Of the four factors of production, viz. men, materials, machinery and money, the last is the most fungible. A $ with me is the same as a $ with you, assuming it is not counterfeit. Moreover, it is also digitised, travelling instantly, at the click of a mouse, across borders without having to face immigration (men) or customs (materials and machinery). Used sensibly, money gives its owner the greatest return; used foolishly the greatest pain. Given the Oliver like expectations of investors ever wanting more, its usage has become increasingly foolish and fancy. Dissatisfied with simple products, financial innovators have created a whole slew of derivative products, ostensibly to reduce risks, but, given the foolishness of their use, which actually increase risk exponentially.
Investors understand the risk versus reward ratio. A greater risk should result in a higher reward. What leading financial players, including some of the best banks and investment houses in the world, have failed to grasp is the fact that foolish risk begets a deserving whack. Citi ended up with huge losses due to subprime lending because it lent to ninjas or those with no income no jobs / assets! After originating the loan, they sliced and sold them as securitised loans, and hid their exposures in off balance sheet entities. This malady has now hit Indian companies with ICICI Bank taking a hit of $263 m. through extra provisioning for mark to market exposure on some of its investments. Though it has stated an exposure of $ 2.2 b. as per an article on www.emii.com the exposure could be as high as $ 6b. which would indicate further provisioning to come.
The week which had Mahashivratri saw the destruction of the sensex which fell 1603 points to end at 15975. Of the 30 stocks in the BSE-Sensex, only one, Maruti, gained whilst 29 lost. The biggest loser was ICICI Bank, which contributed 320 of those 1603 points, followed by RIL (222), and L&T (205). The NSE-Nifty lost 251 points to end at 4771.
What next? It looks like the market is in a trading range of around 3000 points between 15,500 to 18,500. Besides the problem of subprime hitting us, there are a few other concerns both economic and political. In politics, the Left has blown the whistle on the steaming political nuclear kettle, which may actually blow next week.
In April we see Rajya Sabha elections and with opposition parties having scored victories in some states, there is a danger that the Government may lose control of the upper house.
In economic problems, inflation has gone up to over 5% and, given the overspending by Government who would need to borrow money to pay for both the farm debt waiver as also the impending hike by the Pay Commission in May, cannot be countered by lower interest rates. With oil quoting at $ 106/barrel, our trade deficit is widening; though exports grew 20% in January, imports grew 67%. For the period April to January the trade deficit was $ 67 b. including an additional $8 b. on account of oil.
Given rising prices of fossil fuels, one is amazed at the propensity of a Government that worsens the problem (by giving excise duty cuts to automobile industry) instead of trying to improve it (by a whole host of things such as faster progress in public transport and working on quicker implementation of alternative energy sources). One of the biggest things to look out for are the huge gas finds by companies such as ONGC and RIL, which would dramatically cut costs for a whole lot of things. Once the pricing issue is out of the way; alas this is stuck in a court of law.
In corporate news of interest, the Tata group seems to be globalising with vigour. Tata Steel's management has stated it wants to double its ROI (return on investment) to a slurpy 32% by 2012, through greenfield projects, acquisitions and changes in product mix, and synergies with Corus after its acquisition. Steel prices have just been raised 12%. Tata Chemical is to buy the soda ash business of GIP, USA, to become the second largest producer in the world of soda ash, with a 14% market share. Tata Communication (earlier VSNL) is to invest $ 500 m. in a WiMax network, over the next three years.
In the telecom space, the Government is considering allowing MVNO's (mobile virtual network operators) to enter. MVNO's, such as Virgin, do not own any infrastructure (such as spectrum or towers) but rent it. They own the brand. This would require a platform to be set up for spectrum trading and clarity over its allocation, which is not at all evident in Government policy today. Today there is adequate competition in this sector, even without MVNOs, although it is competition for 'acquiring' customers and not for 'retaining' them. The latter will come only with the long debated introduction of mobile number portability and only when mnp is introduced will consumers of India's best reform story really start being treated as kings.
There ought to be a rally in the coming week, although, given the slew of both economic and political issues that are likely to come up, the market could be expected to move sideways. For a few months. Those who became patients in the crash would now need to exercise patience.
Have you read the latest Honest Truth by Ajit Dayal?