Are you basing your investment strategy on elections?

Mar 21, 2014

In this issue:
» Why crony capitalism peaked during UPA
» Another senior level exit from Infosys!
» RBI slams credit agencies for failing to appraise on asset quality
» How El-Nino may push up inflation?
» ...and more!

After nearing an all time low of about 70 to the US dollar in August 2013, the Indian Rupee regained strength recently. Improving economic prospects, slowing inflationary trends and steps taken to curb the current account deficit (CAD) gave a new lease life to the Rupee. And many believe that this rally can have long legs. However, that's only if the poll verdict is in favour of India's chief opposition party led by Narendra Modi.

In fact, Rupee is expected to reach a level 40-45 to the US dollar, if the Modi led government comes to power. There are expectations that the new government will bring stability to decision making and shall be business friendly. This shall attract more foreign money into India. And thus lead to appreciation of Rupee. Not just Rupee but even Indian stock markets have scaled new highs as the probability of Narendra Modi bagging the prime minister's seat is getting stronger by the day.

Modi factor has even muzzled tapering concerns. Recently, the Fed chief indicated that interest rates could be raised from 2015. Generally, in such situations, markets witness a correction. While they did correct, the response this time was measured. In fact, Indian stock markets were least affected by the Fed comment over monetary tightening amongst all emerging nations. In other words, for markets, the poll verdict is overpowering global macro.

So, what should investors do in such a situation? Should they re-allocate their portfolios towards sectors that are expected to benefit from the poll outcome and rupee appreciation?

Well, we believe this could be a grave mistake. Agreed that political verdict is an important event for stock markets. However, considering the regional nature of Indian politics, predicting the outcome is a difficult task. Also, the possibility of a single party government coming to power is not that great. A coalition government will make the decision making that much more difficult.

Thus, restructuring portfolios based on poll results is mere speculation which may not pay off. Further, the belief that the rupee will reach 40-45 level if Modi comes to power is a little far-fetched. The recent appreciation in Rupee was a result of improvement in CAD and forex inflows. CAD improved not because of significant improvement in exports. But it improved due to falling gold imports amidst measures undertaken by the RBI which were temporary in nature. If these measures are rolled back, Rupee can come under pressure. That's because exports are hardly showing any signs of improvement.

Also, if Fed decides to further taper its bond buying program, excess liquidity in the system shall evaporate. This shall not only result in correction in stock prices but also Rupee.

The bottom line is that while poll verdict cannot be ignored, global liquidity and other economic factors are also important. All said and done, what eventually works from a long term perspective is investing in fundamentally strong stocks when they are available at attractive valuations. To that extent, correction in markets will be a good thing as it would result in a lower entry point for stock investments.

Do you think Modi led government will be beneficial for Indian Rupee and stock markets in general? Let us know in the Equitymaster Club or share your comments below.

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 Chart of the day
As per a survey in Live Mint, among the country's top listed companies, contract employees account for 34% of the total workforce. The sample comprises of country's 82 listed firms that account for 64% share of market capitalization and 46% of the revenues. The companies have been further divided into service and industry categories. While the former comprises of sectors like software, finance and telecom, the latter comprises of cement, auto, energy sector etc.

So, here are the findings. The contract workers account for 46% share in the industry and 8.8% share in the service category. Within the service sector, while financial and software services rely on regular employees, telecom's share of contract employees stands at around 46%. For industries, because of lesser need of specialized skills and regulations and labor intensive laws, the ratio is much higher. The industries that lead in using contract employees are energy and utilities with 53.5% share, followed by cement with 52.1% share. Sectors like pharmaceuticals and metals and mining count more on regular employees, with just 23% and 28% share of contract labour respectively.

While the companies may have found temporary solutions by relying on contract labor, the practice adversely impacts employers' investment in human capital and deprives organizations of rich experience of long term regular employees. It also does not guarantee job security for the employees. It's time that the Government relaxes labour laws and creates a long term win-win situation for all.

Share of contract workers in various sectors
*CG = Consumer Goods

They are supposed to be the conscience keepers for banking and financial entities. Sometimes they get too aggressive in seeking profits from loan products and lose sight of depositor safety. However, it seems that neither credit rating agencies nor credit information bureaus have taken their jobs seriously enough. We have already written earlier how credit rating agencies have hardly been independent in their assessment of credit quality of corporate borrowers. And not just in India but even globally, regulators have slammed agencies like S&P and Moody's. Even in the run up to the subprime crisis there were no warnings of bad credit. More recently RBI deputy governor Dr Chakrabarty has criticized credit information companies (CICs) in India as well.

There are four of them in the country - Credit Information Bureau (India) Ltd, Experian India, Highmark and Equifax Credit Information Services Private Ltd. As per Business Standard, Dr Chakrabarty accused the CICs of failing to send across warning to the regulator about deteriorating credit quality in the system. An early warning signal from the CICs could have helped the regulator frame proactive policies to stem NPAs.

Is crony capitalism on the wane in India? Well, it depends on who do you listen to. If its newspapers and media reports, there is certainly no indication that it's on the wane. Simply because scams seem to be tumbling out on a consistent basis. However, if the Economist is to be believed, India's rank has actually improved on the crony capitalism index. This implies that as compared to 2007, our situation in terms of tackling the menace is much better. As a matter of fact even an article on argues that crony capitalism seems to have peaked in the current UPA regime. Well, the reason crony capitalism takes root is because there are either great limitations on free markets or significant state controls or both. However, with the reforms of the 1990s, state controls were cut to size and a lot of sectors have been opened up for free and fair competition.

Besides, with states becoming more powerful politically, a lot of state level businesses have also risen. This has neutralised a lot of the central Government blessed businesses, leading to sharp decline in crony power. The other important reason it is on the wane is that even the state is pretty bankrupt these days. And therefore it is unlikely they are going to sell something at throw away prices for they themselves are in need of money. The recent spectrum auction and a similar planned auction for coals is an example of this, argues the article. Thus, while crony capitalism seems receding as of now, will it raise its head again in the future? Well, it all depends on how strongly we are able to enforce the rule of the land and how much farther we can go in ensuring free markets. All said and done it's an absolute necessity if we are to reduce the enormous rich poor disparity in the country.

Infosys has been in a major restructuring mode ever since Mr Narayana Murthy has returned at its helm. While his efforts have started reaping benefits it has come at the cost of several senior management exits. The recent such exit is that of senior vice president Mr Chandrashekhar Kakal who has been at Infosys for 14 years. This also follows some other high profile exits such as those of board members Balakrishnan and Ashok Vemuri and global sales head Basab Pradhan. Not surprisingly, there are growing concerns that a slew of such exits are bound to impact the performance of the company. Whether that actually happens remains to be seen.

Indeed, Mr Murthy is of the view that such exits will not really hamper the company going forward. While he acknowledges that there have been a couple of exceptions, he believes that the rest were not really adding value. And so their exits were only a matter of time. We would not read too much into these exits unless there are very visible repercussions in the coming quarters. Indeed, if the restructuring exercise at Infosys starts delivering results on a consistent basis going forward, then these exits could actually turn out to be a blessing in disguise.

Indian markets are abuzz with election mania and the likely positive outcome. However this party might not last longer. That's because agricultural output is in danger. And this could have a bearing on inflation all over again. Thanks to the recent hailstorms and the drought-like situation emerging on account of El Nino phenomenon! For these are expected to play spoilsport. Sudden climatic changes have significant economic and atmospheric consequences. And that's what's called an El Nino event.

The hailstorm is expected to hamper crop production. This might lead to crop failure of about Rs 12,000 cr or 0.1% of the full year GDP. Importantly, it will hurt the retail price inflation that showed signs of cooling only recently. That's one side of the story! What's more worrying is that the El Nino phenomena is expected to affect the monsoon prospects this year and might also lead to drought. Lower than expected monsoons give rise to inflation worries and in turn hit rural consumption. And that's indeed a bad news, particularly for consumer stocks. Weather risks are expected to pose a major threat to the consumer stocks and economic developments this year. And that the investors should exercise caution is the least we can say!

In the meanwhile, Indian stock markets pared early gains and are trading flat. At the time of writing, the benchmark BSE-Sensex was marginally up. Metal and realty stocks were the biggest gainers. Barring Japan and Taiwan, majority of the Asian stock markets were trading positive led by China and Hong Kong. Most of the European indices have opened the day on a positive

 Today's investing mantra
"The best thing that happens to us is when a great company gets into temporary trouble... We want to buy them when they're on the operating table" - Warren Buffett

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7 Responses to "Are you basing your investment strategy on elections?"

Sanjay G Abhyankar

May 12, 2014

SG Abhyankar Columbus, Indiana Polis

As I am away from India since 2 weeks. My opinion will be unbiased.I strongly feel Modi's most likely tomorrows PM.Reasons being:
1) Negative feed back on performance of Congress Govt.& Congress unable to use Dr. Man Mohan Sing's talent for the progress of country. 2) Positive results shown by Atal Bihari Vajpayee's Govt.are remembered by Indians.
3) We "Indians" think change in Govt is required as "100 Aparadhs" are already over & beyond tolerance. We also expect some miracle will happen due to change in government.


Jayarajan Madhavan

Mar 26, 2014

No Sir, I am not basing my investment strategy on election. I am a long term investor and I do not base my strategy on temporary factors. Also, I am not a Modi Fan, at 79 I still value Gandhiji's Ideals. I am a new entry to Equity Master Club and do not have much to project from that. Any how, in 2013 I have invested in Selected Small Caps(under consultancy) and benefited too. My 10 Lac. investment in 2013 is now 14.5 Lac now. I do maintain my Porfolio in calender year-wise


Jayarajan Madhavan

Mar 22, 2014

Things are getting more & more confused every day. MODI's opponents in BJP are being grounded by his Bulldozers. Can he deal the corrupt leaders of his own party and of coalition partners same way. Then, he will have a success story. One thing is getting clearer - Modi is going to be the next PM, by hook or crook. The Stock Market will have a sunny look, at-least during first couple of years.



Mar 22, 2014

I do not subscribe to any extra ordinary up lift to either India Economy, or to The Stock Market in post general election phase beyond 18th May 2014. Firstly there is no chance of BJP getting more than 200-220 seats and Congress may not get less than 110 seats. So a hotch potch coalition govt is ahead of us. No firm policies are likely to emerge, and Gujarat success has been by Gujraties themselves and NOT by N.Modi. Above all one man army of Narendr Modi cannot deliver any worthwhile results, as there is no clarity from Modi's side on Foreign Investment in RETAIL, Policy on subsidies, Foreign Policy, Defence Policy and Financial Policies. It is at best a media built hype about Modi and may be it will work to an extent in large cities. But Indian Democracy and Indians are a complex mixture of multiple goals/ethoes and convictions. Modi mania cannot and will not be a game changer in that respect.


avinash ranade

Mar 21, 2014

whether modi or congress come in power . market is going to go up. otherwise then only lpwer circuts only to indian market.


P Balasaheb

Mar 21, 2014

'Bajaraat Turi Bhat Bhatanila Maari" its a Marathi slogan,still we do not know whether Mr narenra Modi may becoming a prime Minister of secular India,even as per strong will(rather over confidence)of BJP workers,if he becomes on the said post we do not know how he ract on national problems,Reforms,International isuuesetc. If we compare with Dr Manmohanaji he is having good international face and the great economist,what quality Mr Narendra is having?hence all discussion is useless.


Dinyar Edulji

Mar 21, 2014

I really do not agree to all this Modi Exageration. Even if he comes to Power (which will not be absolute majority)he will also be having the same pulls and pressures of the allies. Besides, the best leeway he will have if things go wrong is that the legacy he has got from the previous government(which is true. So how will the economy turnaround just by his assuming the power, I cannot fathom that. Surely, the market will react in 15 to 30 days after he comes to power and we will then see the valuations taking the cue.

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