Going round in circles

Economic growth requires more investment in infrastructure. But while more and more people buy more and more vehicles, governments are not spending enough to build or manage the transport system, simply because there are less opportunities in it for corruption

All investors love growth for obvious reasons. Growth means money. For most of this decade emerging markets have been very successful in delivering a great deal of growth. But all investors know that for growth to be sustained, a country has to make continuing investment in its infrastructure. The question is which infrastructure?
An excellent paradigm for economic growth is traffic. When a country's economy is growing and creating wealth, its citizens spend that wealth on cars. Cars are wonderful things, but they need roads. Developing and developed countries are involved in a constant battle to keep up with the growth of automobiles to make sure traffic does not come to a dead stop.

A good example is Russia. Prior to the fall of communism Russia had very few cars except for those elites who could command them. That all changed with the collapse of communism. Now Moscow's streets have been populated with so many cars that often they simply go nowhere.

Billions have been poured into creating new roads for Moscow's traffic. A third traffic ring, proposed since the 1960s, was recently completed at great cost. It hasn't helped much. In fact it is now considered one of the most congested roads in Moscow, which is saying something. Moscow has a horrendous commute. The average delay is up to two and half hours. But the Russian government has come up with a solution to the traffic nightmare: more roads. They now propose to build a fourth Ring Road to solve all the problems.

While the traffic in Moscow is certainly awful, it has some tough competitors. According to a study by IBM, the world's winner for the worst traffic is Beijing-a city that beat tough competition from Mexico City, Johannesburg, New Delhi and of course Moscow. It is not that Beijing fails to spend money on infrastructure. It is in the process of building a sixth Ring Road which will be ready in a few years. The process of building this road has made things worse, as evidenced by a 60 mile traffic jam that lasted for weeks last summer.

According to Japanese traffic expert Kiichiro Hatoyama, who just published a book on Moscow's traffic, there are three reasons for the mess. One is quite understandable and is part of the history of a city. Newer cities like New York have been constructed on a grid, which makes traffic flow much easier. Ancient cities like Moscow, Beijing and New Delhi grew organically and radially from the centre. Going round about is always more difficult than going straight.

The two other reasons why the traffic in these cities is so bad has to do with the country's other infrastructure; its legal infrastructure. For traffic to move efficiently all drivers have to obey the law. In Moscow this is rarely the case. The reason is obvious. There are no legal disincentives.

Although Moscow is one of the most expensive cities in the world, parking in the city is free. The result is that cars park on crosswalks, sidewalks, traffic islands and any place else. There are signs indicating no-parking zones, but the rules are only occasionally enforced and the fines are minimal.

Hatoyama's third point has to do with the nature of the society. Ordinary drivers do not obey the law because of minimal enforcement. Elites are not subject to the law at all. In Moscow cars belonging to one of the federal security agencies, Duma deputies, or simply wealthy and well-connected individuals, have the right to run red lights, use emergency lanes and ignore road rules. This has not only snarled traffic, but resulted in injuries and death.

In contrast, the law in China has created a mess because it is being obeyed. Chinese officials have an incentive to use road construction projects to mandate conversion of agricultural land to commercial or industrial use. Once converted, the land can be sold to private or state-owned developers for a huge profit, which provides local governments with important revenue streams, but also enormous opportunities for corruption. Since there is no profit in public transportation, it has essentially been ignored except for some frantic building before the Olympics.
To solve this problem, cities like Beijing have simply mandated fewer cars. But this can have a contrary result. Last December, when the city published a draft plan, the public assumed that everything had been decided and panicked. They went on a car-buying spree and the official responsible found himself shipped to Xinjiang, China's version of Siberia.

What works? Simple: markets. In Singapore, traffic moves smoothly because the city has the world's most comprehensive road-user charging system. Motorists are charged according to their speed and so have economic incentives to move at the optimum speed and flow is maximised. So next time you are stuck in traffic, you know who to blame.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])


CLSA expects autos, pharma, pvt oil & gas to do well in Q3; but momentum to fall sharply

The brokerage suggests that telecom, cement and PSU oil & gas firms should see a decline in profits compared to the second quarter. Going ahead, seasonality, strong commodity prices and interest costs will hurt

CLSA, an independent investment and brokerage institution, expects Sensex earnings growth to slow from 28% in the second quarter of the current fiscal to 22% year-on-year in Q3. It believes that the best growth in the third quarter will come from autos, pharma, and private oil & gas, but telecom and cement and public sector oil & gas companies should see a decline in profits. The base effect will start to wear off for domestic cyclicals such as auto and banks, as well as global cyclicals such as metals and oil and gas, and that both these categories should see a sequential dip in topline growth. Seasonality and strong commodity prices will hit at least eight domestic sectors and interest costs will rise more rapidly than they did in the September quarter, the brokerage says.

The operating margins of almost all sectors, except oil & gas and property, are expected to ease in the December quarter. The sharpest fall in margins will come for cement, power, and telecom sectors.

Overall, FY12 will see healthy EPS growth of around 19%, but most of this will come from cyclical metals and energy sectors along with some steady growth from the IT sector. Other sectors will face macro headwinds, the base effect and rising competition. This will limit market returns, with the highest returns coming from metals, IT, energy and industrials. CLSA's top picks are Bharat Heavy Electricals, Dr Reddy's Laboratories, Hindalco Industries, IDFC and Mahindra & Mahindra.

While the auto and metals sectors and private oil & gas firms will see the strongest growth, they will also see a significant easing in year-on-year growth momentum compared to the September quarter. In fact, pharma, cement and telecom sectors will see their losses narrowing and stronger growth. Autos, private oil & gas and banks would contribute more than 65% incremental profits in Q3FY11.

Sales growth is expected to be the highest for auto, media, private oil & gas, power, property, software, and telecom sectors and the decline is expected to be the worst for the cement sector. Pharma, telecom, and auto sectors will see forex losses. Net profit growth is expected to be the best for auto, private oil and gas, pharma, software, and capital goods sectors and the worst decline will be seen by telecom, state-run oil & gas and cement sectors.

"The biggest positive swings in stocks will be in Cairn, Oil & Natural Gas Corp and Ambuja Cement. Tata Motors, Ranbaxy Laboratories and Sesa Goa will see significant deceleration in growth," CLSA says.

Strong volume growth will prop up earnings of auto companies (except Maruti Suzuki and Ashok Leyland). Maruti's results will be lower due to poor margins, while Ashok Leyland will be impacted by weaker volumes.

The banks that CLSA tracks are likely to report a 29% year-on-year growth in core pre-provision profit, but net profit growth will be only 13% because of lower treasury gains and higher loan loss provisions. While loan growth and NIMs (net interest margins) will be higher year-on-year, there could be some pressure on a quarter-on-quarter (q-o-q) basis. Fee growth will be good with an uptick in lending activity. Some banks may take a mark-to-market hit on the available-for-sale part of their bond portfolio due to the 20-50 basis points rise in medium-term bond yields. PSU slippages, which were high in Q2 will be keenly watched.

Cement demand has remained weak, but prices improved in the southern and western regions. Operating profit contraction should continue for most companies, except Ambuja Cement. Media companies may report strong revenues due to the festival season. Metals will do well mainly due to higher product prices, and in some cases even higher volumes. Best performers in steel would be Jindal Steel and Power and Tata Steel, while JSW Steel and SAIL will see a drop in net profits. Base metal companies will report strong q-o-q numbers on higher prices, CLSA says.

In oil & gas, "higher crude price will be offset by a higher subsidy burden, which should keep reported profit of OIL and ONGC largely flat on a q-o-q basis." In the case of Reliance Industries, lower KGD6 production would be more than offset by higher refining margins (CLSA assumes $8.9 per barrel, which is about a dollar higher q-o-q) and petrochem margins. Cairn India will benefit from higher volumes from Rajasthan and higher crude prices, while Petronet LNG will benefit from higher spot LNG volumes.

In pharmaceuticals, it is generally a strong quarter seasonally for domestic formulations. For IT, CLSA believes that Infosys should beat the upper end of its dollar revenue guidance, while absence of visa costs should drive positive surprise on margins. TCS should continue the momentum shown through 2010 reporting an 8% q-o-q growth in dollar revenues.

In telecom, October and November mobile net additions were strong. An improvement in network traffic will be keenly watched. Competitive intensity could ease a bit.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)


Path to a secure financial future

Moneylife Foundation engaged a packed audience at Vashi (Navi Mumbai) on how best to go about securing their financial future as also that of their loved ones.

Click here for more pictures of the workshop

The Moneylife Foundation on Saturday held another interesting seminar, this time in Vashi, Navi Mumbai, covering a whole range of topics from how scamsters and pyramid schemes operate to the implications of a borrower's credit history on his ability to borrow and from building wealth through simple, uncomplicated means to the importance of wills and nominations.  

NS Srinath, executive director, Bank of Baroda started proceedings by emphasizing on the banker-customer relationship and discussing the efforts at enhancing the relationship as also facilitating financial inclusion by educating people on banking products and services.

Sucheta Dalal, managing editor of Moneylife, and Debashis Basu, editor of Moneylife, then conducted an eye-opening interactive session on 'How to be safe and smart with your money'. Ms Dalal explained how investors must avoid losses by staying away from certain kinds of investments like chain marketing and pyramid schemes. The audience listened with rapt attention as she explained how these scamsters operate and advised investors to avoid falling prey to such frauds. Ms Dalal also spoke about the implications of credit card transactions and the implications of default and its impact on an individual's credit history and ability to borrow.

Mr Basu explained how a common investor can earn decent returns on investments by keeping things simple and not being seduced by misleading sales pitches of self-serving market intermediaries. He pointed out that one does not have to be an expert in stocks to be able to earn steady returns on equities. The Moneylife editor also delved into alternative investments like gold and real estate. "Gold is essentially a speculative form of investment, where you are placing bets regarding the movement of the dollar and rupee. Unless you are an expert on currencies, you should avoid gold as an investment," Mr Basu said.

In the second half of the day, the audience listened intently as Dr SD Israni, partner, SD Israni and Co, enthralled them with his acumen and his flair for narrating real-life stories that emphasised the importance of wills, nominations and transmission of financial instruments. Dr Israni has over 36 years of experience in the field of corporate, commercial and securities laws. His inspiring keynote presentation of over an hour included many personal anecdotes. He also pointed out the importance of making a will-irrespective of one's age. Dr Israni elucidated the complicated topic of wills by poiting out real-life examples. He also cited examples of how several years of delay in transmission of shares to rightful heirs leads to the shares being usurped by conmen in a series of well-executed steps to decamp with the assets. Also, people sometimes make changes to wills based on emotions. It is important to be in a peaceful frame of mind when creating and changing one's will, he said.

Thereafter, Aashish Somaiyaa, head-retail sales, ICICI Prudential Mutual Fund, initiated an interesting discussion on how to invest smartly in mutual funds. Mr Somaiyaa described the importance of financial health and explained the intricacies in choosing the right mutual fund. "Financial health is as important as physical health. Mutual funds can help you keep your financial health in check by investing in a systematic and disciplined manner," said Mr Somaiyaa. He talked about the psychological factors that play a big role in influencing the individual investor's decision. These lead to mistakes that can be avoided with the help of experts who can address the psychological factors in investing.

The last session of the day saw the panel members engage in an interactive session with the participating audience, who posed queries to the experts on a variety of topics.


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