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General Forum: Current 'Affairs' | | Indian stock market plunges to 800 points | |
| Growth story will beckon investors
M K Venu
The much-celebrated BRIC economies (Brazil, Russia, India and China), which many reckon will replace the OECD countries in GDP size by 2040, showed remarkable synchronicism on May 22, when India’s stock markets witnessed the biggest fall in recent years.
On the same day, Russian stock markets fell about 8% in dollar terms, Brazil fell 7% and China’s index in Hong Kong went down 6%. Of course, our sensex fell 4.2%, after plunging nearly 10% intra-day. The markets in India, Brazil and Russia were shut for sometime to allow things to cool down.
I have consciously chosen BRIC economies to illustrate two points. One, the big fall in the stock markets in recent weeks is a global phenomenon, which most analysts recognise now. The other is that just because there have been big corrections in these markets does not mean that the BRIC economies have lost their sheen.
They remain strong long-term growth stories, each potentially growing at 7.5% plus. If that is so why are global investors, especially FIIs, showing nervousness about their investment in these markets, you may well ask. It is possible that in their over-exuberance, the global portfolio investors may have taken a larger exposure to BRIC economies, than they had initially reckoned.
This is only natural because when big growth stories unfold, the financial markets tend to run ahead of the real economy for a longish time period. It is during this period that stock markets witness a secular and structural upswing. For instance, both the US and Japan had experienced 10 to 15-year periods of six to 10-fold growth in their stock markets. It should surprise no one if the BRIC economies also repeat this feat in the coming decade or more.
However, it is equally natural that such secular bull runs will be interspersed with big corrections, of the kind that was witnessed for two weeks before May 22 across all emerging markets. About $10 billion were the net sales by the FIIs in the Asian stock markets in 10 days before May 22. The point being made is big corrections will come in the emerging markets from time to time precisely because the financial economy would tend to run ahead of the real economy in pursuit of the long-term growth story. Post-correction, the growth story will remain intact and keep beckoning global investors.
It is obvious to any analyst that incremental productivity will explode in countries like India and China, and that currencies will remain undervalued in these economies for some time to come.
It is for this reason that the OECD constantly calls for currency revaluations by the fast-growing Asian economies.
This behaviour alone should assure us of the long-term growth prospects of the stock market in India because undervalued currencies attract more capital. So our stock market index could hover around the 10,000 mark for some months. But make no mistake, it will soon embark on its structural upswing. This story, in some ways, is a foregone conclusion.
Only, the unfolding of the BRIC economies on the world stage could be temporarily marred by some other unpleasant global events. The issue of rebalancing of the global economy, by smoothly shifting the axis of economic power towards Asia is no mean task. Today global investors are a bit nervous about the worsening structural problems in the US economy.
The legendary Fed chief Alan Greenspan was severely criticised by the Economist magazine for creating a bubble of sorts by consistently keeping demand ahead of output during his tenure. Will there be a sharp course correction now? If so what could be the impact of such a course correction on the emerging markets. Indeed, these are issues which could put temporary brakes on the incessant growth of economies like India, China, Brazil and Russia.
The emerging economies could sit together and look for a collective solution to the risks posed by a possible hard-landing of the US structural problems. Such a solution could go a long way in preventing big shake-outs in the emerging markets, hurting retail investors.
In this context, a currency rebalancing exercise between the US and emerging economies in Asia may become necessary. A more consensual variant of the grand Plaza accord in the early ’80s between the US and Japan could become imperative as the Asian economies grow stronger.
The ADB had recently talked about the need for an Asian Currency Unit (ACU) to create greater stability in the global financial markets. A regional currency can actually help in rebalancing the world economy, making Asia play its rightful role.
However, the ADB exercise seemed half-baked as India was not included in the ACU framework. There is a need to launch a truly representative effort from the emerging markets to deal with big shake-outs in both the stock and currency markets. Needless to say, the two are deeply intertwined.
Posted by: Mr. Siri Siri At: 18, Jul 2006 12:19:10 PM IST
Why should we welcome the stock market crash?
Swaminathan S Anklesaria Aiyar
Economics assumes that human beings are rational. But human reactions to stock market movements are utterly irrational. When markets rise, everybody cheers. When markets crash — as has been the case for two weeks — everybody moans.
A hunt for culprits often ensues. No such hunt is ever announced when the markets are rising. In past scams, when manipulators like Harshad Mehta and Ketan Parekh sent share prices through the roof, they were hailed as geniuses and became celebrities. Some market experts cautioned that the markets had shot up to insane levels. But this plea for sanity was widely dismissed as stupid, and ordinary housewives and college kids bought frenziedly in the belief that share prices could only go up.
However, when the markets inevitably fell, the hero-manipulators were suddenly denounced as villains. They were accused of the dreadful sin of rigging markets, and thus misleading small investors. Ironically, no investor complained as long as the manipulators rigged prices upward. The complaints began only when the manipulators were unable to rig markets any more, and prices crashed. Truth be told, the real public complaint against Harshad Mehta and Ketan Parekh was not that they manipulated prices upward, but that they failed to manipulate it upward forever. For that, this could not be forgiven.
The underlying assumption of small investors is that share prices should rise forever. Now, if the price of rice, sugar or petrol rose forever, the small investor would complain bitterly. Yet he seems to think it perfectly fair that share prices should go up forever, and very unfair if share prices crash. How greedy and hypocritical humans are!
Consider the current moaning over the stock market crash. The fall of the sensex from 12,624 to 10,400 represents a sharp 20% decline within two weeks. But few people seem to remember that sensex was at just 9,390 at the start of 2006. So, even after the crash last Monday, the sensex was still up 10.5% since the start of the year. No bonds or fixed deposits could give such a high return within five months. This point escapes the CPI(M), which sees the market crash as reason enough to stop pension funds from investing in equities.
Remember that the sensex was around 5,000 during the last general election in 2004. It then slumped to 4,282 on panic selling. From that low point, the sensex tripled in two years to 12,624 on May 10, 2006. That has been a bonanza, fuelling speculative frenzy. So, the 20% correction is to be welcomed. Stock market valuations remained stretched by historical standards, though not by developed market standards. If the sensex falls all the way to the 9.390 level at the start of the year, the market would still have yielded enormous gains to investors since 2004.
The long run prospects of the economy are excellent. So, some investor exuberance is understandable. Yet such exuberance needs to be tempered by sharp corrections from time to time. This sends the valuable message that exuberance is no substitute for judgement.
Human beings quote many aphorisms that they seem to forget when they enter the stock market. All that glitters is not gold. Don’t be penny-wise and pound-foolish. Look before you leap. There is no such thing as a free lunch. Better safe than sorry. A fool and his money are soon parted.
All who invest in markets must remember these aphorisms. Risk and reward go together. If there were no risk, there would be no market reward. Share prices represent subjective judgements of the day, so bouts of euphoria and depression will necessarily drive share prices up and down.
Marxists find this terrible. They deplore “casino capitalism”, and lambaste foreign institutional investors (FIIs). Marxists cannot bear to acknowledge that FII pressure has sparked capital market reforms that have made Indian markets among the best in the developing world, far ahead of China or South Korea. FIIs were earlier reluctant to invest in a market where one-tenth of all paper share certificates were forged, settlements were delayed for months on end, and thin turnover facilitated rigging by big brokers (and by companies before every public issue).
But after capital market reforms, FIIs have flooded in. They have invested in all emerging markets, but disproportionately more in India. They have favoured companies with good governance and transparent accounting, rewarding these traits for the first time (earlier, the ability to rig markets was rewarded most). Stock market reforms and FII inflows have hugely improved the ability of Indian companies to raise equity finance for expansion. This has reduced their dependence on debt, thus reducing interest rates as well as over-leveraged balance sheets.
The CPI(M) can see none of this. It believes only that foreign devils are making millions and paying no tax. So it demands a capital gains tax and an end to the Mauritius treaty that has been used as a tax loophole by FIIs. The CPI(M) seems unaware that Mr P Chidambaram is in fact taxing dividends and capital gains in ways that have made the Mauritius loophole irrelevant, and so ensured that FIIs are indeed taxed.
Dividend tax is now paid by companies rather than recipients; so FIIs cannot avoid it. A transactions turnover tax is being collected in lieu of capital gains tax. This brings all investors including FIIs into the tax net, and the Mauritius route has been rendered irrelevant. Domestic crooks used to avoid capital gains tax through benami small accounts, but now cannot escape the transactions tax. Thus Mr Chidambaram has ended tax avoidance and evasion, brought FIIs and Indian crooks into the tax net indirectly, and created a level tax playing field between domestic and foreign investors. That is a considerable achievement.
So, our problem today is not untaxed FIIs. It is the notion that markets should rise forever. They will not, and should not. We need sharp dips, not Marxist controls, to remind investors from time to time that stock markets have risks as well as rewards.
Posted by: Mr. Siri Siri At: 18, Jul 2006 11:48:35 AM IST
America's chairman is our chairman
SWAMINATHAN S ANKLESARIA AIYAR
One of the traditional arguments for opening up capital markets is that it facilitates diversification of stock portfolios. Instead of keeping all their investments in just the national market, investors can buy stocks, bonds and mutual funds across the world. Recent events have made this argument sound quite hollow.
Thanks to globalisation, stock markets across the world have become correlated to an astonishing degree. The Wall Street Journal recently quoted experts as saying that the correlation between the Dow Jones Index and emerging market indices could be as high as 90%. Some other studies put the correlation at 80%.
This has some unexpected consequences. One is the similar behaviour exhibited by stock markets in all countries of South Asia. There may be little trade and zero investment flows between India and Pakistan, yet the stock markets of the two countries are highly correlated because both dance to the global tune.
Another consequence is that it makes no sense for Indians to invest abroad to the limited extent that the RBI rules permit. High correlation across markets means that investing abroad does not get you a diversified portfolio. It can give you entry to markets that are less volatile than India’s.
But note that investors in India pay no tax on dividends or capital gains, both of which are taxable abroad. So, it is better to stay invested in India. In the last month, waves of optimism and pessimism have swept across continents like a tsunami. The US is typically the trend setter.
Consider a day when the US market falls sharply. Soon afterwards, markets open in Japan, and they will fall too. Other markets will open in turn, in Korea, Hong Kong, Singapore, Mumbai — and all will dip. Soon afterwards European markets will open and they too will fall, though with diminished intensity (just as a tsunami loses force with time and distance).
And before the European markets close, the US markets open again, and the game starts all over again. Many Indian companies are listed through American Depository Receipts (ADRs) in US stock exchanges. If the Dow dips sharply in the morning, Indian ADRs will dip too. And if the Dow then rises sharply in the afternoon, Indian ADRs will rise too.
Let me not exaggerate: the correlation is not total. On some days, the Dow and Indian ADRs may move in opposite directions. But by and large they dance to the same tune. High correlation between markets does not mean similar levels of volatility. When the Dow rises or falls 1%, some emerging markets rise or fall 2%, or even more.
So, emerging markets can experience more euphoria as well as more despair than American or European ones. Clearly, globalisation has interlinked countries to such an extent that their stock markets have become linked too. Trade and capital flows between countries has grown to enormous volumes, and been magnified by leveraging.
The US accounts for a quarter of world GDP, and so events there have an impact across markets because of the consequences for capital flows and trade. If consumer demand falls in the US, that has consequences for exports of all countries. If US companies step up investment aggressively, that boosts software development in India.
A booming US economy leads to booming tourism the world over. Increased liquidity in US markets spills over into emerging markets. A bubble that forms in the US can envelop the world (as happened during the great IT bubble of 1999-2001).
The attack on the World Trade Centre on in September 2001 had cataclysmic consequences globally, and understandably so. But events far less dramatic have huge consequences too.
In the last month, several members of the US Fed have hinted in speeches that they felt inflation in the US was becoming a matter of concern.
Those expressions of concern have sufficed to send markets crashing across all emerging markets. Investors have interpreted this to mean higher interest rates, a slowing of the world economy, and possibly a bursting of the housing bubble. To my mind, this is alarmism rather than analysis.
Modest increases in interest rates should not have such sweeping consequences. But investors remember the 1990s, when investors looking for safe havens moved billions out of emerging markets. Much international capital switched from emerging markets to US bonds when US interest rates rose.
Investors fear a similar outcome if US rates keep rising this year. However, I do not see the US as a safe haven at all. High US current account deficits have converted the US into the world’s biggest debtor. If central banks switch forex holdings out of dollars to other currencies, the dollar could crash.
Merely because US interest rates rise a little, the risk of a dollar meltdown will not go away. For that reason, I doubt if we will really see a cascade of money into US bonds if interest rates rise. But I admit that herd behaviour may dominate rationality in markets. The Indian Left complains that we are losing national control over our markets.
I agree. Globalisation has many advantages and Indian companies have gained enormously from access to global capital. Indian investors have gained enormously from the pressure that foreign institutional investors have put on the government to reform its capital markets.
In place of the crony-ridden, rigged markets of earlier decades, India now has one of the best stock markets in the developing world, far better than China’s. But the flip side of this is a loss of national control. When RBI governor Y V Reddy hints at a rise in interest rates, the markets hardly notice.
But if the chairman of the US Federal Reserve Board, Ben Bernanke, hints about raising interest rates in the US, Indian markets (and all emerging markets) can crash.
I remember back in 1969, when Naxalites rose in West Bengal, they used to chant, “China’s chairman is our chairman.” Indian stock markets investors today seem to be saying that America’s Fed chairman is their chairman too.
Posted by: Mr. Siri Siri At: 18, Jul 2006 11:36:12 AM IST
LOL Good one Malak.
Posted by: Krishna Ch At: 24, Jun 2006 7:26:08 AM IST
idivaraku 'pacchi' ga undevi .. thx to the marriage, ippudu 'picchi' ga untunnai :))
Jus kiddin
Posted by: Malakpet Rowdy At: 24, Jun 2006 3:42:11 AM IST
Our stock market is very sensitive to the happenings in the world. A positive news from
US fed and positive Asian markets boosted the morale of the market.
Posted by: Mr. Siri Siri At: 21, Jun 2006 2:30:42 PM IST
anta avasaramA manaki?
Posted by: Bahud♥♥rapu Baatasaari At: 21, Jun 2006 2:28:48 PM IST
Can we expect anything better than this?!
Posted by: Mr. Siri Siri At: 21, Jun 2006 1:52:14 PM IST
hannA, idEdO sTAk mArkeT ki sambandhinchinadani vadilESA, madhyalO oka sAri EdO DainEjI goDavostE O sAri tongi chUSA. I lOpala inta jarigindA
malak sArU, kIrtI, ammAyigArU, pApam A siri mIda nAku jAli cheruvulA pongutOndi. EdO dESAnni udhdharinchAlanukunnADu, ekkaDO bhangapaDDADu (E@mvaindanTE, sudha enni kaburlu cheppinA mUrti fasT klAs lEndE kampenIlO aDugu peTTanIDu, I siri EmO mukkI mukkI gaTTEkkADu, sO mUrti geTauT annADu). dAntO tanani tAnu bUtulu tiTTukunTUnE alA amErikA pAripOYADu, adI O bADI shAping kampenI dvArA(adE, brOtal haus dvArA) akkaDEmO brOtal haus kI, kampenIkI tEDA telIkapODam valla O nijamaina brOtal haus lO dUrETappaTiki "sahAyAlu" chuTTukuni peLLikAkapOyEsariki frasTrEshan taTTukOlEka ilA bayaTapaDutunnADu. pOnInDi, kUsinta sAnubhUti chUpinchi "pch pch pch chcho chcho chchO" ani UrukOnDi. plIj , tiTTaDam mAnEyanDi
Posted by: Bahud♥♥rapu Baatasaari At: 20, Jun 2006 4:56:56 PM IST
Still,I must commend her for coming out of "brothel" loop to say something..even if it is critisizing me for challenging her(and all who read them and said something ) to write/correct annamayya keertanas.
http://discussion.telugupeople.com/discussion/index.asp?board=-3&page=3&topicCode=305&tc1=6522&tc2=0
Nobody ,including this idiot AA could write them correctly.Anyway forget it..
nOw..the billion dollar question is.
Can anyone take on this........."the problems technological prgress in India....?"
Posted by: Mr. Siri Siri At: 13, Jun 2006 12:55:09 PM IST
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