Earlier Posting

Big Brother gets Bigger 0750 31 July 2009 New Delhi Across the world, governments have taken on a greater share of their economies. In the US, the largest shift has been in the financial sector, with the nationalisation of the housing agencies, Fannie Mae and Freddie Mac, the partial nationalisation of Citi bank, and massive, low cost loans to investment banks. In India, 'aid' to the financial sector has been less visible, and i suspect has largely been in the shape of a less stringent oversight of bad loans and provisioning. The more obvious, and vote-garnering moves have been by way of massive social expenditure programs, which are budgeted to raise governmental spend by 36% in one year. Since the government was already running a substantial deficit, the legitimate fear is that all this fresh expenditure, coupled with lower tax income, is going to require a great deal of borrowing by the government. This, it is feared, wil make it more difficult for the private sector to borrow money. Only time will tell whether these fears are genuine, but our stock markets are already responding to such a reshaping, and companies which require huge capital flows to fund their growth are way below their 2008 highs. The obvious sector to look at is engineering, where the market leader is BHEL. It's high, in November 2007, was Rs. 2823, and it now fetches about Rs. 2250. In the private sector, Siemens and Larsen Toubro have taken a severe drubbing, and sell at a fraction of their late 2007 peaks. In contrast, look at consumption stocks, starting with the two market leaders, ITC and HUL. The cigarette to snack-foods giant now sells at Rs. 240-odd, compared with Rs. 220 when the markets peaked in January 2008. Soaps ginat was Rs. 230 then, and commands Rs. 280 now. By the way, I don't think these are the best consumer goods stories to buy, and smaller FMCG stocks have done even better - Glaxo Consumer Health, for example, was Rs 680 then, vs. a life-time high of Rs. 1090 earlier this week. These are profound shifts, and can make the world of a difference to the long-term return on one's portfolio. I expect these shifts to continue, and aside from engineering, construction and real estate, I think the worst affected are going to be banks. Among the gainers, all consumption goods companies, especially those with low capital requirements - among which my favorites are packaged goods and pharmaceuticals.
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