Will helicopter Ben shut its window? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Will helicopter Ben shut its window? A  A  A

8 JUNE 2013

US Federal Reserve Chairman Ben Bernanke, who retires in Jan 2014, would like to see some positive results of his policy of flooding of the economy, through quantitative easing, in an attempt to make up for slower private sector investment. This QE earned him the sobriquet of helicopter Ben, the visual image of it being him throwing wads of banknotes out of a hovering helicopter.

In May the US added 175,000 non-farm jobs, more than people expected. Should such signs of economic revival continue, Ben may decide to reduce the monthly purchases of $ 85b. of US Treasury Bills. This would have global repercussions for different asset classes.

As a major buyer of T Bills, the US Fed had kept bond prices higher than they would otherwise be, and yields, therefore, lower than they would otherwise be. A reduction of purchase by them would lead to falling prices and rising yields. As a result, the gap between low US T Bill yields and higher yields on, say, Indian debt, would narrow and that would lead to a fall in foreign investment in the Indian debt market. This is already happening. Issuers of debt would have to raise interest rates to attract the foreign investors in, enough to compensate them for the exchange risk. The Indian rupee has been falling, and is down to Rs 57/$.

The Indian stock market too, has benefitted from the enormous overflow of global liquidity, a small part of which has been invested in Indian equity. If the US economy is seen to be recovering, judging by the job data, then a part of this liquidity could also be withdrawn. To counter it, India's largest insurance company, LIC, plans to invest Rs 2.25 lac crores (just under $ 40b.) over the next year, a bullish factor

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Unless the Indian investment cycle turns up, as CLSA's strategist Christopher Wood believes it will, the attractiveness for foreign investors to invest in Indian stocks will reduce, especially if the currency is weakening. An analysis by CRISIL of results of 1100 companies for the year to March 2013 show that profits are, in aggregate, down 5%, thanks to higher interest rates, low demand and no pricing power. The worst hit are small cap companies, who have no pricing power. Those that do, such as Coal India, National Thermal Power Corporation (NTPC), Hindustan Zinc, fared better.

India's current account deficit is unsustainably high, causing the currency to slide, thanks to inelastic demand for crude oil and for gold. The Government is trying to curb gold demand by hiking import duty, but that will not work; the stuff will enter through illegal channels. The fiscal problem would be translated into a law and order problem. Finance Minister P Chidambaram, as a Home Minister earlier, should know that. High oil prices are already affecting India and China.

There are two ways to tackle high imported crude oil costs. One is to try and curb demand. The other is to try and increase supply. Instead of letting prices rise in order to curb demand, the Government has foolishly subsidised petrol and diesel for decades. It has caved in to the automobile manufacturer's lobby and has not mandated/enforced fuel efficiency norms, as it should have. The US did it after the first OPEC oil price shock.

In order to encourage supply, the Government ought to have a policy framework that encourages investment in finding new and different sources of energy. Globally all countries are searching for shale gas resources, after the new technology of horizontal fracturing made such discoveries commercially viable. The US, which leads the way, has been able to find huge deposits, and is rumoured to be overtaking Saudi Arabia in a few years, to become the world's largest oil producer.

Several other countries are searching for shale oil/gas resources, and Australia is slated to become a leading producer. China is not far behind, and is eyeing its third auction for shale gas resources The Government of China will invest alongwith the private bidder, in order to reduce his investment, and will recover its own investment when the field becomes profitable.

In India things are vastly different. Reliance Industries' Chairman Mukesh Ambani said at the AGM that RIL was not keen on investing in shale gas exploration in India. The reason is because, unlike in the US, where the landowner has the right to any resource discovered on it, and can negotiate with companies for the use or sale of the land, in India the ownership right vests with the Government. This discourages investment in exploration for new resources. Ultimately it leads to higher import costs for our energy requirements, and to a falling rupee. RIL has, however, invested $5.7 b. in shale gas assets in the US. Perhaps it is time for GOI to think about its policies and what it can do to attract investment.

One of the things it must do is take sensible action and have stability of laws. The retrospective amendment made in order to collect capital gains tax from the buyer (Vodafone) instead of the Hong Kong based seller (Hutchison) is a case in point. Even assuming that the Government may have an arguable point, changing the law retrospectively after losing a battle in the Supreme Court, is not the best way to attract investment. Realising this, the Government has offered arbitration to Vodafone, subject to two conditions. One that the arbitration is non binding. Two that it is governed by Indian law. One wonders why Vodafone would accept these. If the proceedings are non binding, why go through them at all? And would Vodafone accept Indian jurisdiction when its opponent is Government of India which can change laws retrospectively? So does the offer for arbitration suggest progress?

In other corporate news of interest, Infosys co-founder, N R Narayana Murthy, has been asked to assume an executive role, as Chairman, in order to revive its flagging image. NRN had retired from an executive role a few years ago bringing in K V Kamath as the executive chairman, to concentrate on his private firm, Catamaran, an investment vehicle set up with his son. As testimony to his perceived value, the stock rose sharply on this announcement. This makes the negative publicity to bring in his son (at the princely salary of Rs 1/year) seem like petty nitpicking by a media which has run out of sensible ideas.

Last week the BSE-Sensex lost 331 points to close at 19,429 and the NSE-Nifty lost 104 to end at 5,881.

The future course of the market will be a battle between helicopter Ben, who will be taking his foot off the monetary pedal, and the LIC Chairman, who will be stepping on it. And between the handful in Government still pursuing sensible economic policies and the multitude of myopic political leaders continuing to think they are Gods and dictating what the people should do.

With general elections around the corner, though, the odds favour a downslide before a resumption of the upmove.

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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1 Responses to "Will helicopter Ben shut its window?"
Jun 10, 2013
No he will not shut the window. The helicopter is up in the air and he has been denied permission to land ! Like 
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