Dow & S&P may spoil the party - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Dow & S&P may spoil the party A  A  A

24 OCTOBER 2009

The Dow Jones Industrial Average hitting the 10,000 mark has cheered investors, but technically both it and the S&P 500 are showing some weakness and may spoil, at least for now, the party. Should this lead to a fall of, say, 1000 points in the sensex, we would have a buying opportunity. Whilst the Indian story, and the China story, remain good, the story of developed markets is not so good.

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The baton of global financial leadership passed quite easily and smoothly post World War II, from a bombed out Britain to a resurgent US. It was also aided by the fact that both nations were Caucasian and democratic. The passing of the baton from the US to China is going to be more arduous. For starters China is still a much smaller economy than the US is. Besides it is neither Caucasian nor democratic.

Stephen Roach, former Chief Economist and now Chairman, Morgan Stanley, who has authored a book The Next Asia, primarily on China, says in an article 'Wake Up Call for the Next Asia' that China must convert from being an export led economy to one which is more led by domestic demand.

This becomes important because the US economy also has to structurally correct the huge dollops of fiscal and monetary stimuli it has got. US consumers will have to increase savings rate and reduce consumption rates, which they have already started to do. Japan went through a similar phase, lasting around 20 years, though the US would, by virtue of being a more flexible and innovative economy, come out of it faster. However, for the next 3-5 years, US GDP growth would be just around 1-1.5% p.a.

This places India, and its stockmarket, in a good position. The Indian economy is not export dependent, as China's is (although it needs its own set of structural reforms). But its corporate performance is excellent and its economy is expected to grow 6.5% this year, and probably over 7% next year. Our economy is of a size that can absorb large foreign funds, both direct foreign investment as well as FII. Spotting the opportunity, the Government has moved ahead, more boldly than when it was constrained by the shackles of coalition politics, with disinvestment.

It is to sell small stakes in NTPC, SAIL, Coal India and Rural Electrification Corporation Ltd. Private sector companies such as Emaar MGF and others are also tapping the market.

Following the General elections, where the Congress party was able to form a Government without nettlesome partners, it has managed to do so in the State elections of Maharashtra and Arunachal Pradesh, and has also formed a Government in Haryana, with support from independents.

Going in India's favour is the fact that it has institutions in the shape of multi party democratic institutions, a competent bureaucracy (it can be faulted for slowness but not for competence), an independent judiciary and a competitively free press. Other things going India's way are a planned, massive (Rs 3 lac crores) road programme which, if successfully implemented, would be transformational. And the economic boost, and fiscal relief, provided by the gas coming out of the KG Basin.

Faster exploitation of this gas, which is in national interest, has been unfortunately bogged down in a dispute between the brothers Ambani. It has now, hopefully, entered the final phase of legal domain with the Supreme Court commencing to hear arguments, which should, hopefully, be concluded in a month. The crux of the issue, one would suspect, is whether under the production sharing contract between Government of India and Reliance Industries, as operator, the latter had the right to market the gas at a negotiated price, without reference to the former, or not. RNRL argues that it did and that the price of either $ 2.36 or $ 4.2 is merely for the purpose of computing the recovery of the investment made by RIL.

Under the PSC, operators, like RIL, have the right to recover a multiple of the amount invested by them, through sale of gas. Once this milestone is hit, the Government share of revenue from sale of subsequent gas, goes up sharply, and the operator's share falls. Obviously, the milestone is hit earlier, at a rate of $4.2 than at a rate of $2.36.

Last week the BSE-Sensex lost 512 points, to end at 16810. RIL contributed 196 of those points, after Hardy Oil, a 10% partner in KG9 well, said it was ceasing exploring in it. Perhaps the market overreacted. Other contributors to the sensex fall were L&T, with 85 and ICICI Bank with 66. Gainers were Infosys followed by ITC, which came out with good results for Q29/09, with a 26% rise in profits to Rs 1009 crores (a whopping 23.5% of net sales). The NSE-Nifty lost 145 points to end at 4997.

It looks like the sensex could, at worse, go down another 1000 points, though probably less. The party spoilers would be Dow and S&P. Given the expected lacklustre growth in the US and other developed countries, more money would flow India's way. It may be a good idea to consider buying on dips.

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 "Dow & S&P may spoil the party"
Oct 28, 2009
good article.nicely written. Hope most of the investors will follow and keep faith in Indian economy and markets and invest.Again This time around retail investors are again fleeing away and missing the bus as usual. Like 
Oct 26, 2009
A quick and crispy analysis of the present macro and micro market features, especially WRT investment side of it. Thanks for the good work and keep it up.
Vinay Paranjape
Oct 24, 2009
I tend to agree. The market may go down to as much as 4200 on Nifty and the bottom may be in place by 18th Dec. 09. Like 
surajit som
Oct 24, 2009
it is completely wrong that the baton will pass from USA to china.there never was and never will be another USA. just like Rome. it must not be. otherwise it will lead to complete destruction of earth's ecology !!!

rather the baton will now on be shared by the trinity:europe ,america and asia.brazil,USSR etc will be important for other words ,the economic order will be more representative.but that is only natural ,isn't it? it will be second is already underway. but china will lead the pack and dominate ,no doubt. but its democracy(or lack of it) will cloud its hegemony.india will not live upto its full potential due to lack of infrastructure ,poverty ,its historical divisiveness etc.

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