The song, above, sung by Abba in 1976, continues to be valid today. The day, Thursday, there were fears that the US Federal Reserve would turn off its monetary spigot, global markets crashed. The BSE sensex fell 387 points, to 19,674, recovering 30 the next day when Fed Reserve Chairman, Ben Bernanke, said there were no plans, for now, to go back on its quantitative easing programme.
The collapse of global markets shows that they are liquidity driven more than fundamentally driven. Adding to the US Fed spigot of monetary Jack Daniels is the Japanese one, of sake, after the Abe Government announced its intention to pump in $ 1 trillion to stimulate economic growth.
Little of this money the Central bankers are pumping in, for banks to lend to customers to spend, or to invest, is actually used for that. Most of it goes into buying assets. Hence any feeling that the liquidity tap may be shut results in a sharp fall in the asset prices. Prices of bonds, especially Japanese bonds, also fell, and yields increased sharply, on this news.
There is little capital formation because companies are chary of investing and banks are equally chary of lending. More so in India. The chart, below, from www.zerohedge.com, shows how, starting Jan 13, earnings estimates have fallen, even as the S&P index is rising.
In India, bank officials would get more cautious in granting loans, following the 1 year imprisonment sentence mooted to a former Indian Bank Chairman for granting a loan without adequate security. The irony is that even loans granted against collateral turn sour, as in the case of Kingfisher. Bankers here may have drawn comfort from the fact that he had pledged, as collateral, shares of United Spirits, a profitable group company and hence a valuable asset for pledge.
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Last week, however, Mallya cancelled the power of attorney on the pledged shares! Surely it can't be that easy to negate collateral! Surely the lenders and their lawyers would have taken care that the collateral is amenable to unfettered acquisition and sale!
For banks this results higher provisioning for non performing assets. Classification of assets as non performing is now system driven, i.e. the management has no discretion over it. SBI's profits for Q4 dropped 19% because of higher provisioning. Tata Steel revealed a quarterly loss of Rs 6,528 crores after writing off goodwill on its Corus acquisition. In other words, it admits that it paid too high a price for Corus.
Indian banks are global minions; they are not large enough compared to their global peers. Given the growth of India's economy (over 6%) and of India Inc., banks need to be larger in order to serve Indian companies growth. This column has been advocating larger Indian banks, through a process of merger, which need is now recognised by the Finance Minister.
If Indian banks do not grow, the larger Indian companies would need to turn to foreign banks to meet their needs. Last week the Essar group got a sanction of $ 400m for its working capital needs from two Chinese banks. Three of the top 5 banks in the world by market capitalisation are Chinese.
The reason why banks need to grow inorganically (through mergers) rather than organically (through growth) is because the Government continues to want to hold more than 51% in the public sector banks. It so wishes, in the interest of safety of the financial system. This is arguable. The system would be just as safe, in my opinion, if the Government held a majority stake in 2 or maybe 3 banks, say State Bank of India (SBI), Bank of baroda (BOB) and Punjab National Bank (PNB) and diluted it to below majority in others. The banks would then be free to obtain capital through equity issues, which they are unable to, now, because the Government is unwilling to dilute its stake and unable to contribute in their rights issues.
So, perhaps, alongwith encouraging a needed move towards consolidation, the Finance Minister may also encourage a move towards letting go majority control in the smaller PSU banks, to start with. It would, in so doing, release funds for itself, and release the banks from the constraints of ownership that lead to tepid growth.
Pharma companies which are exporting to the US, the world's largest market, are under scrutiny. Ranbaxy, now owned by Japanese Daiichi, was made to pay a $ 500 m. fine because the US FDA found that the company had falsified data. Daiichi plans to sue the Singh brothers for not disclosing full information prior to sale of their holding in Ranbaxy. The one who came out on top was the whistleblower, who got a share of the $500 m. fine, pocketing $ 48m. for blowing the whistle. News that US FDA had prohibited entry of Wockhardt products also led to a fall in its stock price.
In other corporate news of interest, Reliance Industries Limited (RIL) has announced a major gas find in the KG basin. Luckily for it, the news comes shortly after the Government has recommended a hike in gas price to $ 6.7, from the current $ 4.2
The I Gate Board has dismissed its CEO Phaneesh Murthy, after he was charged with sexual harassment, the second time Phaneesh has faced such a charge (he had left Infosys earlier).
Infosys was served with a fresh notice of Rs 577 crores of tax; it is already contesting a Rs 1,175 crore demand. If the serving of the notice is due, as Narendra Modi claims, to the fact that, as President of CII, its executive co-Chairman, Kris Gopalakrishnan, praised Gujarat, then it is a very sorry state of affairs of governance. Such petty minded actions to score political points can destroy successful industries. The telecom sector has been killed. Now it will be the IT sector.
Reliance Infra is to exit infrastructure projects worth Rs 20,000 crores due to the inordinate delays by Government agencies in fulfilling their commitments. Perhaps Finance Minister P Chidambaram may look at what Government action or inaction is impeding investment in India before advocating to India Inc. to invest more in India than abroad.
Last week the BSE-Sensex
lost 581 points, to close at 19,704, and the NSE-Nifty
ended the week at 5,983, down 203 points.
The fall was on fears that the liquidity tap was going to be shut or tightened. As long as the tap is kept open, money will flow into various asset classes, including emerging market equity, and the markets will cheer. But Central Bankers know that they cannot perennially keep the tap open. It only debases the currency. Robert Mugabe did that in Zimbabwe, debasing the currency so badly that they had to print 100 trillion dollar bills. Guess what they are worth? US $ 1.34 only. That is how badly the currency is debased.
The way the printing presses are being run by many central bankers, chances that their currencies will get debased are high. That, then, is why Indians, who are prudent, prefer gold. And why the appeal of the FM, to "contain the uncontrolled passion for gold" would go unheeded. Indian citizens would retort, asking politicians to contain their uncontrolled passion for bribes.
The market is susceptible to any shutting of the monetary tap. It seems like the tap is being kept open for now, at least until unemployment levels in the US show signs of tapering off and falling. The hope is that cheaper energy due to shale oil and gas finds would encourage greater investment by industries that are energy dependent. So for now, the party goes on. But watch if the bartender, Ben, is removing his apron and preparing to leave. Then the party will get abruptly over.
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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