The group of 20 leading financial nations met on all fools day (just a coincidence) and announced a $ 1 trillion stent meant to unclog the financial arteries of the world so as to get bank and trade credit flowing again. This includes an additional $750 b. to the IMF and $ 250 additional credit for trade. Stockmarkets, globally, went wild, as did the Indian market. It was, after all, like the supervisor at an alcoholics anonymous meeting, declaring the bar to be open! The BSE-Sensex performed like a Sehwag on steroids and notched up a gain of 446 points. It ended the week (Friday was a bank holiday) at 10348, for a weekly gain of 300 points. The NSE-Nifty ended up 202, at 3211.
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Why is this insider buying his own company's shares at 55% above market price?
The mess created by the global financial system has prompted Governments to announce bailout packages totalling over $4 trillion. On a global per capita basis this is about $ 590! Think about it. A few thousand people on Wall Street and other financial centres have wiped out the equivalent of what 600 m. people in India would earn in a year!
Not that everyone there got it wrong. The latest issue of Alpha (disclosure: this columnists represents Institutional Investor, a sister publication) mentions the estimated earnings of the top 25 hedge fund managers. The top spot went to James Simons, at Renaissance Technologies, who raked in $ 2.5 b! The average compensation for the top 25 guys was $ 464 m
So after the G20 opened up the bar, the party continues. For now. US Treasury Secretary Geithner hopes that the US trillion dollar public private partnership plan will succeed in getting a market price for toxic assets. The plan is great for private investors (US investors are reportedly sitting on some $8 t. of cash) because they pay 10% upfront (which limits their risk) but get 50% of the upside. But as the Economist, Mar 26, says the plan could fail because of absence of sellers willing to sell toxic assets and immediately take a hit on their balance sheet.
The $250 b. set aside for trade is a good move. The benefits of globalisation, and the dramatic reduction of poverty, was predicated upon a significant increase in global trade which has shrunk thanks to a credit crunch. If the slowdown continues, there is great danger of countries resorting to protectionism. India's current account deficit for the 9 months to Dec is 5.1% of GDP and the BOP is minus 6.9% of GDP. The fiscal deficit of Centre and States combined is likely to exceed 12% of GDP, unsustainably high and the resultant borrowing by the Government would not only push up interest rates but also crowd out private investment.
What could help reduce both the trade and the fiscal deficit is the commencement of gas supply from the KG basin. In terms of oil and oil equivalent, India's dependence on imports will drop from 60% of energy requirement to 45%. As oil as an energy source runs out, countries would need to rebalance their energy mix. India's energy mix today is 78:22 oil: gas. This ratio would change to 35:65 in 2 years! RIL, which has invested $4.7 b. in oil exploration, will invest over $5 b more. Piped gas would soon be available in cities, obviating the silly need to transport weightless gas in heavy steel cylinders at an avoidable cost. RIL contributed 125 points of the 300 point weekly rally in the sensex; Infosys was second with a contribution of 50.
Another bullish factor for India is that the Government has cleared the new pension scheme (NPS) which can be used by both the organised and the unorganised sector. (perhaps also by the disorganised sector, viz. the Government). As and when confidence returns to the equity market, the NPS would provide a good source of funds and drive up values.
It is likely, therefore, that the sensex can breach the resistance at 10,500 and rally further. Investors must be wary of not assuming this to be the start of a new bull run and so rush in to buy on fear of being left out. The world is awash with toxic assets; a brave attempt is being made to detoxify them. Even if the effort succeeds in some way, detox would take time.
That the Indian electorate is shortly going to usher in a new Government does not call for much optimism either. The picture is murky and the political rhetoric murkier. Each political party is trying to best the other in offering sops to the electorate in an Indian sop opera! The sops are, of course, paid for by taxpayers not by the parties promising them. It would be a marvellous idea if the Election Commission could somehow ask political parties to bear a fraction (5%? 10%?) of the cost of the sops so generously offered, themselves. That would soon put an end to this nonsense of partying at someone else's expense. With a combined fiscal deficit of 12% of GDP we just cannot afford any more sops.
The OECD expects India's GDP growth to fall to 4.3% in 2009, and China's to 6.3%. Will a new coalition of strange bedfellows be capable of handling the social consequences of a prolonged downturn? Will they have the courage to take the tough but necessary economic decisions to pull the economy back on a growth path? This, when neighbouring Pakistan is threatening to spiral out of control; witness the attack in Lahore by terrorists and the growing clout of the Taliban in the Swat valley.
So, should the market rally, as looks likely, and should the sensex breach 10,500 and rise, say, to 12,500, it would be a time to head for the exit, not the entry, door.