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"If you want to learn how to sell assets at the lowest price contact the Government of India". - Views on News from Equitymaster
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  • Oct 5, 2001

    "If you want to learn how to sell assets at the lowest price contact the Government of India".

    Ajit Dayal is the co-founder and Chairman of Equitymaster.com and Personalfn.com. He is the Deputy Chief-Investment Officer of Hansberger Global Investors Inc, a company, which manages $ 3 bn in the global markets. Ajit is one of India's best-known investment advisors; he set the stage for entry of FIIs in India. He founded India's first equity research company in 1990 (this company has evolved from that pedigree).

    In an interview with Equitymaster.com, Ajit speaks on a diverse range of subjects from the September 11 attacks and their impact on global markets to a little on geopolitics. Ending, finally, with his evaluation of the Government's performance year to date.

    EQTM: Is the fear of a global recession real? What would be its impact on India and China?

    Mr. Dayal: The world economy on a daily and weekly basis has deteriorated considerably. Even before the attacks on WTC, New York the numbers coming out indicated that Euro zone was slowing down dramatically, especially Germany and France. Across the Asian continent Japan was doing absolutely nothing. Although the U.S economy was decelerating it was the only hope for a recovery. Most analysts expected a bottoming around July - August '01 and were expecting economic numbers to reflect that. In the meantime, the Fed had aggressive cut interest rates to kick-start the economy. Unfortunately, with the September 11 incidents, the focus of the market has changed. No one is looking at earnings multiple (PER), cash multiples etc. The markets are factoring a massive fear factor. We have an element out there, which is defined as a terrorist and these terrorists are willing to go to any extreme, which could severely hit the world economy. Post September 11 there is likely to be time & cost impediments in travel and trade, which are key to the global economy. Also, latest numbers indicate slower retail sales in the U.S. With retail consumption contributing significantly to U.S GDP the economy is not expected to recover soon. Combined with the slowdown across continents global GDP rates are expected to soften and that is what is being priced into the stock markets today.

    Coming to India and China, these economies are relatively insulated, as total trade to GDP is a very small percentage for both the countries. What is most likely to affect them is foreign flows and the view on their currency. In case of India, we import oil. If there is uncertainty in the Middle East region, yes we are likely to be adversely affected. A war scenario, which leads to domestic unrest, will have an adverse affect on India. As far as China is concerned they are much more insulated. For starters, they have much more oil of their own. They are probably the safest economy, as GDP growth rate is not expected to come down very dramatically.

    From the stock market perspective, India looks more attractive because of the diversification in kind of listed companies. China still does not offer that kind of diversification but is getting there. There are much more alternatives in India, you got petrochemical, steel, automobiles, consumer staples, consumer discretionary etc. You got lot more choice in India. The other positive is that India has a weak equity market. The BSE Sensex is about the lowest in 12 years in dollar terms. Whereas, the Chinese stock market is still very expensive. Though the Chinese market has come down it has done very well because of a bunch of liquidity measures taken by the Chinese Government to encourage trading. This led to an estimated 90% spurt in share prices between February and May of 2001, which is now being unwound. In momentum terms, China is on a downswing and potential-wise India has a lot to offer to investors looking at emerging markets.

    EQTM: What is the prevailing outlook for equities in America? How much of an impact will the recent events have on the fundamentals and sentiment of the market?

    Mr. Dayal: In terms of fundamentals, in the U.S, approximately two-thirds of the GDP is contributed by retail consumption. If the consumer sits at home and does not go out or is seeing the massive layoffs and finds that his/her job is at risk they may decide to increase their savings. This could push U.S into slower growth. In terms of stock markets, people are quite shattered that world equity markets, including the U.S, fell dramatically. The Dow had its largest weekly fall, in absolute terms, since the great depression in 1929. These are all clearly frightening statistics. If there are more attacks across the world the sentiment towards equity, which is inherently risky, will fall dramatically. People will rather have money in bank deposits rather than in stock markets. I believe we are at a turning point in terms of negative cycle.

    Having said that, I believe I am more optimistic than others, as I try and put things in context. If you look at the first hijacking ever, the speed and extent of media coverage was not as much. People surely found out and were afraid to fly for sometime. With the coverage of last fortnight's ghastly events, yes, people will stay at home and maybe longer. But I guess they will learn to live with it. They will travel across continents, go to amusement parks, go out shopping etc. The big choice before the U.S is that the people will have to give up some convenience for more security.

    EQTM: Despite eight rate cuts the U.S bourses are trading at three year lows. When can one expect the easing in monetary and fiscal policy to percolate into the market? Which are the sectors that could come out stronger?

    Mr. Dayal: The Fed and the European Central Banks have cut rates over the calendar year and yes one round has come after September 11. Clearly, the monetary authorities are pumping money into the system. In fact, they were flushing in money at an approximate rate of $40 bn per day immediately after the strikes at WTC. Basically, the Fed is assuming that economic activity is going to carry on. If you look at the U.S GDP, it is roughly $10 tr and the per day contribution works out to $30 bn. So the Fed threw in enough money to support economic activity. When this money will flow into the stock market is really a question of sentiment. As we all know the stock market works on two factors; fear and greed. Why were people buying Amazon at $150 and why are they not buying it today at $7? One is reality and the other is the factor of fear and greed.

    There has been the greed factor that has been unwound in global equity markets, including the U.S, over the past year and a half. That said, at some point in time that fear will once again give way to greed. When that happens, and I do not know the month, day and time, is when stock markets will go up again. Which is why we advice it is foolish to try and time the market. You buy a stock because the valuations are attractive. Yes, if there is a fundamental change in the company's business, let's say insurance looks dangerous today because the claims from writing policies in the past maybe worth more the premiums then maybe you avoid the sector. But if the fundamentals have not changed there is absolutely no reason to panic and no reason to dump stock. At this point in time there is no distinction between sectors or big companies. Be it Unilever or Nestle, which are very remote from the incidents at the WTC or insurance and airline stocks, which are more directly affected, they are all down. The degree of decline has been -40% for insurance companies to -20% for consumer staples. When things turn around clearly the stocks that collapsed more; the financials, insurance, airlines etc will bounce back more rapidly. That will be followed by consumer discretionary stocks, which are the Gaps etc. The final recover will come when you have the defensive stocks, your consumer staples or healthcare, moving higher.

    EQTM: You track the insurance sector globally. What do you think has been the impact of the crisis on the insurance sector? Has the market reaction been justified?

    Mr. Dayal: The market reaction to insurance stocks, globally, has been insane. In the sense that what do insurance companies do? They make money from you today when they sell you a policy. The payout, if any, will come at a later unknown date. They hedge their risks by writing multiple kinds of policies for different kinds of events spread over different geographical areas. They really diversify their portfolio. The maximum hit that can be taken by insurance companies is normally 3%-5% of their networth. Warren Buffet is in the business of insurance and he's no idiot.

    Now that the WTC events have occurred, guess what insurance companies are doing? They are increasing, very dramatically, the premiums charged to new policies for the same coverage. Insurance companies, when something like WTC happens, react instantaneously and raise premiums, which improves cash flows. Even though there is a $35-$40 bn payout from insurance companies these payouts will occur over the next 6-12 months. Meanwhile, they are collecting higher premiums from day one. In addition, they also have investments in bonds and equities and can liquidate these investments to overcome any immediate liquidity crunch. Most insurance companies, especially the large ones, are extremely safe. To that extent the market has reacted dramatically.

    EQTM: What is the thinking in the US regarding the possibility of military action?

    Mr. Dayal: I'm not in a very good position to judge that. But hearing what friends and colleagues are saying one senses the desire of American people to strike back and retaliate.

    However, therein lies the danger. The danger is not striking back but striking back with the wrong partners. Without getting into too much of geopolitics, I'm referring to Pakistan. Many believe that Pakistan has supported terrorists in Afghanistan and Kashmir. In fact, as per some sections of the press, Pakistani intelligence, ISI, has helped create Taliban. It is a strange geopolitical situation, as U.S does not seem to mind whose help it is asking to strike out at the suspected perpetrators of the September 11 attacks. This could be a negative for India.

    It is believed that U.S has rescheduled some $387 m of debt. Also, they have removed the sanctions on India and Pakistan. Obviously, Pakistan is the bigger beneficiary. This in my view could be a negative message that America is willing to tie up with Pakistan if they i.e. Pakistan can catch the perpetrators and are willing to pay a monetary price for the same.

    EQTM: The Indian market, this calendar year, has repeatedly been hit with bad news. Markets anyway were trading at 3-year lows before black Tuesday. Do you believe Indian bourses have over reacted to the events since Tuesday?

    Mr. Dayal: I do not think the India bourses have over reacted to the events of Tuesday. I think most of the decline, over the last year, has been due to domestic events. You've had scandal after scandal, an inept administration unable to bring to book the doers of the various scams and you've had UTI money being misused as was in the past. To that extent the retail investor is a loser. It is an endless story and the retail investor continues to suffer. While a lot of noises are being made from Delhi the crooks seem to thrive all the time.

    The reaction post September 11, was more of a FII reaction. The FIIs, presumably, were faced with fears of fairly large redemptions. This could have led to selling across the board to raise cash. To that extent, Indian Government's reaction of increasing FII limit seems inappropriate. Portfolio investment is hot money and this could act as adding fuel to the fire.

    EQTM: Do technology stocks look attractive to you today?

    Mr. Dayal: Technology stocks looking good today or otherwise seems to connate a short term view, which in my mind is a pretty silly way to go about investing. This seems to be the work of sell-side analyst who are out to get weekly trades. From my perspective some technology stocks look very good. I have been saying that for Infosys at Rs 5,000. Today it is Rs 2,400 and so it should be all the more attractive. I do not think Infosys has changed its business model. There seems to be nothing wrong with the company. There are some good stocks out there.

    EQTM: Where should retail investors be putting their money in terms of the various investment avenues? How should they allocate their assets?

    Mr. Dayal: Asset allocation is a very individual exercise. It depends a lot on your demographics and psychographics. Whether your young, old, married, have kids, risk appetite etc. Property prices in India are amongst the lowest in quite a while and if you do not own one, it looks like a good time to buy with interest rates also falling. That said, the percentage allocation to the various investment avenues is really a function of everything I mentioned earlier.

    People are not used to the downturn. In a downturn people go out of business. Not many sell side analyst today have gone through a downturn. But it is a cycle. And the good thing about cycles is that they are circular. There is bound to be an upturn. Today we are in a downswing, we do not know how deep or long it will get. But by definition of cycle there has to be an upswing. Make sure your allocation is such that you can live through a downswing and plan for the upswing.

    EQTM: What is your evaluation of the Indian Government's performance in terms of fiscal policy and reforms?

    Mr. Dayal: The Indian Government has always said a lot, promised a lot but delivered nothing. There still is, I would imagine looking from the outside, a lot of systems needing change and a lot of remaining legacy problems. I do not think the decisions are difficult. I think the decisions are made in an environment, as if India is the greatest place in the world to be in, which very well maybe and being an Indian I would love to believe that. But the rest of the world does not think so.

    The Government, for years, has been trying to sell Air India and now to they want to sell the company in this environment. Nobody wants to buy an Airline company. This is all the wrong environment. What they should have done was that when the decision to sell was there they should have auctioned it. But there are too many pushes and pulls in the Government. They sold VSNL at the lowest price in telecom, they sold ONGC at the lowest price in oil and they possibly will sell Air India at the lowest price. If you want to learn how to sell an asset at the lowest price contact the Government of India.



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