Shifting investor moods - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Shifting investor moods A  A  A

30 JUNE 2012

Investing in stockmarkets involves an understanding of both the underlying fundamentals of the economy/company as well as the shifting sands of notoriously fickle investor moods.

Despite extremely negative sentiments on India by foreign investors, (deservedly so, because of the amazing ability of our policy makers to screw things up), the fact is that FIIs have, so far, in calendar 2012, been net investors of some $ 7.5 b. in equity, at current rupee/$ rates, and about half that in debt instruments.

Why so?

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Well, for one, there is an enormous amount of money sloshing around in financial assets. It is over 3 times global GDP. So far as economies go, despite the best efforts of our political leaders to mess things up, the Indian economy is growing at a decent pace (which could, doubtless, be a lot better with half decent governance) whereas the developed world is not growing. The economies of US, Europe and Japan are faring poorly.

Our problems are self inflicted. It may be a good idea for the Prime Minister to appoint Abhinav Bindra, winner of the Olympic gold medal for shooting, to teach his cabinet not to shoot themselves in the foot. So if foreign investors feel that steps are being taken to address the policy issues, they optimistically buy.

After taking over as acting Finance Minister, Prime Minister Manmohan Singh has speedily announced that he intends to tackle the shaken confidence of foreign investors that has reduced foreign capital inflows, causing a balance of payments problem which has the Reserve Bank of India (RBI) worried, and a slide in the rupee.

He intends taking steps that will remove the vexatious issues that have shaken foreign investor confidence. As a first step, he has slowed down the pursuit of tax claim against Vodafone, and it is possible he may amend the retrospective tax provision recently made by the former FM, Pranab Mukherjee.

In the UK, the Supreme Court has ruled that if it has adjudicated on an issue, the Government cannot then change the law with retrospective effect.

Perhaps the Prime Minister may view that ruling as a means to allow Vodafone to escape the retrospective claim, since Vodafone has got a Supreme Court ruling in its favour. Should he be doing this, it would be less because he feels the Government's case is weak and more because the cost of shaken investor confidence manifesting itself in reduced FII/FDI investment is judged to be higher than the benefit of succeeding in collection of tax.

The Prime Minister is also trying to take a more lenient view on interpretation of GAAR (General Anti Avoidance Rules) so that genuine foreign investors are not troubled. This, together with the agreement reached by the leaders of the European Union to provide more funding to Spain, boosted the BSE-Sensex by 439 points to 17429, on Friday.

Helped by this 439 point boost on the last day, the sensex ended the week up 457, at 17429. The NSE-Nifty closed at 5278, up 132 over the week, including 129 on the last day.

This suggests that foreign investors, with oodles of funds, are willing to invest if they see signs of serious intent to correct what they believe to be past mistakes and if they see signs of serious intent to continue with economic reforms.

One feels that the PM, as acting FM, intends to continue with economic reforms. Another statement he made was that he wanted to unleash the animal spirits of Indians (one hopes he chooses the animal well; hungry as a lion would be fine but not greedy as a pig).

It is possible that, once the Presidential election is over, the UPA Government may come out with one economic reform measure after another. It needs to wait till the Presidential race is over, so as not to give allies a chance to walk out in a pretended huff.

After the Presidential elections one could expect a flurry of measures as the UPA shakes off the policy paralysis. Pricing of diesel would be one of the first things on the agenda. Under recoveries (euphemism for loss due to selling below cost) in diesel is Rs 81,000 crores of the Rs 138,000 crores total, alongwith kerosene and LPG. Prices of diesel would be raised, and perhaps excise on diesel cars hiked, to discourage the dieselisatioin of the economy. Together with the fall in petrol prices, thanks to a fall in crude oil prices, (Rs 3.1/litre in Mumbai), this would help grow the sale of petrol vehicles, which have been declining.

Ironically, the falling rupee has also helped stanch the tide of FII selling. Suppose an FII had invested when the parity was Rs 45/$. The rupee has since fallen some 27% to over Rs 57/$. So even if the foreign Institutional Investors (FIIs) stock has appreciated by 27%, were he to sell now, he would get back the same amount of $s he had invested.

There are now expectations that the rupee would stop falling, and start rising. This is because the main component of our imports is crude oil, and the sharp fall in the price of crude oil has helped reduce the current account deficit. Gold imports have also slowed down. If we add to that the FII inflows, thanks to measures taken to revive confidence (they invested $ 600 m. on Friday), then it is very likely that the rupee will start its upward movement.

This means that the FII who invest at Rs 57/$ would gain from a currency appreciation as well as a stock appreciation, in what is called a double whammy.

It is thus very possible that, if the PM cum FM were to start announcing one reform measure after another, after the Presidential election (i.e. the Indian one, not the US one; Obama has nothing to do with this), we may see a sustained rally in stock markets.

Hopefully the PM will commission Bindra soon, to give shooting lessons, so that his cabinet ministers do not, yet again, shoot themselves in the foot.

If not, the next time he asks an FII to invest, the FII may well retort, 'sorry, I'm not in the mood, honey'.

Its all about shifting investor moods.

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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6 Responses to "Shifting investor moods"
Jul 3, 2012
Well said. PM was sleeping when FM was roaring like a lion and trying to undo the judgement of Honourable Supreme Court of India only one of the few institution which does not toe the political line. Rule of law is designed to be followed by everyone and should not be changed at the whim and fancies of few selected people. The Vodafone case is the harbinger of today's Indian market . May GOD bless my country and it's people. Like 
P R Roy
Jul 2, 2012
Animal spirits have always been there at its rapacious best among our politicians, industrialists and babus.Lets' talk of Pranabda and Manmohan Singh only. Both will be 80, both have nothing more to have.But both are loyal to the senorita with a shady past and with a diabolic cunning. Her agenda is simple, make hay for the son-in-law(yes he comes first), son, daughter. A yoyo-ing stock market helps the high and mighty the most. Today there is a report in TOI that demand for safe deposit box and high denomination swiss franc notes have sky rocketed in swiss banks as these do not come under black money stashed abroad investigations. Yes, markets are likely to rise. PM+FM will dole out sops to MFs to mop up funds, allow the corrupt to get away so that the filthy rich can get filthier rich. After all their India has to shine. Steer clear of MFs, pay tax but stay invested in FDs, come out of ULIPs, and rest assured that all of them are after your hard earned money. Like 
Rajanikanta Verma
Jul 2, 2012
Excellent as usual but I was surprised to read about the Supreme Court in the UK. Should it have been the House of Lords instead of the Supreme Court or should it have been the US instead of the UK? Like 
Jul 1, 2012
I liked the bit about animal spirits. Apart from the lion and pig similes, we have other pairings--elephant and tiger, and, of course, tortoise and hare.

The belief that things will improve since Pranab-da has moved upstairs and MMS is King seems naive. What was he doing all these months when the down-slide was occurring? And, why is there such touching faith that he will activate himself and turn things around? 10 Janpath is fully in charge of the economy, and that where the action is NOT taking place.
Jun 30, 2012
We are stupid,period.Every week or month we fool ourselves in believing that now the Govt. will do something.This has happened so many times.We can rest assured that this Govt.will do nothing this time also and that our economy will run on the resilience of its people only, inspite of the Govt. Like 
C A Colaco
Jun 30, 2012
Mr Mulraj has hit the nail on the head. (I used to be an avid reader of his newspaper column in years past - I find he has like great wine - improved with ageing !!) Like 
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