Markets poised for a major rally - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Markets poised for a major rally 

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In this issue:
» Barton Biggs on stocks, economy
» Mukesh Ambani on India's future
» India to remain top on offshoring charts
» Political bribery rules roost in India
» ...and more!

These days one does not have to turn too many pages to read about the upcoming economic doom. The death of equities is a topic that even your neighbouring grocer would love to tell you about. But amidst all the gloom, it is quite soothing to hear some positive outlook and sound reasoning. Especially, when it comes from someone like Mr. Barton Biggs, the global investment strategist for Morgan Stanley.

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In a recent column in Newsweek, Mr. Biggs has suggested that the doomsday scenario of depression and deflation are quite farfetched and that global markets are possibly well poised for a major rally. Now that is something one would certainly be keen to know more about particularly when it comes with some good reasoning.

Mr. Biggs acknowledges the quick and appropriate reaction to the global crisis taken by the authorities (the global central banks and the governments) this time around unlike in the US in the 1930s or Japan in the 1990s. In fact, he says that earlier the authorities also made serious policy errors such as raising tax rates, imposing tariffs and not curing the banking systems. Mr. Biggs justifies the potential rally in global markets on the back of the fact that with markets around the world trading 60% to 70% lower, most of the bad news is already priced in.

He adds, "Treasury bonds have vastly outperformed stocks for 10 years, and the relationship between the two is back to the level of the early 1980s, which was a fabulous buying opportunity for stocks." One could possibly keep fingers crossed to hope for these predictions to fructify at the earliest.

"India will become richer before it gets older and the Chinese will become older before they get richer." These are the words of Reliance Industries' Chairman, Mr. Mukesh Ambani who was speaking at a conference organised by the International Bar Association in Mumbai last weekend. His views were underlined by the demographic advantage that India has over most other major economies in the world, including China.

On the issue of corporate governance, Mr. Ambani was of the view that Indian corporates are among the best governed in the world. He said, "We really have a free press, that's a big advantage in India. We have a sensible regulation. The good thing is that all of that works. I don't think you can take isolated instances. If there's a Madoff, the whole Wall Street doesn't become bad." He also spoke against the disparity in distribution of wealth between the haves and the have-nots in India.

Incidentally, in two recent polls we conducted on our website, Mr. Ambani's group did not score well - first in terms of investors' admiration and then in terms of trustworthiness of financial reporting. As far as disparity of income is concerned, the irony in his statements is cleared from the fact that while an average Indian struggles for as basic needs as food, clothing and shelter, Mr. Ambani is building for himself a 27-storey sprawling building in Mumbai at a total cost of US$ 2 bn, which will make it the most expensive housing complex in the world!

Chinese seem to be concurring with the idea of senior Ambani, given that the dragon nation has urged India to join hands to check the impact of downturn. As per Hindu, China is mulling two-way investments with India as they believe that joining hands will not only help enhance bilateral cooperation in economic field but also send out a positive message!

If reality is not so cheerful, some predictions are for the Indian technology companies. As reported by Mint, credit rating and consultancy firm Moody's believes that India will remain a top outsourcing destination despite the global economic and financial crisis weighing heavy on its future. "India will remain a top outsourcing destination because of its tech-savvy and English-proficient urban workforce whose wages are much lower than their western counterparts," says Sherman Chan, an economist with the agency.

This is notwithstanding his view that the sector will be hurt by this global downturn as demand for IT services declines across industries and geographies. "I don't think businesses leave India mainly because of protectionist sentiment," was Chan's view on nationalistic policies of countries like the US.

In the meanwhile, history is repeating itself in the US where corporations are going back to a concept of zero-based budgets popularized (during 1977-81) by the former President Jimmy Carter, also a Democrat. As a way of cutting costs, zero-based budgeting is used by companies to do an audit of their entire IT infrastructure and evaluate which ones they still need to continue with.

With pressure to cut down costs aggressively, this approach while sounding positive for the profitability of American corporations might invite tensions for Indian IT companies that believe that the slowdown would mean greater offshoring from these firms.

Popularisation of zero-based budgets notwithstanding, some American corporations continue to see offshoring as a way to improving productivity while cutting costs. The second biggest bank in the US, JP Morgan is one such example. The bank, which acquired Washington Mutual and Bear Stearns last year, is all set to increase its offshoring to India by 25% in the current year.

The total amount of offshoring from India would thus reach US$ 400 m. As per an Economic Times report, JP Morgan already offshores projects worth US$ 250-300 m to vendors like Cognizant, TCS and Accenture apart from having its own captive centre in Mumbai.

In an instance of increasing nationalisation in the western world, the UK government will be raising its stake in Lloyds Banking Group to as much as 77% while guaranteeing the bank's toxic assets worth £ 260 bn.

Nationalisation of Lloyds thereby leaves just Barclays and HSBC as the only major British banks not controlled by the government, following last month's bailout of Royal Bank of Scotland. "If we and other countries don't fix our banking systems we won't fix the rest of the economy," says the British finance minister. We won't disagree with him.

As the world economy continues to falter, a slew of dire predictions also continues to flow in. "I don't see the US economy getting better for a long time," says the legendary investor and commodities guru Jim Rogers. "I hope the US recovers in two years. That will be good news. It could be 10 years," says Rogers.

"A rally in Indian stocks will depend on the outcome of a general election in the South Asian nation this year as government spending is needed to bolster economic growth amid the global recession," says Morgan Stanley. While the BSE-Sensex had gained about 15% in the four months prior to polls during the previous four elections, the chance of a rally this time around seems low. This is given that there is immense uncertainty at the global level as also with respect to who will form the next government in India.

Morgan Stanley adds - "Investors need to be most wary of a third-front government. The country has had three instances of third-front governments. The economic performance during those short-lived governments was not something to write home about."

What would your reaction be if you were told that in Andhra Pradesh, 94% of below the poverty line (BPL) category voters have accepted money for the purpose of deciding who to vote for? As striking as it sounds, there is much more to it. Tamil Nadu, Karnataka and Chhattisgarh, among many other states, too follow suit with above 70% of the BPL voters casting their vote on this basis.

At least that is what a survey conducted by Centre for Media Studies (CMS) has concluded. Further in context of India as a whole, it states that the national average of people who took cash to cast their votes is 22% in the general category and 37% in BPL families!

Stocks in India closed in the red today, as the BSE-Sensex ended down by almost 170 points (2%). Among other Asian markets, while Hong Kong and China closed with losses of 4.9% and 3.4% respectively, Korea closed 1.6% up. European stocks have also opened weak.

The Satyam saga has forced the Institute of Chartered Accountants of India to improve auditing practices in the country. As per the Economic Times, it plans to introduce joint audits and a rotation policy for auditors. We believe such a move will provide checks and balances in the auditing process thereby increasing the independence of the auditor.

As per Bloomberg, crude oil price might hit the US$ 50 mark in the near term, given that the OPEC reduced crude oil supplies by 13% since September, 2008. It may be noted that the US Energy department has predicted that the earnings of OPEC nations will decline by 59% this year due to the decline in oil prices. This provides them with a strong incentive to support prices. However, they have to be careful because excessive aggression might stall a recovery of the world economy.

04:52  Today's investing mantra
"Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it." - Peter Lynch
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