What I read this week: What will it take to start India’s private capex; and why big brands die




Everyone is just waiting for the private sector to start the expenditure cycle which would give boost to the GDP. Hi there,

Ever wondered why big brands die? Or in this age of information, will brands become irrelevant going forward. It seems with the increasing popularity of online platforms, it may not be so easy for the brand owners going ahead. What’s the way forward then?

This column also has more, including one interesting piece as to what would it take to kick off the private capex cycle in India, which has remained stalled for many quarters now.

I am sure, there is enough dope to tickle your grey cells on a holiday. Do read. But do also make time to enjoy your weekend. I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts.

Private sector will take time to give helping hand on growth
(Source: What shapes investment?)

The government has been doing bulk of the capital expenditure over the past couple of years. Everyone is just waiting for the private sector to start the expenditure cycle which would give boost to the GDP. The wait has been long and we see no signs of it picking up.

The promoters’ instincts about the business prospects are very important for Kick starting capex and employment generation. But behind the instincts, there are a lot of factors which are considered. To start with the current capacity utilisation is considered. Naturally, utilisation rate has to be high enough for the company to go ahead with expansion.

Businesses exist to make profits. Without saying, the high capacity utilisation should generate adequate profits for the company. Considering that the firms are generating healthy profits and operating at high capacity utilisation, they would start discussing about new capex. The firm would evaluate the financing options in terms of equity and debt and the cost of each to judge is the project to be undertaken meets the minimum required returns. Assessment of the economic outlook is also taken into consideration in forecasting how much cash flows the project is expected to generate in the future.

And finally, a check would be on the government institutions and personnel are in good shape, so that good outcomes can be counted on with future policy actions and future disputes.

While some of the above factors seem to be in place currently, we need to see how the other factors fall in place before expecting any new capex in our economy going ahead.

This will again end in tears
(Source: Issuing new loans against unrealised capital gains has created an Australian ‘house of cards’)

People really have short memories. Especially the investing class, who time and again ignores what lessons have been learnt in the past.

The decade-old mortgage crisis in the US, which led to housing crash and took the entire world into a massive financial crisis, has been forgotten in Australia. An innovative mortgage finance scheme in Australia has become popular which leaves behind the Ponzi scheme prevalent before the global financial crisis. It is the use of unrealized capital gain of one property to secure financing to purchase another property.

It allows lenders to report cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

Profitability is therefore predicated upon ever-rising housing prices. When house prices fall in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.

More and more people opt for such schemes to increase their investment in property on the premise that they are bound to rise in the future. They buy the debt funded house with no tangible income to pay off their debts when they become due. When this upward spiraling effect is disturbed, we may see tears, again.

The death of brands
(Source: Intrinsic investing)

Brands as we all know is a differentiating factor which we look in a product or service which makes us decide to buy or use that particular product or service amongst the plethora of available similar options. Brands are a key source of value for many companies. It acts as a moat against competition.

Brands actually create value by lowering the ‘search costs’ for consumers; that is, the costs incurred by a prospective buyer to determine what to buy. We would pay a slightly higher price if we are assured that the product, be it toothpaste, detergent, canned food, amongst many others is of a quality perceived by us.

This is the way brands are able to charge higher than others, thereby creating value for the companies. With the increasing popularity of online platforms, it may not be so easy for the brand owners going ahead. Let me ask you a question: Do you check who is the ultimate supplier of a product bought from Amazon? Or who would be the chauffer driving your Uber ride? This is because these services providers and not brands have created a trust factor within us that the products available on Amazon would be of an assured quality or the chauffer of our Uber drive is safe for us to spend the travel time with him.

Then the question arises that would brands become irrelevant going forward. Difficult to say, but they certainly would not have the same value they created for the owners as in the past. Unless, there are brands which are called Identity Brands which define your personality.

China’s fifth-largest bank downgraded to junk status
(Source: china’s fifth-largest bank downgraded to junk status)

Confirming the fragility of China’s financial system, its fifth largest bank, Bank of Communications, was recently downgraded to junk status recently by Moody’s. China’s central government owns 42.26 per cent stake in the bank. The downgrade was on account of the over-reliance of the bank on the volatile and expensive wholesale deposits and lack of customer’s deposits. All these led to decline in the bank’s profitability.

Chinese officials fear domestic banks’ growing dependence on less stable funding sources such as the sale of financial products and interbank lending, rather than traditional deposits, could impact economic growth and stability in the world’s second-largest economy. Earlier this year, the newly appointed head of China’s banking watchdog pledged to end the regulatory chaos in the country’s banking system and cracked down on these instruments, limiting the availability and increasing the cost of financial sources which Bank of Communications relied upon. Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.




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