Reflections on the week ending May 30, 2010

The financial news continues to be dominated by reports of the amount of leverage that exists in the developed markets with the current focus on the European countries of Portugal, Italy, Ireland, Greece and Spain.  An interesting divergence is appearing between countries which are highly leveraged and those that have relatively low amounts of debt per capita  -- consumers high amounts of leverage are likely to spend less and save more and vice versa for consumers with low amount of leverage.  During the past week, I attended an event where the speaker effectively proffered a very simple investment strategy  to profit from this divergence:

• In developed markets, consider businesses that help people save money. 
• In emerging markets, consider businesses that provide goods or services to domestic consumers; i.e. help people spend money.

Sounds simple and makes sense to me; how about you?

During the week, the following companies of interest reported results:

• TD Bank reported results for its second quarter ended April 30, 2010.  Adjusted EPS for the quarter of $1.36 compared with $1.14 in the prior year.  TD’s 3 main messages were:
• Exceptional performance in Canadian Retail
•  Credit environment stabilizing
• Wholesale earnings beginning to normalize

While referencing macro concerns regarding the European debt situation, TD communicated that its exposure to European debt was manageable.  In addition, Ed Clark indicated that he felt, on balance, the drivers of positive improvement were stronger than the headwinds emanating from the European debt problems.  On a more company specific basis, TD’s business franchises in Canadian retail banking, US retail banking and Wealth Management appear to be further strengthening and this provides TD with the potential to generate above-average growth.

• On May 29, 2010, Financial Technologies (India) Limited (FTECH) reported its results for the year ended March 31, 2010.  Diluted EPS of Rs. 74.96 was slightly lower than the Rs. 80.33 earned in the prior year.  FTECH is among the global leaders in offering technology intellectual property and domain expertise to create and trade on next generation financial markets,  that are transparent, efficient and liquid, across all asset classes.  Our investment thesis regarding FTECH includes both, its current profitability and, more importantly, its growth potential.  From the perspective of growth potential, FTECH reported the following regarding the market shares of its subsidiaries and affiliates:
  
1. In fiscal year 2010, IEX markets share for electricity spot trading stood at 87%;
2. NSEL garnered a market share of 91% in commodity spot market for last quarter;
3. MCX-SX’s market share stood at 55% in the currency derivatives segment for last quarter;
4. MCX witnessed 40% growth in the volumes, maintaining leadership position with 82% market share for FY10;
5. Custody warehouse NBHC facilitated collateral funding in excess of Rs. 120.9 billion.
6. Payments processor, ‘atom’ processed transactions worth Rs. 8.9 billion during the financial year.

Establishing and maintaining market leadership is the key to FTECH being the beneficiary of the growth of capital markets activity that is expected to accompany the growth of emerging markets in Asia and Africa.