The silent killers - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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26 NOVEMBER 2009


There are various ways to harm nations and their people.

One can send terrorists across the border by land, as many in Kashmir have discovered.
One can send terrorists across the border by sea, as we in Bombay have discovered.

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Not that harming people of one's own country is a monopoly of 'enemy states'.
Politicians, dictators, and leaders around the world have probably done more harm to their own people than any cross-border terrorist could ever imagine.

Stalin, when he ruled Russia, oversaw the killing of millions.
Mao did the same in China.
As did the Khmer Rouge in Cambodia.

And while countries like India have been spared the vicious dictatorships of China and Russia - the role models of People's Power - one can argue that failed policies of the government have led to the death of millions of Indians, mostly in villages.

The point is that you don't have to be a 'foreigner' to kill your own people.
Indians murder Indians.
Chinese have murdered Chinese.
Russians have murdered Russians.

And the American government, in its own way, seems intent on decimating the wealth of its people. For the benefit of the few.

How global trade can cause harm
But death can also slip across borders via the legitimate movement of goods.

A recent report on Bloomberg noted that drywalls used in construction in homes in the southern states of Florida and Louisiana were emitting sulphur fumes which were corroding the electrical wires and fittings, leading to a risk of fires. Fires which can spread pretty rapidly and destroy families.
A reported 200,000 homes have been built with these Chinese firewalls.

During Diwali, I was amazed at the increase in fumes during the lighting of fire crackers. Many of these firecrackers, I was told, are made by the Chinese.
Hmm, I pondered, could this also have increased the risk of poisonous gases spread across various parts of India?

AIDS is also a product, in some sense, of global trade.
Of the flesh variety.

SARS was a Made in China event and H1N1 began in Mexico.

India exports mosquitoes that give malaria so they need to spray every aircraft that leaves Indian airports with sprays that kill the mosquitoes (and a few asthmatic human passengers J).

But the unkindest cut must be the damage that global capital flows can bring about.
Billions of dollars of money skims the surface every day across so many asset classes across so many geographies, looking for those fleeting mis-priced opportunities.

But in their rush for "alpha", the capital ends up like a dog chasing its own tail.

This mythical alpha is the so-elusive 'excess' return: the extra return that an expert promises you over and above the return you would get from investing in the overall markets.

So, in their search for "alpha" the global capital flows seek out superstar fund managers in the super growth nations of Brazil, China, India, and Russia.

These superstar fund managers have fee structures that are built to reward the managers far in excess of their falsely claimed brilliance.

By the time the investors find that out, it is usually too late.

Table 1: Only Brazil and Gold made you money since July 31, 2007
(all in USD) % change for month ended October, 2009 % change YTD in CY 2009 % Gain/Loss since July 31, 2007 (Bear Stearns funds in trouble)
Quantum Long Term Equity Fund +1.5% +89.2% +6.2%
India - BSE-30 TRI -5.0% +71.5% -9.0%
Brazil - Bovespa 0.6% +117.8% +20.4%
China - SHCOMP +7.8% +66.8% -23.5%
Russia - RTSI$ +7.5% +116.8% -30.8%
MSCI EM Free +0.1% +64.4% -13.6%
S&P 500 -1.8% +17.0% -24.9%
MSCI World -1.5% +27.1% -23.7%
Berkshire Hathaway -1.9% +2.5% -10.0%
Gold +3.7% +18.5% +57.4%
Oil +9.0% +72.6% -1.6%
Source: Bloomberg -

Meanwhile, QIP after QIP is launched.
Companies which deserve to be in the dustbins of corporate governance or corporate performance are touted as the companies 'best-positioned' to seize the India opportunity.

Table 2: A sell off will hurt India - foreign activity still dominates
Period Net foreign Activity (US$ m) Net Local Fund Activity (US$ m) Total (US$ m) Change in BSE-30 TRI in that Period (% USD)
CY 2003 6,940 93 7,033 +86.3%
CY 2004 8,958 -261 8,697 +23.1%
CY 2005 10,896 3,089 13,985 +42.2%
CY 2006 7,994 3,442 11,435 +53.3%
CY 2007 17,235 3,121 20,357 +68.5%
CY 2008 -13,136 2,037 -11,099 -60.7%
Cumulative 38,888 11,520 50,707 +231.1%
Oct. 2009 1,948 -1,115 833 -5.0%
YTD 2009 14,076 -604 13,472 +71.5%
Source: Sebi.gov.in

In Calendar Year 2008, foreign investors sold USD 13 billion worth of shares in India.
The BSE-30 Index fell by -61% in US Dollar terms.

Now, in the past 10 months of this year, the foreign investors have brought in USD 14 billion already.
The BSE-30 Index has gained by +71%.

Actually, I am not sure if you can call them foreign 'investors'. A better name may be 'punters and speculators'. The source of the money happens to be from outside India.

But, like the drywalls from China; the mosquitoes from India; the H1N1 from Mexico, these short term capitals flow can cause significant damage to India's stock markets.

The good news, though, is that any such collapse will be a "price" risk: the businesses of many of the companies will continue to do well
And, over time, share prices will head back to more robust levels.

So, don't worry about a decline in the share markets; just stay put and you will do well out of that.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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7 Responses to "The silent killers"

Ramakrishnan

Nov 29, 2009

Sir,
Is there no way to restrict the foreign investors so that there is no way for them to gamble the future of our country?

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taxworry.com

Nov 29, 2009

Very well written ! This article is a philosophical masterpiece on stock market.

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Satish Athale

Nov 29, 2009

The whizz-kids in finance sector have made millions for themselves by luring common man's hard earned money to various instruments [creating a mirage of high returns with the help of media], and ultimately ditching them to their destiny.
A few people in the industry have conviction in their philosophy and courage to implement it.Ajit , you and Team Equitymaster is one amongst them.

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sethuraman

Nov 26, 2009

i fully agree wiyh what is said..Corrupt politicians,bureacrats,and judges do more harm than external terrorism..incidentally why so much crackers are made in Sivakasi,india..I do not see any logic for having Chinese crackers in india to celebrate deepavali.

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Krishna

Nov 26, 2009

I agree with all of it! Just interested in knowing if the Indian govt. charges those big money 'investors' any fee for investing in India or not? Even if they capture 1% of the transcation, it will give great inflows to Indian coffers!

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Swaminathan R

Nov 26, 2009

It is in deed true that Governments kill more people than terrorists and enemies. Ajit has left out the Iraq war counts. In India our roads and vehicles kill 300 people a day; mind you 300 a day; thanks lax enforcement, corrupt licensing which we all abet. Our city roads are meant for automobile manufacrurers than for people. Now to FII . They are fly by night gamblers hopping from country to country with their ill gotten riches. They do affect the local investors. Fund managers of ICICI Prudential ruined my hard earned money through fancy schemes and products.
Keep it up Ajit.

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surajit som

Nov 26, 2009

i totally agree with ajit d. he is one of the few sane voices that recognise that indian market is at the mercy-needlessly-of foreign "investors".it was exposed mercilessly in 2008 but now that has been forgotten.one might say that this money tend to come back (like in 2009) and the market rise again. but imagine the pain of millions of retail ,new investors in october 2008 who had bought a few months ago-say in january 2008. the probable truth is that this dollar will again go out and the market will again crash.lot of people will lose a lot of money again.

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