveals that the quality of senior leadership—including core capabilities as well as personal qualities such as honesty and integrity—has a direct, and measurable, impact on analysts' assessments of whether companies have been successful and will be successful in the future.
More than 50 percent of stock market analysts surveyed routinely factor leadership into their valuations—and 80 percent award a premium for particularly effective senior teams.
The report indicates that analysts look for three core components when assessing an organisation's leadership strength:
Strategic clarity – a clear vision of what the organisation needs to achieve.
Successful execution – proven ability to meet objectives.
A culture of innovation – commitment to enterprise; an environment for ideas.
In addition, analysts look for two attributes that support these components: effective corporate governance and effective leadership characteristics.
1 of 1 File(s)
uk-con-winning-confidence-of-investors.pdf
Investors are familiar with the boom in commodity prices and experience the effects of rising prices for those they use, petrol being the most obvious. Australian investors are "enjoying" the fruits of the boom through the high inflows of capital into our economy, and at the same time suffering under the high interest rates the inflation-fighting Reserve Bank of Australia is imposing in response.
So investing in commodities should be a way to generate returns as well as a hedge to protect your investments against the rising costs flowing from the boom. Because Australia is apparently in a long-term commodities "supercycle" - linked to the urbanisation and industrialisation of China, India and other emerging economies - we ought to be thinking that investing in commodities is important now and for the future.
It is not that simple. Post-GFC investor scepticism combined with the "black box" of commodity prices - how much of the price is driven by hedge fund speculation and hoarding? - has traditionally forced most investors to stay away from commodities as an asset class.
This article provides a balanced analysis of the pros and cons of agricultural commodity investing and how to include it in portfolios, with guidance on how to interpret and react to the "noise" surrounding commodities. There has been a huge shift in the production and consumption of most commodities, with agricultural (soft) commodities subject to the same explosive demand growth that is driving prices for hard commodities.
Portfolio efficiency can be improved by including 5-10 per cent agricultural commodity exposure by, for example, using the BetaShares ETF (ASX code: QAG).
Commodity boom sustainability
Commentators say the current commodity boom is driven by the growth and industrialisation in emerging economies, which overlays the normal demand from developed economies. This typically leads to research by brokers and investment managers that encourages investors to buy resource-related shares and also invest in the underlying commodities. In parallel, we also hear claims that the China story is a bubble waiting to burst and that economic growth in emerging markets is likewise uncertain.
With a heavy dose of scepticism in mind, let's look at the evidence of how real this commodities boom is, what are the enduring sources of high prices, and what are the risks for investors. We will see that the drivers of demand for the soft agricultural commodities (wheat, rice, corn, etc) are very similar to those of hard commodities (iron ore, coal, copper, etc).
The Reserve Bank of Australia is one of the most consistently accurate economic forecasters available to us. In November 2010 its governor, Glenn Stevens, highlighted how much stronger the commodities boom was than any of its predecessors.
Australian Terms of Trade
Source: RBA
Stevens noted that commodity prices have always experienced a "boom and bust" cycle in Australia, going so far as to say the RBA assumes that iron ore prices will moderate over coming years as supply increases to match demand. Yet he was clear that there was a reasonable basis for the view that the boom may be "longer and stronger" than previous ones.
The chart above, which Stevens used in his speech to the Committee for Economic Development of Australia (CEDA), makes it clear that, despite the various booms during the 19th and 20th centuries, the long-term trend in commodity prices was downward for all of the 20th century. This leads many commodity sceptics to predict the current boom may just be a blip in demand, and therefore commodity investing will end in tears.
A great source of analysis comes from the eminent investor Jeremy Grantham, founder of investment house GMO. As a noted sceptic of broker and investment bank claims about rising asset prices, his detailed analysis of the "paradigm shift" in commodity prices is a must read for all investors. This is what he says about the current commodity boom:
"…we now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common…accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources. After 100 years or more of price declines, they are now rising and in the last eight years have undone, remarkably, the effects of the 100-year price decline."
Grantham names the Chinese industrial revolution, which grew exponentially after China joined the World Trade Organisation in 2001, as the primary source of the "great paradigm shift" in commodity prices.
The table below shows how extensive Chinese demand is for commodities.
Source: Barclays Capital (2010), Credit Suisse (2010), Goldman Sachs, United States Geological Survey (2009), BP Statistical Review of World Energy (2009), Food and Agriculture Organization of the United States (2008), International Monetary Fund (2010).
Note that China's demand for agricultural commodities sits side by side with its demand for hard commodities. China now accounts for 28.1 per cent of the global demand for rice, 24.6 per cent of soybeans, 16.6 per cent of wheat, and nearly half the entire demand for pork.
It is no wonder the rise of China and other emerging economies is fuelling such a significant increase in commodity prices. The graph below illustrates this with iron ore prices.
Iron Ore prices chart - 1900 to 2010
Source: Global Financial Data, as of 31/12/10
The case for investing in agricultural commodities
The urbanisation and industrialisation of the emerging economies, led by China and India, has many facets. Demand for hard commodities comes from the building of infrastructure needed to house and transport the hundreds of millions of people moving from rural to city life.
Their jobs in the cities are typically far more productive of national wealth than their lives as farmers. This leads to rising national GDP, which directly creates rising household GDP. As household incomes rise, more citizens consume more electrical and whitegoods, thus increasing demand for hard commodities. The quality of food improves, with rising consumption of protein and calories. This directly leads to higher demand for the key soft commodities of wheat, rice, soybeans, etc.
The finite supply of hard commodities is a primary reason for their rising prices, compounded by the higher cost of extracting and processing lower-quality deposits, which is necessary as higher-quality deposits are mined out. It is the same with agricultural commodities: as demand grows, production moves to marginally lower-quality land. This is exacerbated by the growth in size and number of urban centres; typically cities are established in geographic regions with good supplies of water and good growing conditions for crops. As cities grow, they overwhelm the best agricultural land. Australians know this only too well with urban sprawl.
Agricultural productivity has been helped over the past few decades by improved fertilizers and farming techniques. Even though total output has risen, the efficiency of agriculture is falling because of the declining quality of land used. The graph below shows this decline is permanent, and there will be a fundamental shift as petrochemical-based fertilizers become more expensive.
Agricultural productivity chart - 1971 to 2006
Source: Food Agriculture Organization of the United National, as of 31/12/2009
It is little wonder that the prices of the four key agricultural commodities - wheat, rice, soybeans and corn - are high, and moving higher.
Portfolio construction with agricultural commodities
The problem for investors is that it is impossible to buy most physical commodities unless you are a supplier or end-user of them. How does a retail investor store an investment in wheat?
Investors seeking exposure to commodity prices have traditionally done so through owning shares in commodity companies. This works reasonably well with hard commodities, but is difficult to do in agriculture. The total exposure to soft commodities of companies in the ASX 200 is less than 1 per cent.
As a result, various commodity indices have been developed to provide a convenient method of investment in agricultural commodities. The graph below shows the performance of the leading global commodity index, the S&P GSCI index, compared to that of the ASX 200 and the S&P 500.
Commodity index comparisons
Source: BetaShares
BetaShares provides a range of commodity ETFs, including a diversified commodity basket (ASX code: QCB), an energy ETF (ASX code: OOO), a gold bullion ETF (ASX code: QAU) and a metals ETF (ASX code: QCP). The BetaShares agriculture commodity ETF (ASX Code: QAG) tracks the S&P GSCI Agriculture Enhanced Select Index and is a useful tool for blending with more traditional assets such as Australian or international shares.
The graph below shows how the performance of an Australian equities portfolio can be improved by the inclusion of a 10 per cent allocation to QAG.
Australian equities portfolio with inclusion of 10% allocation to QAG
Source: Mercer, BetaShares. Blending QAG with ASX 200.
Conclusions
Driven by the urbanisation and economic growth in emerging economies, and decreasing rates of agricultural productivity, agricultural commodities prices are rising and should continue to do so as these fundamentals continue their trend growth. A portfolio allocation into the BetaShares agricultural ETF QAG improves the overall return and portfolio efficiency for retail investors.
About the author
Tony Rumble, PhD, is Head of Portfolio Construction, BetaShares. Email Tony.
Important: This information has been prepared by BetaShares Capital Ltd (ACN 139 566 868 AFS Licence 341181), the product issuer. It is general information only and does not take into account your objectives, financial situation or needs so it may not be appropriate for you. Before making an investment decision regarding any BetaShares ETF you should consider the relevant product disclosure statement ('PDS') and your circumstances and obtain financial advice. The PDS is available at www.betashares.com.au. An investment in any BetaShares ETF is subject to investment risk including possible delays in repayment and loss of income and principal invested. Past performance is not an indication of future performance. Standard and Poor's® and S&P® are registered trademarks of The McGraw-Hill Companies, Inc. ("McGraw-Hill"), and ASX® is a registered trademark of the ASX Operations Pty Ltd ("ASX"). These trademarks have been licensed for use by BetaShares. BetaShares ETFs are not sponsored, endorsed, sold or promoted by S&P, McGraw-Hill or ASX, and S&P, McGraw-Hill and ASX make no representation, warranty or condition regarding the advisability of buying, selling or holding units in BetaShares ETFs.
From ASX
ASX Exchange Traded Commodities (ETCs) provides useful information about how to use ETCs to gain pure exposure to commodities.
The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.
© Copyright 2012 ASX Limited ABN 98 008 624 691. All rights reserved 2012.
So investing in commodities should be a way to generate returns as well as a hedge to protect your investments against the rising costs flowing from the boom. Because Australia is apparently in a long-term commodities "supercycle" - linked to the urbanisation and industrialisation of China, India and other emerging economies - we ought to be thinking that investing in commodities is important now and for the future.
It is not that simple. Post-GFC investor scepticism combined with the "black box" of commodity prices - how much of the price is driven by hedge fund speculation and hoarding? - has traditionally forced most investors to stay away from commodities as an asset class.
This article provides a balanced analysis of the pros and cons of agricultural commodity investing and how to include it in portfolios, with guidance on how to interpret and react to the "noise" surrounding commodities. There has been a huge shift in the production and consumption of most commodities, with agricultural (soft) commodities subject to the same explosive demand growth that is driving prices for hard commodities.
Portfolio efficiency can be improved by including 5-10 per cent agricultural commodity exposure by, for example, using the BetaShares ETF (ASX code: QAG).
Commodity boom sustainability
Commentators say the current commodity boom is driven by the growth and industrialisation in emerging economies, which overlays the normal demand from developed economies. This typically leads to research by brokers and investment managers that encourages investors to buy resource-related shares and also invest in the underlying commodities. In parallel, we also hear claims that the China story is a bubble waiting to burst and that economic growth in emerging markets is likewise uncertain.
With a heavy dose of scepticism in mind, let's look at the evidence of how real this commodities boom is, what are the enduring sources of high prices, and what are the risks for investors. We will see that the drivers of demand for the soft agricultural commodities (wheat, rice, corn, etc) are very similar to those of hard commodities (iron ore, coal, copper, etc).
The Reserve Bank of Australia is one of the most consistently accurate economic forecasters available to us. In November 2010 its governor, Glenn Stevens, highlighted how much stronger the commodities boom was than any of its predecessors.
Australian Terms of Trade
Source: RBA
Stevens noted that commodity prices have always experienced a "boom and bust" cycle in Australia, going so far as to say the RBA assumes that iron ore prices will moderate over coming years as supply increases to match demand. Yet he was clear that there was a reasonable basis for the view that the boom may be "longer and stronger" than previous ones.
The chart above, which Stevens used in his speech to the Committee for Economic Development of Australia (CEDA), makes it clear that, despite the various booms during the 19th and 20th centuries, the long-term trend in commodity prices was downward for all of the 20th century. This leads many commodity sceptics to predict the current boom may just be a blip in demand, and therefore commodity investing will end in tears.
A great source of analysis comes from the eminent investor Jeremy Grantham, founder of investment house GMO. As a noted sceptic of broker and investment bank claims about rising asset prices, his detailed analysis of the "paradigm shift" in commodity prices is a must read for all investors. This is what he says about the current commodity boom:
"…we now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common…accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources. After 100 years or more of price declines, they are now rising and in the last eight years have undone, remarkably, the effects of the 100-year price decline."
Grantham names the Chinese industrial revolution, which grew exponentially after China joined the World Trade Organisation in 2001, as the primary source of the "great paradigm shift" in commodity prices.
The table below shows how extensive Chinese demand is for commodities.
| Commodity | China % of World |
|---|---|
| Cement | 53.2% |
| Iron Ore | 47.7% |
| Coal | 46.9% |
| Pigs | 46.4% |
| Steel | 45.4% |
| Lead | 44.6% |
| Zinc | 41.3% |
| Aluminum | 40.6% |
| Copper | 38.9% |
| Eggs | 37.2% |
| Nickel | 36.3% |
| Rice | 28.1% |
| Soybeans | 24.6% |
| Wheat | 16.6% |
| Chickens | 15.6% |
| PPP GDP | 13.6% |
| Oil | 10.3% |
| Cattle | 9.5% |
| GDP | 9.4% |
Note that China's demand for agricultural commodities sits side by side with its demand for hard commodities. China now accounts for 28.1 per cent of the global demand for rice, 24.6 per cent of soybeans, 16.6 per cent of wheat, and nearly half the entire demand for pork.
It is no wonder the rise of China and other emerging economies is fuelling such a significant increase in commodity prices. The graph below illustrates this with iron ore prices.
Iron Ore prices chart - 1900 to 2010
Source: Global Financial Data, as of 31/12/10
The case for investing in agricultural commodities
The urbanisation and industrialisation of the emerging economies, led by China and India, has many facets. Demand for hard commodities comes from the building of infrastructure needed to house and transport the hundreds of millions of people moving from rural to city life.
Their jobs in the cities are typically far more productive of national wealth than their lives as farmers. This leads to rising national GDP, which directly creates rising household GDP. As household incomes rise, more citizens consume more electrical and whitegoods, thus increasing demand for hard commodities. The quality of food improves, with rising consumption of protein and calories. This directly leads to higher demand for the key soft commodities of wheat, rice, soybeans, etc.
The finite supply of hard commodities is a primary reason for their rising prices, compounded by the higher cost of extracting and processing lower-quality deposits, which is necessary as higher-quality deposits are mined out. It is the same with agricultural commodities: as demand grows, production moves to marginally lower-quality land. This is exacerbated by the growth in size and number of urban centres; typically cities are established in geographic regions with good supplies of water and good growing conditions for crops. As cities grow, they overwhelm the best agricultural land. Australians know this only too well with urban sprawl.
Agricultural productivity has been helped over the past few decades by improved fertilizers and farming techniques. Even though total output has risen, the efficiency of agriculture is falling because of the declining quality of land used. The graph below shows this decline is permanent, and there will be a fundamental shift as petrochemical-based fertilizers become more expensive.
Agricultural productivity chart - 1971 to 2006
Source: Food Agriculture Organization of the United National, as of 31/12/2009
It is little wonder that the prices of the four key agricultural commodities - wheat, rice, soybeans and corn - are high, and moving higher.
Portfolio construction with agricultural commodities
The problem for investors is that it is impossible to buy most physical commodities unless you are a supplier or end-user of them. How does a retail investor store an investment in wheat?
Investors seeking exposure to commodity prices have traditionally done so through owning shares in commodity companies. This works reasonably well with hard commodities, but is difficult to do in agriculture. The total exposure to soft commodities of companies in the ASX 200 is less than 1 per cent.
As a result, various commodity indices have been developed to provide a convenient method of investment in agricultural commodities. The graph below shows the performance of the leading global commodity index, the S&P GSCI index, compared to that of the ASX 200 and the S&P 500.
Commodity index comparisons
Source: BetaShares
BetaShares provides a range of commodity ETFs, including a diversified commodity basket (ASX code: QCB), an energy ETF (ASX code: OOO), a gold bullion ETF (ASX code: QAU) and a metals ETF (ASX code: QCP). The BetaShares agriculture commodity ETF (ASX Code: QAG) tracks the S&P GSCI Agriculture Enhanced Select Index and is a useful tool for blending with more traditional assets such as Australian or international shares.
The graph below shows how the performance of an Australian equities portfolio can be improved by the inclusion of a 10 per cent allocation to QAG.
Australian equities portfolio with inclusion of 10% allocation to QAG
Source: Mercer, BetaShares. Blending QAG with ASX 200.
Conclusions
Driven by the urbanisation and economic growth in emerging economies, and decreasing rates of agricultural productivity, agricultural commodities prices are rising and should continue to do so as these fundamentals continue their trend growth. A portfolio allocation into the BetaShares agricultural ETF QAG improves the overall return and portfolio efficiency for retail investors.
About the author
Tony Rumble, PhD, is Head of Portfolio Construction, BetaShares. Email Tony.
Important: This information has been prepared by BetaShares Capital Ltd (ACN 139 566 868 AFS Licence 341181), the product issuer. It is general information only and does not take into account your objectives, financial situation or needs so it may not be appropriate for you. Before making an investment decision regarding any BetaShares ETF you should consider the relevant product disclosure statement ('PDS') and your circumstances and obtain financial advice. The PDS is available at www.betashares.com.au. An investment in any BetaShares ETF is subject to investment risk including possible delays in repayment and loss of income and principal invested. Past performance is not an indication of future performance. Standard and Poor's® and S&P® are registered trademarks of The McGraw-Hill Companies, Inc. ("McGraw-Hill"), and ASX® is a registered trademark of the ASX Operations Pty Ltd ("ASX"). These trademarks have been licensed for use by BetaShares. BetaShares ETFs are not sponsored, endorsed, sold or promoted by S&P, McGraw-Hill or ASX, and S&P, McGraw-Hill and ASX make no representation, warranty or condition regarding the advisability of buying, selling or holding units in BetaShares ETFs.
From ASX
ASX Exchange Traded Commodities (ETCs) provides useful information about how to use ETCs to gain pure exposure to commodities.
The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.
© Copyright 2012 ASX Limited ABN 98 008 624 691. All rights reserved 2012.
Cushla Sherlock: Not long ago India was hoping to help lead the world in growth, what went wrong? Is the slowdown permanent?
Deepak Parekh: The slowdown is definitely evident, but I'm confident that it is temporary. In the last decade, India grew at over 9 percent for three consecutive years and the aspiration was that we would achieve double digit growth. Unfortunately global GDP slowed, and as a result, so did we. Compared to the last couple of years, where we experienced a GDP growth rate of over 8 percent, this year we are in a bad shape and will come down to 6.9 or 7 percent. That indicates that the slowdown is definitely there, but I don't think it's permanent for a number of reasons.
What are the reasons?
We've had policy paralysis in the government. Various decisions have not been taken by the present ruling government because the coalition partners are not gelling and the opposition is not playing ball. As a result the government is unable to take reforms forward.
Some steps have already been taken, are these going in the right direction?
The government has accelerated some decision-making particularly with respect to fuel supply, whether coal or any other raw material needed for power, because without adequate power for industry you cannot achieve a larger GDP growth. These reforms in the power sector indicate that government is well aware of the slowdown need for action.
Is it worthwhile for investors to build exposure to India now?
Yes. I think some shares and equities have been battered down, not because the intrinsic values are not there, but because they are not able to get adequate raw materials, which are government controlled. We had a couple of major scandals last year and that also slowed down the government's decision-making, but I think this is behind us: inflation is now under check, interest rates have peaked and they will only come down during the course of 2012. I expect that things will improve in the last six months of this year.
Let's continue looking forward, what will the engines of growth be in India this year?
The service sector is the engine of growth in India. Growth in this sector is about 10 percent and it constitutes almost 60 percent of GDP - the service sector is booming. Agriculture and industry contributes the balance amount and have been hit badly by industry this year. However, with decisions from the government and the fast-forwarding of some reforms, I'm very confident that the industrial growth will come back to 7 or 8 percent.
In an environment of deleveraging, and low economic growth rates in the developed world, what asset classes should investors be focussed on? Bill Gross, the Co-CEO of the world's largest bond manager PIMCO, wrote an important monthly note arguing that as we move towards a mildly reflating world (higher rates and credit spreads) investors should add risk assets and move away from negative real returns offered by cash and short-term treasuries. To summarise:
-The current process of financial deleveraging follows a multi-decade period of levering, dating back to the fractional banking system and central banking in the early 20th century, the debasement of gold in the 1930s, the creation of Bretton woods and the dollar/gold standards which followed for 3 decades after WWII, the abandonment of the gold standard in the early 1970s and the deregulation of Glass-Steagall in the 1990s.
-While there were a variety of crises during this period, including the S&L crisis, Continental Bank, LTCM, Mexico, Asia in the late nineties, the Dot-com mania, and the more recent subprime crisis, the system continued to leverage-up as the market participants were emboldened by seeing that policy makers would continue supporting the system by extending credit, expanding deficits, and deregulating.
-The combined fiscal and monetary leverage produced extraordinary returns which exceeded the ability of the economy to create real wealth. Stocks and houses were viewed to be one-way bets over the long-run and homes were even categorised as financial assets (even though they were just a pile of sticks and stones) which could be borrowed against.
-As nominal and real interest rates came down, credit spreads were suppressed by policy support and securitization, stock PE ratios rose, 30-year treasury bond prices doubled, real estate boomed and anything that could be levered did well.
-This process suddenly stopped in 2008 and started to reverse. While the private sector has been selectively delivering (i.e. US households, banks) the public sector continues to pick-up the slack causing the system as a whole to mildly expand leverage, eventually leading to global inflation and slower growth.
-During the period of leveraging, financial assets with long duration (long maturity bonds, stocks, real estate with rental streams) did exceptionally well as their future cash streams were discounted by lower rates and spreads. Wealth was brought forward from future years as real growth was not able to match financial returns.
-Commodities lagged financial assets as well (as they could not be levered and could not benefit from PE expansion) underperforming them by 2% per annum over the last 20-years.
-However, as the process now reverses with rates and spreads not being able to come down further and likely to rise slowly along with inflation, delivering double digit or even 7-8% total return from stocks, bonds or real estate becomes difficult , and relative underperformance to commodities and real assets becomes more likely.
-While inflation will elevate some financial assets like stocks, their ability to return in excess of inflation or nominal GDP growth is likely to be limited.
-The investment strategy for this environment comprises:
-Real asset like commodities (inflation sensitive and supply constrained products) , land, buildings, machines and worker knowledge.
-Developing country stocks, with emphasis on dividend paying rather than growth stocks.
-Higher quality, short duration bonds and inflation-protected bonds.
-Be wary of levered strategies that promise double-digit returns in a delevering world.
-Don't get too defensive – maximise the "risk adjusted carry" or "safe spread" to pay your bills.
-Buy some insurance against fatter tailed outcomes arising from the myriad monetary, policy, geopolitical risks out there and manage investment expenses.
A brilliant snapshot of the financial world we are in and what we can expect going forward. As I have reiterated in several newsletters, it is absolutely critical to construct a well diversified portfolio which provides enough upside under a mildly reflating world and low real growth in developed markets, while protecting against future inflation. A portfolio weighted towards EM equities, energy and commodity stocks, high quality multinational stocks, EM local currency and dollar high yield bonds, high quality developed world credits, cash, farmland and gold should meet these requirements.
Why eating less meat makes sense?:
To follow-up on the newsletter from last week which reasoned how increasing incomes in the developing world are increasing the consumption of protein and putting excessive strain on the finite supply of grains, arable land and water, I present below a report from the Harvard Health Publications (Feb/March, 2012) supporting the case for moderation in meat consumption and more emphasis on plant protein as a means to better health:
-Researchers at the Harvard School of Public Health have been following 85,000 female nurses and 45,000 male health professionals since the mid-1980s. Every few years, the participants fill out questionnaires detailing what they eat and provide other information on their health.
-In one study, the researchers created scores for each nurse's intake of protein from red meat, poultry, fish, dairy, eggs, nuts, and beans. The findings:
- The more protein from red meat, the higher the chances of developing heart disease.
- Women who averaged two or more servings of red meat a day had a 30% higher risk of developing heart disease than those who had one or fewer servings a day.
- Replacing one serving of meat with one of nuts reduced the risk by 30%.
-In a separate study, the researchers created scores that reflected both the amount of carbohydrate in the diet and the main sources of protein. Among the nurses and male health professionals, those with a low-carb diet heavy in animal protein were 23% more likely to have died over 20-plus years of follow-up than those with "regular" diets, while those following a low-carb diet rich in plant protein were 20% less likely to have died.
--The authors of the study suggest that the increased risk from red meat may come from the saturated fat, cholesterol, and iron it delivers. Potentially cancer-causing compounds generated when cooking red meat at high could also contribute. Sodium, particularly in processed foods, may also play a role. It's also possible that red-meat eaters may be more likely to have other risk factors for serious, life-shortening diseases
-Good sources of protein deliver different amounts of saturated fats, carbohydrates, and fiber. Here's what 3 ounces of different protein sources contain.
Food
|
Calories
|
Protein (g)
|
Carbohydrate (g)
|
Saturated fat (g)
|
Roasted chicken, white meat
|
130
|
23.1
|
0
|
0.9
|
Roasted leg of lamb
|
184
|
22.7
|
0
|
3.9
|
Cooked ground beef (85% lean)
|
197
|
20.9
|
0
|
4.5
|
Baked coho salmon
|
151
|
20.7
|
0
|
1.7
|
Roasted chicken, dark meat
|
151
|
19.8
|
0
|
2.1
|
Baked ham
|
151
|
19.2
|
0
|
2.7
|
Boiled green soybeans
|
127
|
11.1
|
10
|
0.7
|
Cottage cheese, 1% milk fat
|
61
|
10.5
|
2.3
|
0.6
|
Boiled black beans
|
114
|
7.6
|
20
|
0.1
|
Source: USDA National Nutrient Database
| ||||
-To your body, protein from pork chops looks and acts the same as protein from peanuts. What's different is the protein "package" — the fats, carbohydrates, vitamins, minerals, and other nutrients that invariably come along with protein. The two Harvard studies add to a growing body of evidence that emphasizing plant protein sources is a better bet for long-term health.
-If you are overweight, shedding pounds can improve everything from your blood pressure to the way you feel. Do it the wrong way, though, and shrinking your waistline could also shrink the number of birthdays you get to celebrate. Instead of having bacon and eggs for breakfast, a burger for lunch, and steak for dinner, getting more of your protein from plants may help you steer clear of heart disease and live longer.
-One way to cut back on red meat is to follow a Mediterranean-style diet. It is rich in plant-based foods, and doesn't emphasize meat.- Eat fruits, vegetables, whole grains, beans, nuts, and seeds every day; they should make up the lion's share of foods.
- Fat, much of it from olive oil, may account for up to 40% of daily calories.
- Small portions of cheese or yogurt are usually eaten each day, along with a serving of fish, poultry, or eggs.
- Red meat makes an appearance now and then.
- Small amounts of red wine are typically taken with meals.
To eating less meat and more plant protein!
Research indicates that for most investors, tuning out the noise and sticking to their portfolio plan may be their best path to success.
These days, it’s not simply Homer Simpson that is uttering the famous TV catchphrase, “d’oh!” Some shaken investors who ran for the door in late 2008 and early 2009 are feeling stunned and bewildered at the markets dramatic recovery. As of March 9, 2009, three short years ago, the DOW sank to a shocking 6,547. Today, the DOW has boldly marched past the 13,000 mark, well above the pre-crash 11,543 close of August 2008. Investors who simply tuned out the drama and did little more than follow through with their portfolio plan consisting of low-cost diversification and disciplined rebalancing, are now rejoicing. Could such a simple approach be a key to good portfolio management?
The Roller Coaster from Hell
When it comes to roller coasters, even the youngest children know they should remain buckled in their seat until the ride deposits them safely back on terra firma. Unfortunately, for investors, the stock market allows a panicked rider to hit the eject button midcourse in spite of the risk of being thrown headlong to an ignominious demise.
According to research by Drs. Joy and Layton Smith, professors of Finance at Coggin College, this is exactly what many investors in fact did. Gripped by fear from both the market collapse of 2009 and the Flash Crash of 2010, a majority of investors abandoned their portfolio plan in a “flight to quality”. The roller coaster drama of watching a life of hard work and disciplined savings be hewn in half in a few short and horrific months was, for most, too much to bear.
Like an ultimate fighter suffering an unbearable chokehold, investors “tapped out” in a “flight to quality” – selling their stocks in favor of treasury bonds. Investors no longer cared that bond yields produced less than the annual inflation rate. They wanted off the crazy train and were in desperate need of security.
The Power of a Plan
In the late nineteen-sixties, Walter Michel, a Stanford professor of psychology performed the now historic Bing studies more commonly known as the marshmallow test. In this study, researches sat four year-old children at a table in a private room, marshmallow temptingly placed in front of them on a solitary plate. The kids where further told that the instructor must leave the room but would be back shortly. If they wanted, they could eat the marshmallow at any time, but if they waited for the instructor’s return, they would receive a second marshmallow as a reward.
On average, children lasted about three minutes before caving into desire and consuming the treat. However, thirty percent of the children lasted the entire fifteen-minute wait, receiving the reward of a double portion.
It is no surprise that after tracking of these children into adult life, those with the ability to delay gratification had greater success across many areas of life. One of the remarkable insights of the Bing studies, however, was in how children successfully in delaying gratification – something us shot delayers need help with. The high delayers approached the stress of the marshmallow temptation quite different from the majority – via something researchers called strategic allocation of attention. Instead of sitting there and getting obsessed with the marshmallow or “hot stimulus”, the children distracted themselves with other activities, like playing hide-and-seek underneath the desk, singing songs or moving about the room. Their desire wasn’t defeated – it was intentionally ignored via a distraction plan.
A simple analysis of the past three years demonstrates how this same skill worked for some investors. Take for instance a simple $1M portfolio of 50% stocks via the SPDR S&P 500 ETF, SPY, and 50% bonds via the Vanguard Total Bond Market ETF, BND. If an investor had simply made those purchases on August 1 of 2008, turned off every news source and spent the last three years gardening or playing with the grandkids, as of March 9, 2012 that investor’s account would be a robust $1,213,140 with a return of 21.32%. Not too shabby a three-year return for the worst market in modern history.
Now what happens if that same investor added the basic discipline of rebalancing according to the pre-established portfolio plan? The MarketRiders analytics engine reveals that such an investor would have been alerted to rebalance eight times over those three years. The results of the rebalancing are that the investor enjoyed account growth to $1,260,598, or a return of 26.07% – a 4.75% outperformance to the unbalanced equivalent.
Founder of the Vanguard Group and white hat, John Bogle, wrote, “Stay the course. No matter what happens, stick to your program. I’ve said ‘stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”
As much as investors believe that they can anticipate the downturns and time the market, research repeatedly debunks this myth. This three-year anniversary of the downturn has once again illustrated that bailing out of even the simplest of portfolio plans is an easy way to torpedo your investment program. Yes, this turbulent journey sure felt hopeless at times, but steadfast investors understood the dictum – this too shall pass. Like the kids with the marshmallows, staying focused on the plan helped such investors resist the temptation to react, and in the end, they move a little closer to their reward of a double portion.
The Indian economy will face an uphill battle in 2012. During the second half of 2011, a variety of factors, including monetary tightening, rupee depreciation and continued turmoil in the Eurozone, fueled anxiety about India's macroeconomic and industrial outlook for
2012. GDP growth dropped to 6.9 percent in the quarter ending in September 2011, registering the slowest year-on-year increase in the past two years.
Policymakers' approach of pushing for growth with less focus on the productive dynamic has translated into increased signs of macro stability risks emerging in the form of higher inflation, fiscal deficit and current account deficit.
Sustaining high growth is likely to be the overarching concern in 2012, although the risk of inflation will remain, largely because of a weakening rupee
2012. GDP growth dropped to 6.9 percent in the quarter ending in September 2011, registering the slowest year-on-year increase in the past two years.
Policymakers' approach of pushing for growth with less focus on the productive dynamic has translated into increased signs of macro stability risks emerging in the form of higher inflation, fiscal deficit and current account deficit.
Sustaining high growth is likely to be the overarching concern in 2012, although the risk of inflation will remain, largely because of a weakening rupee
Global - Economy and Market
Spain risks years without economic growth
(Reuters) - Belt tightening in the board room and the living room, deep public budget cuts and anaemic bank lending may be setting Spain up for years of economic stagnation that could eventually force it to seek a bailout.
ECB gives national central banks more discretion on collateral
The European Central Bank said national central banks are allowed to reject as collateral securities issued by banks in Greece, Portugal and other countries involved in rescue programs. "National Central Banks (NCBs) are not obliged to accept as collateral for Eurosystem credit operations eligible bank bonds guaranteed by a Member State under an EU-[International Monetary Fund] financial assistance programme," according to an ECB statement.
Ireland returns to recession
The Irish economy slid back into recession during the second half of 2011, the Central Statistics Office said. Gross domestic product contracted 0.2% in the fourth quarter, after a 1.1% decline in Q3
Interest rates must stay low to create jobs, Bernanke says
Federal Reserve Chairman Ben Bernanke said it is essential that the U.S. central bank hold interest rates close to zero to create jobs. Despite recent gains, the number of Americans holding jobs and the hours they work are fewer than they were before the financial crisis in 2008, he said. "The job market remains far from normal," Bernanke said.
Initial jobless claims in U.S. fall to a 4-year low
The U.S. Labor Department said first-time jobless claims fell to 348,000 last week, the fewest since February 2008. The four-week rolling average -- considered a more accurate indicator of labor-market conditions -- declined 1,250, to 355,000 claims, the department said
U.S. home prices sink to lowest level since financial crisis
U.S. house prices fell in January to their lowest since the financial crisis, according to the Standard & Poor's/Case-Shiller Home Price index. The index declined 0.8% from December and 3.8% from January 2011. Many analysts said they expect the housing market to hit bottom this year and begin a slow recovery.
Profit slides 5.2% at Chinese industrial firms
With export demand falling, profit at China's industrial companies dropped 5.2% in January and February compared with the same months last year, the National Bureau of Statistics said. The agency withheld a separate January figure because the long Lunar New Year holiday interfered with production.
Analysis: U.K. budget acknowledges need to lure foreign investment
The U.K.'s budget signals the government acknowledges a need to attract foreign investment and bright financial minds, according to The Economist. Cutting the top tax bracket from 50% to 45% probably won't aid the rich much, but it sends the right message. "At a time when France's most likely next president wants to introduce a 75% tax and [U.S. President] Barack Obama is moaning about millionaires and billionaires, Britain is welcoming entrepreneurs and financiers," the magazine notes. The Economist
Italy moves toward labor-market reform
Under technocratic Prime Minister Mario Monti, Italy is proceeding toward labor-market reform that was politically impossible in the past. Almost every proposal from the Monti administration, which has overwhelming public support, is fought for a while by parliamentarians, who buckle in the end.
U.K. banking trade group prefers gradual revamp of Libor
The British Bankers' Association said it prefers a gradual overhaul of the London Interbank Offered Rate, which has been under review amid allegations that it was manipulated. CEO Angela Knight said change needs to be slow because so many contracts worldwide are tied to Libor. "It will take place on a sensible and reasonable timetable," Knight said. "It's all about evolution, confidence and no fireworks. If you went for a big-bang change, you have big market instability."
Analysis: EU makes dangerous step toward protectionism
The European Commission's proposal to bar countries from bidding on EU government contracts unless they are open to buying from Europe is the wrong thing to do when the region's economy is slumping, according to The Economist. "Europe needs more competition, not less, to overcome its crisis," the magazine notes.
Saudi Arabia pledges to cut global oil prices, support recovery
Saudi Arabia's King Abdullah promised to use his nation's oil to bring down worldwide prices enough to accelerate the global economic recovery. He said Saudi Arabia will work with other Persian Gulf oil-producing states to ensure all customers have adequate and stable supplies.
China: March HSBC Flash PMI
The March HSBC flash PMI moderated to 48.1, down from the actual release of 49.6 in
February, and staying below the 50 mark.
This weakening fits with our view that the Chinese economy is still on moderation trend, and our expectation that growth is likely to continue slowing on both a yearly and sequential basis in 1Q12.
Hong Kong: February CPI
Headline inflation eased to 4.7% yoy in February, while underlying CPI inflation moderated to 5.4% yoy. Similar to the January release, the February inflation reading was distorted downwards by the Chinese New Year effect.
For January and February combined, headline inflation was at 5.4% yoy, versus 5.7%
yoy in December, while underlying inflation softened to 6.1% yoy. The latest trend shows that inflation has moderated mildly, but remained elevated.
Singapore: February CPI
Inflation slowed on food and transport. CPI inflation slowed to 4.6% yoy in February from 4.8% yoy in January, below the market expectation of 4.9% yoy according to a Bloomberg survey. Food and transport inflation led the slowdown.
Malaysia: Minimum wage policy: Pain for SMEs
Malaysia is set to introduce a minimum wage policy. Our channel checks suggest that the government could set the minimum wage at RM900 for Peninsular Malaysia and RM800 for East Malaysia. The policy would benefit some 3.2 mn workers or about a quarter of Malaysia's workforce, including foreign workers.
India - Economy and Market
RBI to keep liquidity tight till inflation eases
NEW DELHI - The Reserve Bank of India will keep liquidity tight as long as inflation is above comfort level, Deputy Governor K.C. Chakrabarty said on Tuesday.
RBI to provide additional borrowing facility on March 30, 31
The RBI said it will provide additional borrowing facility to banks in the last two days of the fiscal to prevent any liquidity crisis in view of tax payments.
Analysis: Indian economy is hindered by politics
Since liberalization in the 1990s, India has enjoyed remarkable growth. However, the economy is becoming sluggish again, and the political system is to blame, according to The Economist. "India is a place that has fallen out of love with reform," the magazine notes. "It needs to get the magic back." The Economist
Arms of profitable PSUs like MMTC, NBCC, Sail, Hindustan Copper, Bhel to be listed in disinvestment drive
Govt plans to focus on firms in which it has more than 90% stake. MMTC, STC, Neyveli Lignite and Rashtriya Chemicals & Fertilizers are among such public sector units.
