The fall may not be over yet

15 MAY 2010

Consider the table below. When the global crisis came, emerging markets like China and India fell more sharply than the developed ones, at over 60% from their peaks, versus around the 50% levels for DJIA or FTSE. This is because emerging markets are buoyed by foreign capital, which flees home when there is a perceived problem, in a flight to safety. (Judging, though, by their own precarious finances, it may be more a flight of fancy than a flight to safety, but that's another story).

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When that capital returned to emerging markets, they also rose more sharply, with gains of over 100% from the lows compared to 74% and 64% for DJIT and FTSE. Now notice the dates of peaks and lows. Peking peaked earlier, (if you will forgive a bad pun, or, if you prefer, Beijing said bye to the bull earlier) 5 months before the others. Even the recent peak was in July 09, compared to April and May 2010 for the other 3. Having started the fall earlier, it has fallen more, 24% off its recent peak, twice that of the developed markets. India's sensex has only fallen, as yet, by 7%. This would suggest that we have some downside left. Remember that the all time peak was made in India in Jan 08, 3 months after the others collapsed, in the wake of the Lemon Brothers, pardon Lehman Brothers, scandal.

 DJIAFTSEShanghai compSensex
Date peaked7-Oct7-Oct7-Oct8-Jan
Date low9-Mar9-Mar8-Oct9-Mar
% fall-48%-54%-62%-61%
Recent peak112585742345418047
% gain from low74%65%113%124%
% fall therafter-12%-12%-24%-7%

The problems of the Eurozone are still serious, with barbarians at the gates of Greece. The Euro lenders got together and made a $ 1 trillion rescue package, so that the barbarians don't break through Greece and attack the other PIIGS. News of this led to a global rally Monday, when the sensex rose a whopping 561 points. The rally was shortlived, as Eurozone problems persist. There is a possibility that the Eurozone would split the weaker economies like Greece away from it; once Greece is out of a common currency, it can devalue its currency. Right now it is trying to curtail expenditure, as part of its deal, by cutting Government salaries by around 30% something that has, obviously, not gone down too well. But even were it to be sequestered, Greece owes money to banks of other European countries and the linkages would affect the others.

India, too, has a dangerously high level of Government spending leading to a dangerously high fiscal deficit. However, we have some antacids to ease some of the pain. One is the (overdue) introduction of the GST, or goods and services tax. This is expected to boost GDP by 1%. Another is the clarity, after the Supreme Court verdict on the Ambani dispute, about gas pricing and allotment which, hopefully, will spur its speedier exploitation. Some argue that giving Government, and not markets, the power to price and distribute would discourage exploitation. The point is that until there is enough supply of gas, and enough of a delivery infrastructure to distribute it, there would not be a free market. Until such time as this develops, the Government would have to be arbiter. Exploitation of natural gas can lead to a further 2% GDP growth, and enormous savings in things like fertiliser subsidy and LPG subsidy. As prices of crude oil start going up (Mukesh Ambani believes they will hit $ 100), the discovery of domestic gas becomes even more valuable.

Then there is the first phase of the UID project, which ought to be rolled out in H2 of 2010. By better targeting subsidy payments, it would help prevent leakage. Most of the subsidy goes to the corrupt middleman rather than the poor farmer.

The recent auction of 3G spectrum would add some Rs 55,000 crores to the Government kitty. On top of that, TRAI is tweaking rules for 2G spectrum, wanting an additional fee for those having more than 6.2 MHz, and seeking to cap spectrum with any one operator at 8 MHz. This is highly contentious. The Government would, if this is cleared, get another Rs 35,000 crores. TRAI has also recommended sharing of spectrum but not its trading, which seems asinine. Spectrum is a scarce resource, and a key to the success of a telco. In order to cater to peak demand, telcos must, logically, have more spectrum than they need on average. When not needed, the excess spectrum can, and must, be traded. It is ludicrous to say it ought not to be! Allowing its trade would benefit consumers, as it would provide a revenue stream for telcos and would reduce the propensity to hoard it. Hence the proposal to ban trading, and to charge fees for 'excess' spectrum indicates that the Government wants to kill this golden goose, and puts its own interest to raise funds above the interest of consumers and of efficient operators.

In fact, the countries which have the most advanced wireless networks are those, such as Taiwan, which have given spectrum for free, in the interest of consumers and in the interest of driving economic growth through use of available technologies.

It is this kind of ill thought out quest for funds, by the Government, that should concern investors investing in India. This, and the senseless interference in management of their own companies. Witness the fact that BSNL and now, MTNL (it declared a quarterly loss of Rs 1574 crores) are the only two telcos which are bleeding. Similarly, Air India has organisational colitis and continues to bleed losses. The Government plans infusing Rs 1200 crores equity into it. Why? It should simply be sold to the highest bidder from the private sector, with freedom to downsize it.

The Maharashtra Government is similarly trying to interfere between two private sector providers of power, by directing Tata Power to supply power to R-Infra. Tata Power points out that there is no PSA (power supply agreement) between the two and would go to court, if needed. It has offered 200 MW of power to R Infra at Rs 5.90 per unit, which would be higher than the average price the latter buys power for.

Last Monday the BSE-Sensex rallied sharply, gaining 561 points on news of the Eurozone package. Later it lost 336 points of that gain, ending the week at 16994, up 225. The NSE-Nifty gained 75 to end at 5093. Its movement this week would depend a lot on nervousness of investors re the Eurozone but it seems there is some more downside to come.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "The fall may not be over yet"

Jigar Shah

May 17, 2010

It may be better for Germeny to get out of Euro and let the Euro depreciate as it will save Greece and PIIGS by way of devaluations.

Anyway most of the countries in the Eyuro zone do not follow the fiscal prudance but problem is Geopolitical and not economic for Germany.



May 15, 2010

The impending double dip depression seems round the corner. The final nail would be driven in the coffin when the Govt of India succeeds in killing the golden goose of Telecom Sector. With its irrational restropective increase in 2G spectrum, absurd bidding for 3G spectrum, Sealing of towers in Delhi by Delhi State Govt and demanding 5 lakhs (from earlier fee of 1 lakh) from telecom tower companies the communication sector will collapse. If that happens the ripple effect on Indian economy will be a disaster. Since we are coupled with the world economy imagine the consequences!



May 15, 2010

Fat chance that anything would improve with the quality of political leadership(non)we have in this country. Whatever the aam aadmi saves the crooked political class and babudom has already spent it by their mismanagement or perks for themselves or whatever. We will muddle along that is for sure because the economies of the developed world needs the enormous market that is India.


vinod chandna

May 15, 2010


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