A fistful of euros, starring Ahmedinijad - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
A fistful of euros, starring Ahmedinijad A  A  A

19 JULY 2008

A good bit of the world's problems is linked to the performance of the US economy and thence to the strength of its currency. After world war II the US, unaffected by the war, became the supplier of goods, accepting gold in return, so that by 1945 almost 80% of the world's gold lay in US vaults. It used this gold horde to print dollars, which were allegedly backed by gold at a price of $35/ounce, making the US $ the world's reserve currency. In 1971 the US did not allow some countries, which demanded gold in return for the $ reserve, to redeem in gold. As the world's reserve currency the US economy, a consumption led one (over 70% of its GDP is consumption) thrived on consumption financed by other countries. Its current account deficit went up to 6% and it paid for this by printing $.

This is now under threat. For one, consumers are wary to spend, now that asset prices have collapsed (both stock market as well as house prices) and now that they have less confidence in retaining their jobs. As compared to 1.76 m. jobs created in 8 years prior to President Bush's term began, there have been only 0.37m jobs in the 7 year term of President Bush Personal savings rate has gone from +2.3% before he took over to -0.5%. The USD which fetched 1.07 Euros before GW took over, now fetches 0.68.

The US $ as world currency is now under its severest threat from the Euro after Iranian President Ahmedinijad opened an Iranian Oil Bourse which will quote for oil in euros not in dollars. Kuwait has unpegged its currency from the $. These developments bode ill for the $ and, with it, a whole system of a consumption based economy surviving on printing $s to finance its consumption. Such movements can affect the world's largest economy and with it, funds flow to global markets.

How these things play out would affect long term movements of the stockmarket. In the immediate short term, movement of the Indian market would depend on whether the Government survives on Tuesday or not. It is too close to tell, and is a lamentable commentary on the state of Indian parliamentary democracy that the survival of a Government depends, ultimately, on a handful of members criminally convicted of serious offences.

Once the Tuesday vote is over and the market reacts to either the Government surviving (by going up sharply) or falling (by falling equally sharply), the further movement would depend on how the economy fares and if company results for the coming quarters are found satisfactory. For the June quarter, tech companies have shown falls (TCS) or modest rises (Wipro) in profits and have cautioned about the future, as developed economies slow down. HDFC has shown a 19% rise in profits. Only Axis Bank has shown a commendable performance with an 88% rise in profits and a healthy capital adequacy ratio.

What about the others. Well, look at the constituents of the BSE sensex. Six companies account for just a shade under 50% of its weight, viz. Reliance Industries, Infosys, ICICI Bank, L&T, Bharti Airtel and HDFC. The first 3 account for nearly a third. RILs performance would be hugely boosted by its gas output, expected to commence in Q3. However, this is still subjected to the ongoing litigation over its pricing. Political compulsions are also leading to demands for a windfall profit tax on gas. Infosys and other IT majors would be affected by the US slowdown. ICICI Bank could be hit if interest rates are raised to combat inflation, as seems likely, end July. L&T, despite the sharp correction of its stock price, still quotes at a robust PE multiple of 34. Bharti and HDFC ought to continue providing encouraging growth, although HDFC would be also affected by an interest rate hike although less than a commercial bank would.

If earnings growth do not provide positive surprises then a changed perception would be needed to provide a strong fillip. Given the likely weakness of the US economy and global pressures of high oil prices and inflation, this would take its own time. Hence, it is likely that, after whatever happens in the coming week, the market would move in a sideways band. This would provide patient investors beguiling opportunities to buy at attractive prices without chasing them. The key word is patient.

The biggest domestic cause of concern is the way our parliamentary democracy functions and the poor quality of leaders it throws up. We do not attract the kind of politicians who care about the future of the country; only for their own short term survival, at any cost. What else explains the appalling move by the Left parties to pre-empt the vote of the Speaker, and to blithely say that he is, after all, a politician attached to a party! Mr Karat, once you accepted him as Speaker of the House, he ceased to be beholden to any party and donned the mantle of impartiality. By your logic nobody can be a Speaker of the house, since all members of Parliament are, obviously, politicians!

The week gone by started like the Indian cricket team, with 3 early wickets. The sensex went down 893 points in the first three days of the week but then emulated a boomerang to climb 1059 points over the last two. It ended the week at 13635, up 166. RIL contributed 101 of these and L&T 71.

Investors should identify stocks they want to buy and prices at which they wish to, sit back with their favourite drink in hand, and bide the moment when opportunity presents itself. Unlike elsewhere, it will knock more than once. Be patient.

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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