Of Chinese whispers and more! - Views on News from Equitymaster

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Of Chinese whispers and more!

Feb 28, 2007

Mr. Market is at it again! He has ruffled feathers in China through his histrionics and then has traveled the world over - from the US, to Europe and back to Asia. After setting sights on Indonesia, Malaysia, Hong Kong, Singapore, Korea and Japan, he now awaits the trigger from the Indian finance minister, to either wreck havoc or, at best, do nothing silly! As a matter of fact, after the Chinese -9% show, leading Asian markets are trading deep in the red currently, with Malaysia, Singapore, Japan, Indonesia and Korea trailing in the red by 6%, 6%, 4%, 3% and 3% respectively. The US Dow closed 3% down yesterday while Europe was also mired in the red. India closed 1.2% losses.

It all started in the mother of all economies, China (which has given 'birth' all these excesses, some good and some not so good, that we have witnessed in the past few years), where stocks plunged nearly 9% on Tuesday. Incidentally, this was the Chinese market's worst drop in a decade and wiped out around US$ 140 bn of market value. The slide was amidst fears that Chinese authorities would come down hard on 'speculative' capital that drove shares to record highs. Remember the Thailand of December 2006, when the central bank of Thailand announced a 'withdrawal tax' on short term foreign capital, which resulted in US$ 22 bn loss in market value in a single trading session?

Ironically, the latest 'crash' in China has come after the country's benchmark index - the Shanghai Composite - jumped to a record high, bringing its gains for this year to nearly 14% (after the 130% gains it made in 2006, which made it the world's best-performing market). On Tuesday (February 27th), the Shanghai Composite was hit by several negative rumours, including talks that Chinese authorities would take strong steps to cool speculative activity that has led to the strong surge in equity values over the past year. There were also talks of an imminent interest rate hike after inflationary concerns in the past two months. Like the Indian central bank, the RBI, the Chinese central bank (People's Bank of China) raised bank reserve requirements by 0.5% on February 25 2007.

So, what does it have for you?
Stock market history suggests that the actions of those who control the vast bulk of investments (institutional investors) guide the overall belief of where the markets are headed in the future - up or down. You do not know what they are up to. Neither do you know what Mr. Market has under his sleeves. In that case, the only choice we have is to guard ourselves if 'all hell were to break loose'! And the mantra is - Whatever Mt. Market does today, we need no follow suit.

Also, what the finance minister says today for the 40% of us Indians must not be your guide to investment into India's future! Rather, what he says for the upliftment of the remaining 60% (those dependent on agriculture and allied activites) in terms of provisioning for their education and healthcare is what will determine our future - the future of this country and 'all' its citizens. As far as India Inc. is concerned, it is already in the 'pink of its health' and a tinkering here and there (with respect to taxes and all) won't be of much significance in the long term. As far as income taxes are concerned, it remains our responsibility to honestly pay the same, so that the government has the 'resources' for inclusive growth that it has been talking for some time now. We (40% of us) already are beneficiaries of subsidies on cooking oil and electricity (and of course, railway tickets!). Even the Rs 5 coin that we have as change in our pockets is subsidised (it takes more than Rs 5 to produce that coin!). What else do we want? And how will the finance minister know what each of us wants that will make us happy this year?

The key is to understand, and we shall reiterate that, the key to today's budget will be to understand where the government spends, rather than from where it generates its income. As for your investments into equities, continue to invest by understanding the businesses of the companies, the quality of managements, and with a strict regard to valuations. Leave speculation to speculators! If the job is done correctly when a common stock is purchased, the time to sell it is - never! Not even when 'everyone' is selling! Have a nice day ahead!

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