A False Cheer? - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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13 DECEMBER 2013

The stock markets have raised a victory toast to the recent BJP sweep of the state elections. The S&P BSE-30 Index scaled a new high of 21,483 on December 9, 2013. However, the markets are wrongly celebrating the victory of a few false gods.

Graph 1: The markets cheer - but what are they celebrating? (Sensex from Jan 1, 2013)
The markets cheer - but what are they celebrating?
Source: Equitymaster.com

Share prices are influenced largely by:

  1. political and social events,
  2. fundamental performance of companies, and
  3. flow of funds.
Politics gets a face lift from the jharoo-wallahs!

While the BJP spokespersons on TV channels are trying hard to convince the viewers that the "sweep" by the BJP is due to the Namo factor, the winners within the BJP in the winning states of Madhya Pradesh and Rajasthan are not buying that story.

This BJP victory in states they were expected to win is not proof of any Namo fever. If Namo had vacationed in California and New Jersey, the new capitals of Hindutva - assuming he was given a US visa - the result would have been pretty much the same. The failure of the BJP to get a majority in Delhi is proof that the BJP has a lot of ground work to do.

The right to celebrate a "sweeping" victory belongs to the Aam Aadmi Party who, with their brooms, have shaken the outlook for those involved in murky deals. What the AAP does next will be the biggest determinant for the next national election. Not that the AAP can win at a national level - but they can upset the equation for the BJP. Disgruntled supporters of Congress may vote for AAP candidates in urban and semi-urban areas: enough to trouble the BJP in their bid to get over 200 seats.

The markets are right, though, in celebrating the slap on the faces of the arrogant Congress. Not that the arrogance of the Congress has diminished because of the election loss. To prove how disconnected the Congress is from the people and how connected they remain to delusion and "yes-men", we had to bear the embarrassment of a Digvijay Singh telling us that he is happy that the AAP took his advice and joined politics. And Finance Minister Chidambaram grumbled once more about how states have not curtailed inflation and have ruined his game plan of a solidly growing India. What the Congress needs to own up to is that most of the efforts of the Congress to boost India's global competitiveness have been by-products of corruption-riddled deals. Though there have been some flash-in-the-pan brilliant attempts by the Congress to even the distribution of opportunity by implementing acts such as the Right to Information, Right to Employment, Right to Education, and Right to Food.

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The juvenile blessing of AAP by Rahul Gandhi shows, once again, his failure as a politician even before his career has started. Rather than endorsing people after their victory, it would be better if Rahul Gandhi did what Pope Francis did in his first public appearance: seek the blessings of the people rather than bless them as has been the past tradition of the leader of the Roman Catholic Church. But don't expect the Congress to change: they will get back to the drawing board, huddle a bit, and in their muddled response will probably replace one Gandhi with another. Don't be surprised if Priyanka is propped up to be their new maata. She has the characteristics of her grandmother, the infamous Indira Gandhi: her look of determination, a strong walk, a convenient surname, and a husband who is an embarrassment.

The economy is still limp

So if the markets were celebrating any expectation of "political certainty" for the next general election, it will soon shed those 500 points of celebration. With no bonus points from a Modi wave, the market will have to get back to the difficult task of calibrating stock market levels with current levels of growth in the economy and with expected levels of growth in the economy. And if anyone is visualising a rate of growth in India's economy over the next 6 months that is higher than 6% per annum, they are probably:

  1. members of the Congress party still hallucinating from their investment banking days of BRIC and Jim O'Neil with a complete disconnect from reality (which explains why they are members of the Congress party in the first place!),

  2. bureaucrats appointed by the Congress party to sit in ivory towers and pontificate till they retire about the great India story,

  3. hedge fund managers related to members of the Congress Party - but being hedge fund managers they will soon worry about their performance and, being supporters of the Congress, they will soon worry about money and abandon ship!
India's GDP is stuck at 5% or so for the next one year. And it will remain there till we find a way to move national and natural resources from their present dormant state to a more active state. Coal in the ground is useless if it remains in the ground. Coal needs to be given to industry (PSU or private) in a fair, transparent and open manner for industry to use it for a business. And it is this "business" which translates into economic activity. However, if policy making is still tied to the threats of business houses (note Sterlite's grumbling of wasting time and money in Odisha, or Reliance's stance on natural gas discoveries which it has clearly stated in a court affidavit belong to the nation) and some sort of deal making, then GDP will go nowhere.

Sure a good monsoon may add a percentage point to growth as much as a bad monsoon will deduct a percentage point from growth. But stock market rallies cannot be built on whether the gods decide to bless us with rain or not. Investors are aware that economies and stock markets can be cursed by the effects of bad policies and numbed by the impact of uncertainty and drift. The impact of a weak currency (which boosted exports) and the slight uptick in the global economy cannot negate the problems with the larger, largely domestic economy. To get India moving, the internal policies need to be right - exports can only help on the margin.

Go with the Flow

The rally - since the recent lows of August 28 when the Index flirted with the 17,500 levels - is a function of some Namo Premium but mostly caused by global inflows. The Namo Premium is still a work of imagination and hope and has yet to prove itself. The flow of money - the liquidity - has been real.

With over USD 10 billion swarming into India since August - note that local investors continue to sell - stocks had nowhere to go but up. The company results for the 6-months ended September 30 were marginally better than the expectations. But there are two things about these "good results" which make me a sceptic:

  1. The expectations of the results for the 6-months ended September 30 were lowered from the earlier expectations. So, no great stuff here. And,

  2. These are "unaudited" results which give companies a lot of flexibility in terms of calculating profits. For example, pushing products to dealer and counting that as a "sale" on which the company can correctly book a "profit" is legitimate fudge. Were this inventory with the dealers to remain unsold in the next few months- or sell slowly - future sales and future profits will be affected. So, there could be some "masala" in these past results.
The yarn from many of the broking houses visiting their global clients is that the election results are a good indicator of what will happen in the next general election: a BJP sweep is imminent. I disagree.

The other yarn is about the better results. I am sceptical.

The truth is that the global flows will be less a function of "India events" and more a function of what the new Chairperson of the Federal Reserve Board of Governors, Ms. Janet Yellen, will do in future meetings. The bet for now is that she will keep the printing presses flowing. This is good for the Indian stock market and will act as a strong antidote to the slow poison of misrule by the Congress and its disconnected leaders. But the day the Fed takes that injection of money away - or slows the printing press - that is the day when the stock markets will need to take a reality bite on:

  1. The state of politics and policy making, and
  2. The performance of the economy and its impact on company profits.
I don't think the outcome will be pretty.

Which leads to the obvious question: should investors book profits and exit stock markets?

What do you think?

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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 "A False Cheer?"

hem

Dec 15, 2013

i feel one should prune one's holding as sooner or later one wil hav the opportunity 2 own the bluechips at reasonable valuation

Like 

Shishir Lall

Dec 13, 2013

Brilliant observations, each one of them. I agree & barring unforeseen events, things are going to play out pretty much as stated in this article

Like 

Aniket

Dec 13, 2013

"A False Cheer". Superb article... Must must read.

Like 

shah dilipkumar

Dec 13, 2013

IT IS TOTALLY WRONG FOR YOU TO LINK US VISA NAMO FACTOR BEING AN INTELLIGENT AND RESPECTFUL EDITOR IT SHOCKED ME HEAVILY WHEN YOU ARE WRITING SARCASTIC COMMENT ON US VACATION TO CALIFORNIA IT SEEMS YOU ARE A PUPPET OF SONIA N RAHUL BY PRAISING PRIYANKA AS MATA HATS OFF TO YOUR CHAMACHAGIRI BETTER WORSHIP YOUR OWN MOTHER WHOSE BLESSINGS WILL SHOW YOU THE RIGHT PATH AND DIRECTION DO YOU THINK US VISA IS A CREDIT FACTOR FOR NARENDRA MODI MAY BE YOU ARE HURT BY US IMMIGRATION BEFORE

Like (1)

sundar rangan

Dec 13, 2013

While I am no less elated than other citizens at the huge and unexpected performance of AAP, I would like to caution that AAP should eschew populism, if it were to form a govt. anywhere. Populism may get it cheap votes but will wreck the economy and eventually put it in a position where congress find itself now. What is needed is decisive, corruption free crime free facilitating environment where people can pursue their interests without fear or favour. Regards.

Like (1)

Sudhindra

Dec 13, 2013

Two things.
First politics - there's no way anyone can say how much influence Modi had on the election results. To turn around and say he had no effect is downright silly.

I Thought equity master is about long term investing. You have always suggested that people put money in quality stocks for the long term. How does your suggestion that investors sell their stocks sync with that?

At the end of your article, you mention ideal asset allocation is 80% towards the quantum equity fund. How is that in keeping with the suggestion to sell and go away.

Like (1)

tejas

Dec 13, 2013

Dear Ajit,

It is true that markets will not run to newer highs soon, but if you see most of the nifty companies have operations out of India also.
For IT services , Pharma & FMCG the growth is steady, so likelihood of prices increasing with increasing earnings is high. for cyclicals like metals, international prices are quite near the cost of production in many cases. This cannnot continue for long and efficient will survive. For financials , NPA's will top out in next 4 quarters.
As it is outlook for Nifty heavyweights looks to be moderate growth irrespective of the Govt.
Overall the future seems to be better for large caps. For small and mid caps , its on a case to case basis

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