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At Ambit, we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across could have relevance for Indian stocks and the Indian economy, or could be of plain genuine interest to all readers.
Here are the ten most interesting pieces that we read this week, ended May 20, 2016.
1) Buffet and Bogle unite against hedge funds [Source: Financial Times]
Warren Buffett and Jack Bogle, octogenarian opposites of investing, discuss in this piece their viewpoints on why passive index investing is likely to generate much better returns for investors than actively managed funds. Both Buffett and Bogle ascribe lower returns to excessive fees charged by such active funds. Bogle in fact gives numbers to attest this argument. He says “Hedge funds manage about $2.8tn of assets, generating about 300 basis points in management and performance fees i.e. about $84bn in fees alone. Vanguard, by contrast, supervises about $2tn in index funds, at a cost of about $1.6bn” With investors possibly realizing the benefits of passive investing it is not a surprise then that passively managed mutual funds and exchange traded funds in the US attracted $384bn in the year to March, while active funds lost $277bn in assets.
2) Always cry over spilt milk! [Source: GMO]
This quarterly letter (1Q 2016) from GMO has two parts to it. Whilst both are super reads, we highlight the second part - authored by Jeremy Grantham – as being an outstanding read. Grantham discusses his views on the disproportionate impact of Chinese economy on commodities as an asset class. For instance, China, he believes was the dominant 60% driver of the crash in commodities - the sheer magnitude and the long 30-year duration of its growth surge; the remarkable late acceleration in its growth rate; and, finally, the abrupt cessation of Chinese growth. He also goes on to provide a rather gloomy outlook for the metals based on the argument that whilst China’s demand is likely to slow down in the years ahead, the new capacity is likely to keep coming online for the next two to three years, thus worsening the supply-demand gap.
3) The dystopian lake filled by the world's tech lust [Source: BBC]
This eye opener by Tim Maughan is a report on a toxic, nightmarish lake in Mongolia created by our thirst for smartphones, consumer gadgets and green tech. The place discussed is Baotou, the largest industrial city in Inner Mongolia-one of the world’s biggest suppliers of “rare earth” minerals. The shock of the author at the sight of the lake is quite evident in his description – “It’s a truly alien environment, dystopian and horrifying. The thought that it is man-made depressed and terrified me, as did the realization that this was the byproduct not just of the consumer electronics in my pocket, but also green technologies like wind turbines and electric cars that we get so smugly excited about in the West."
4) US Researchers enter the cutting edge with first robot surgeon [Source: Financial Times]
This piece is another testament of the growing advances being made by robotics in our mainstream lives. STAR – acronym for Smart Tissue Autonomous Robot developed by the Children’s National Health System in Washington DC, is the world’s first surgical robot that can outperform human surgeons when operating autonomously on soft tissues such as intestines. According to the team that developed the robot, it performed better than human surgeons, with or without robotic assistance, on everything except timing. However, according to Dr Kim - the project leader “adjusting it to work faster in future would be simple and that the next steps will be to develop the system so that it can carry out a complete operation “skin to skin””.
5) Evergreening by private sector banks [Source: livemint.com]
Finally, it is becoming clear that Indian private sector banks have many of the same asset quality problems that have crippled the country’s public sector banks. It is just that they have been better at hiding them for longer beneath a veneer of respectability. More specifically, this searing article by Krishnamurthy Subramanian, calls into question the quality of board oversight, especially with respect to evergreening of loans in private sector banks. He presents numbers to illustrate this argument (numbers which were first highlighted in the P.J. Nayak committee outstanding report in May 2014).
6) China companies borrow to repay debts in latest credit binge [Source: Financial Times]
This article describes how China’s attempt to fire its growth engine through credit stimulus is not reaching its intended goal. As per the article, the world’s second-largest economy is currently using four units of credit to generate a single unit of GDP growth – a ratio that signifies that the debt efficiency of the Chinese economy is at its lowest point since early 2009. Struggling with overcapacity and oversupply in several key traditional sectors, many of the sectors are using the new financing not for investment, but rather to repay debts built up since the 2009/2010 stimulus.
8) When TV ads go subliminal with a vengeance, we’ll be to blame [Source: NY Times]
This piece discusses the existential threat that the TV advertising industry faces. It describes how “for decades the ad people and the TV people have sat down together to cut deals for the 30-second spots that run during prime time’s commercial breaks”. However, with people now switching over to on-demand content delivery through channels like Netflix that showcase popular shows without any commercials - the future of $70bn industry has been thrown into question! The changes have already begun as the article showcases with Magna Global, one of the biggest ad-buying firms in the world, shifting $250 million of its clients’ ad dollars to YouTube from traditional television.
9) Is it ok to torture or murder a robot? [Source: BBC]
With robots increasingly becoming a part of our mainstream lives, do you think they deserve a set of “robot rights”? If so, in what circumstance would it be OK to torture or murder a robot? And what would it take to make you think twice before being cruel to a machine? This interesting piece dives into the reaction of the human psyche to “observation” of pain. Using a set of experiments researchers have shown that humans are unable to inflict ‘pain’ on a robot if it looks like it is alive. Given these extreme reactions, some researchers are in fact putting forward a case of ‘robot right’ – much like the animal rights we have in place today!
10) Lure of the Irish: Dublin ready and waiting for post - Brexit bankers [Source: WSJ]
Describing the unwanted consequences and complications of a British exit — or “Brexit” — this article shows this event can spur banks across the world to re-evaluate long held attachments to the U.K. According to the article, “The cost of being based in London in particular, combined with more stringent financial regulation, is taking its toll and across Europe, financial centres — from Frankfurt to Luxembourg — are quietly touting their benefits ahead of the June 23 vote”. Some of the banks, the article says, have already begun their process of expansion outside London. Most notably, Citigroup Inc. last year announced plans to move its European retail headquarters to Ireland while Wells Fargo and Credit Suisse are two other banks which are also looking to expand their operations in the country.