Is Delhi the real culprit for bloodbath in Indian mkts? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is Delhi the real culprit for bloodbath in Indian mkts? 

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In this issue:
» Pledged shares giving nightmares to promoters
» Listing PE-backed companies to get easier...
» This is why France's economy lags Germany's...
» What's in store for the steel industry?
» ...and more!

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00:00
 
We all know that the ongoing turmoil in the global financial markets owes much credit to the sovereign debt crisis in Europe. The Indian stock markets have been severely hammered in the past couple of weeks. But would it suffice to put all the blame on the Eurozone alone? Is it not that the problems engulfing the domestic economy have a lot of roots in our own soil?

A person by the name of Jim Walker maps many of these roots to Delhi. For a brief introduction, Mr Walker is the founder and managing director of Asianomics, an economic research and consultancy firm and has earlier worked as chief economist at CLSA Asia-Pacific Markets. He opines that the Indian government's complacency and the consequent fiscal recklessness is the main reason for India's current troubles.

Without any doubt, the government has failed on several fronts. It has been unable to keep proper control on expenditure. It has displayed a lack of focus on areas of reform that would debottleneck the economy. A slew of big ticket scams that flooded the Indian mindscape are a concrete proof of the hidden cracks in our system.

The result of all this is visible in our economy. Look at the way our currency has been hammered in recent times, look at how inflation is burning the pockets of our masses, or look at how economic growth is showing signs of a slowdown. There are signs of weakness everywhere. People are beginning to doubt the sanctity of India's growth story. If the government does not pay heed to this alarm, the consequences are going to be much worse. High time that New Delhi wakes up!

According to you, who is to blame for the current problems of the Indian economy? Share your comments with us or post your views on our Facebook page / Google+ page.

01:00  Chart of the day
 
We have often voiced our criticism against the unscrupulous policies of the US government, on how it has salvaged big banks and big corporations at the cost of the larger economy. Bailouts are nothing but a way to privatise gains and socialise losses. Today's chart shows the real reason why the US government keeps bailing out Wall Street, while doing little for the real economy. As it turns out, the 2011-12 campaign donation figures show that the finance industry is the biggest donator. In other words, the finance industry has the power to hire and fire the elected US officials. So as to protect their positions, the officials make sure that they do not begrudge Wall Street.

Data source: Business Insider


01:30
 
The Indian stock markets must have sent a lot of patients to the cardiac wing of the hospitals. The recent volatility and fall in prices has seen many portfolios turning red. But no one is sweating as much as the promoters of companies who have pledged their shares. Several promoters use their own shareholdings as collateral against debt taken by them. On face value, this does not sound like a bad deal. Promoters have an idle asset in the form of their shareholdings and they are using it to get loans. And these loans are ploughed back into the business with the aim of driving future growth. But when the market goes into a bloodbath, things turn bad for such companies. The promoters have to increase the pledged portion of shares in order to make up for the fall in the value of the collateral. Failing to do this could make the bank jittery about its loans. And, the jittery lending bank may just sell off the shareholdings to recover its loan values. When this happens, the value of the said company's shares would plummet in the open markets. As per a recent report of CRISIL, nearly Rs 1.1 trillion worth of the total market's capitalisation has been pledged by promoters. And nearly 183 companies' promoters have pledged 25% or more of their holdings. Now when the share prices of these companies come down and the banks start getting jittery what would happen to their market values? Do the math.

02:13
 
Daniel Goleman, the man who revolutionised the entire concept of Emotional Intelligence or at least brought it into the mainstream, would feel really proud after hearing this. It so happens that his path breaking theory has been used to some very good effect in explaining some of the anomalies between the different countries of the Euro zone. Take France and Germany for instance. President Sarkozy of France has urged his fellow countrymen to spend little and work harder than the Germans so that the country's economy can be strengthened. But is this the real reason why France lags Germany? The popular magazine Economist does not think so. Apparently, France is believed to have a much stronger work ethic than the British and the Americans. If this is true, then what explains France's current economic state? The magazine goes on to mention that while better work ethic is all good, managers in France seem to lack the emotional intelligence to extract the best out of its employees. They are just not motivated enough it appears. While this may not be the only reason, we do believe that motivation plays an important role when it comes to productivity improvement. And the sooner more companies in France do something about this, the better it will be for the country's economy.

02:58
 
The IPO market in India in 2011 has been a disaster. With uncertainty rampant both domestically and in the international markets, fundraising has slowed to a trickle. However, capital market regulator, SEBI (Securities & Exchange Board of India) has recently come up with a few moves to appease companies who are brave enough to go public. One important move we believe is a separate set of disclosures for venture capital and private equity (PE) funds. This will make it much easier for PE-backed entities to list on the bourses. Earlier many PE firms did not want to take a promoter role as they would have to disclose their investments in other companies. This was a major point of contention for PE firms as they did not want to make this sensitive data public knowledge. We may now soon see a bunch of PE-backed firms hitting the street. But we hope that we see some good quality issues, versus being conned into subscribing to the 'greater fool theory'.

03:39
 
The fortunes of the steel industry are directly linked to how well or badly the economy behaves. It was, therefore, a foregone conclusion that with the major economies contending with slowdown, steel makers around the globe would be severely impacted, which was reflected in their September quarter earnings. In India, rising raw material cost, depreciating rupee, slowdown in consumption due to rising interest rates has contributed to the downfall of steel industry. In fact, the growth rate in steel demand, after registering an annual growth rate of 8.8% in the first four years of the 11th Plan, has fallen to 2.8% in the first six months of the current year. The sector has also been hit by various scams. The illegal mining of iron ore in Karnataka and Goa has led to the ban on production in iron ore in Karnataka, thus leading to supply disruptions which have increased the cost of raw material. Going forward, the steel industry in India will face some tough times. With the raw material situation (especially coal and iron ore) deteriorating day by day and slowing demand for steel products, the Indian steel makers, particularly the non-integrated (without captive iron ore and coal mines) steel makers may face some turbulent times ahead.

04:20
 
In the Meanwhile, indices in the Indian stock markets were trading near the dotted line but in the negative territory, with the BSE Sensex trading marginally lower by 17 points at the time of writing. Heavyweights like DLF and BHEL have been arresting the decline. Other Asian indices closed in the red today. In Europe, barring France and Germany, the other markets are trading mostly in the red.

04:45  Today's investing mantra
"Find bargains and maintain discipline; if you can't find bargains stay in cash." - Francis Chou
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22 Responses to "Is Delhi the real culprit for bloodbath in Indian mkts?"

Sura

Nov 28, 2011

Of course Delhi is the culprit. When prices are shooting up due to unproductive doles like MGNREGA AND SUCH FANCY SCHEMES in the name of poor without corresponding output in the economy, prices shoot up. Nor the poor benefit. We know hardly 18% of these unproductive expenses in the name of development, reach poor in Govt's own admission. Then whose benefit is it? The UPA is simply looting the country and opposition is ineffective. The reluctance of the Govt to check prices, stop corruption and ferret out black money even if other countries are willing to give information, very clearly shows that Delhi is living in a world of its own and the people and their concerns do not matter. Madam and Prince-in-waiting,(with a kow-towing Sardar PM in attendance)are destorying the lives of people of this country. The political class has lost credibility completely and if they don't wake up quickly to the anger and angst of the people Tahir Square like eruption cannot be ruled out.

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ASHOK SUCHDEVA

Nov 27, 2011

reward those who are actual wealth creators and not book profit creators. agriculture growth, investment in agriculture on commercial scale, infrastructure development will hold the key. reward PADAM shree to agricultural scientists, padam shree, padam vibhushan etc, who can take the nation forward. Economic management can be done from existing wealth. so grow more money

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S.S.Ranganathan

Nov 27, 2011

Delhi is the main culprit for the bloodbath in the Indian Markets ably assisted by an irresponsible opposition.Not a single one the players has anything remotely resembling national interest at heart.

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Tikam Patni

Nov 27, 2011

All u have said are right. RBI is also to be blamed for inaction. When Re was appreciating, they should have been buying to build reserves . They should have re price objective say @ 48-50 and keep accumulating to maintain this band. But when u appoint an AIS officer as Gov RBI, decision lithargy is expected.

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S.K.Damani

Nov 27, 2011

Sir,

The fall in the share markets and the economic downturn is not an effect of any one factor. Mrkts move up and down based on various factor. (If not than everyone would be making loads of monies)First the dwonturn in US, than the eurozone downgrades and now the rising rupee ar ethe major factors.

But yes we could have saved a lot of pain ONLY if we would have a reasonable logical and pragmatic Govt. in New Delhi. The problems are while a sincere and intelligent "Sardar" is PM, his hands are tied at his back. He CANNOT do any thing without the consent of Madam and the new Prince. And there are extemely great doubts on their economic acumen. They might be Popular with a section of people,(who have nothing to do with markets and least bothered about the economy till such time that the Madam and Prince are descendents of "Gandhi" name. Believe me at least 25% of the population still thing they are related to their "Bapu". they know only one gandhi and that is Bapu. Pleasse believe it.).

So the main concern iin our country is Delhi. And till such time we get over this MAdam and Prince synodrama, nothing much can be expected. When the voting time comes they will throw so many loolipops to the poor who will easily forget the hardship and again vote for them.

Recently attend the lectur of an Ex-MLA, who openly challenged, at least in MAharashtra,any ordinary normal person to win the elections. He elaborated conditons of his own party, were a sincere lady, very highly educated was willing to stand for the elections and she even had substantial funds. But the party put forth the list of the oppsite candidates, who were not only financially much stronger than her, But also had enough Muscle power. Well she did not get the ticket. With this secenario how can you expect people who will bother about Country. They are first to recover their own "investment" and than "earn" sufficient to feed their next seven generations.

To change all these you require very strong laws. BUT than these are the same people we entrust to make laws.

Pure CATCH 22.

There are many simple steps, which I ahve enamorated many a times on your site:

Sell PArtial Gold, bought four years ago at the rate of approx. $550 /$600. We had bought 200 tonnes. Rupee downfall could be stopped.

Take immediate reform steps to revive the economy. Like FDI in retail.

Pass the strict LOKPAL bill as put up by Anna Team. (Not the JOKEPAL bill please.)

Reforms on IPOs. All IPOs to list in Trade to trade category at least for the first 1 year. GUARANTEED ALL SCAMS AND MANIPULATIONS OF IPOS WILL STOP.

We have to first realise that India is totally a unique country. It is not advisable to just follow western or other countries module. We a re different in thousands of ways.

Poverty, population, scamsters by thousand, huze corrupt politicians, no role model for the youths, huze markets, No roads but huze mfg. of vehicles, Supply of fuels to the rich and poor at the same price. A diesel mercedes get fuel at the same rate that a tempowallah gets. Simple legislation could change and bring relief to millions against subsidy to only a million or so.

There should be will to work for the poor and the country, than and than alone we can be a great country and a super power.

GOD BLESS MY COUNTRY !!!.
(Ram bharose chal rahi hai India mere bhai)
Thanks - Damani.

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deepak

Nov 26, 2011

having passed 33years in the indian capital market as an active investor , i feel that i was a stupid naive dumb person to base all my decesions on economic principles when it is obvious that in this country politics will always prevail upon economics come what may.at the fag end of my career i pray god to send no more saviors in this country and leave us alone to manage and defend ourselves economically before the politics prove us wrong for our prudence and hard work

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WSS

Nov 26, 2011

Delhi was always the culprit ... always ... this is nothing new.

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Shyam Samant

Nov 26, 2011

Are you a politician or a financial advisers (as you boast)?
In my opinion you waste lot of time in throwing this rhetoric and uncalled for jargons at your subscribers. Whoever likes it can keep themselves engaged in chanting it forever. Good luck to them!
My views differ as I think you should use your team’s time productively i.e. in continuously monitoring all possible and if you are an expert look for even all local /global, inevitable cues/clues whether from Uncle Sam or Tom Dick Europe. Then quickly review and revamp your recommendations and expressly advise your subscribers. Needless to say, this will improve your performance and your establishment will become more trustworthy.
Actions speaks louder than hundreds of thousands of futile words you keep throwing out..
..I feel your 5 min rap-up is not going to produce Buffets.. it will continue to remain a waste of time...use it effectively for your own GOOD and the GOODS you are supposed to deliver.

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Madhu MS

Nov 26, 2011

Indian blood bath is due to the Pull out by FIIs due to various reason especially the currency depreciation. we are always proud that our economy is able to sustain from Global turmoil mainly because of internal consumption. Indian Stock market is not controlled or not have any major role by indian investor and is dictated by FIIs. Simply because of that reason it is extremly volatile and dancing as per the tune of externel forces.scams or Complaceny is not new to indian and we have experiance to libve with that. overnment should find way to get the Indian to invest in his market and he should have the last say of the market.Thins will definetely change.

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Ganapathy Sastri

Nov 25, 2011

It is true that India has been having MASSIVE TRADE DEFICITS year after year and that is the single most important cause for the rupee to devalue.
Added to that you have been having MASSIVE INFLATION (CAGR more than 15% during last three years) in goods and also in wages of all kinds. Fiscal deficit is the single most cause of inflation all these years and the govt must learn to live within its means and that does not include sale of shares in PSUs but does include losses of PSUs, EBs etc.
Hopefully the devaluation of the INR will help shrink the trade deficit.

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