U appear, agree, nod (and) go!


Strangely enough an anagram of 'a George Papandreou' (the Prime Minister of Greece who shocked the investment world by calling for a referendum to validate a deal struck with the EU to bail out his impoverished country) is the title of the column! It sounds like, but is a far cry from, the Julius Caesar comment 'Vini, Vidi, Vici' or I came, I saw, I conquered. EU leaders can justifiably complain that Papa appeared, agreed, nodded and then tried to get himself a political escape route by going and asking for a referendum! ----------------------------- Don't Miss! Best of The Daily Reckoning... -----------------------------

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Understandably, the unexpected call for a referendum unnerved investors, and global markets fell. A referendum, even if the Greek Parliament approved of it, as required, would have taken far too long and, since Greece does not have the time, would have led to bankruptcy. A bankruptcy would, in turn, trigger off the liabilities under 'credit default swaps', fancy instruments which, for a premium, insure the lender against precisely such a default by the borrower.

No one knows exactly who owns the CDS instruments; European banks are supposed to be the main holders. They would then face a run and that would spread across the Atlantic, to the US.

German Chancellor Angela Merkel was, equally understandably, infuriated at this turn of event, feeling that EU leaders had slipped on Greece. Had Mrs Thatcher been alive, she would have borrowed her handbag to whirl and threaten Papa with. In the end, Papa sought a vote from the Greek Parliament which were only too happy to allow him to bell the bankruptcy cat, and investor sentiment returned to normal.

It is interesting that whilst FIIs were net buyers all of last week, domestic mutual funds were net sellers. The investment world is awash with equity which has been earning abysmal return from the 'safe havens' of Treasury bonds in which they have been parked, and is raring to deploy the funds into equity.

There will come a time when global problems become manageable and, with more money pouring into equities, global stock markets take off with the speed of a Baba Ramdev exiting the Ramlila maidan. Are we there yet?

One doesn't think so. Other European countries such as Italy, Spain and Portugal are yet to unfold their tales of woe and seek bailout packages. A twist in the tale would be if China agrees to help Europe (of course in return for a pound of flesh) - that could be the factor that calms investor nerves enough to have a sustained bull market.

Last week the BSE-Sensex lost 242 points, to end at 17562, entirely due to Papa's call for a referendum. The NSE-Nifty dropped 76 to close at 5284.

One has seen how frayed investor nerves are, in the swiftness of reaction to adverse news, such as the referendum call. One has also seen how keen global investors are, to get their money back into action in equities, with the equally swift upmove once nerves calm down. Investors are, like Alfred Doolittle in 'My Fair Lady' waiting to invest, willing to invest and wanting to invest!

If circumstances permit a sustainable rally, how would India fare?

India's story remains good but our governance remains murky as ever.

Added to the current political paralysis is the flip flop in policy and decisions. This, in turn, affects investors.

Consider those who invested in buying properties in the newly developed hill station, Lavasa, by Hindustan Construction Company (or those who, impressed by the developmental potential of Lavasa, invested in HCC). Years after work on developing the hill station began, and months after sale of several properties, the Maharashtra Government, under pressure from the Environment Ministry, charged Lavasa with criminal action of breaching environmental norms. How do people invest in properties, or stock, with an ever hanging Damocles' sword of subsequent Government action declaring the whole thing illegal, at any point in time?

Or consider the continuation of subsidy on diesel (petrol prices were raised by Rs 1.9/litre to hit Rs 73.8 in Mumbai. Tendulkar better hit his 100 before petrol does). Subsidised diesel has propelled the sale of diesel vehicles. Added to which is the folly of adulteration of subsidised diesel by further subsidised kerosene, causing huge environmental, and health, damage. The Government is now been compelled, by an uncontrolled fiscal deficit, to think about removing diesel subsidy. The writing was on the wall for decades. What, then, happens to the stock of diesel vehicles plying on the road, which no longer provide an advantage over petrol?

Or consider the stand taken by the IT Department, in a case against Infosys relating back to 1992-3 to 1996-7, that when their software engineers are sent abroad to work on client locations to develop software, it is a 'technical service' which doesn't qualify for tax benefit relating to export of software? This has now been upheld by the Karnataka High Court. Infosys, and other IT companies, would face a big hit, from 1992-3 onwards! How are investors to factor in such risks?

So we are slowly seeing the erosion of the sectors we were proud of.

Maruti Suzuki has reported, for Q2 ended Sep 11, a 19.3% fall in vehicle sales (thanks to the strike at its Manesar plant) and a 59.8% drop in net profit, y-o-y. Now that the strike is over, profits would bounce back, like a y-o-y-o. However, higher interest rates and skyrocketing petrol prices will also dent demand.

Another success sector was the telecom sectors. Leading telco Bharti Airtel has declared a 38% fall in Q2 net profits, thanks to the high cost of additional spectrum and the poorer than anticipated returns from its African acquisition. The Government has made telecom M&A activity easier, which should lead to a much needed consolidation in this space. M&A, of course, stands for mergers and acquisitions and not, which would be more appropriate, murders & acquittals of corporate entities.

The steel sector, which was the beneficiary of the boom in auto, white goods and real estate, is also going through a bad patch, and SAIL has lost wind, declaring a 52% fall in net profits on sales as flat as its steel.

Mamata Bannerjee of Trinamool has threatened to withdraw support to the UPA Government against the rise in petrol prices. Her state, West Bengal, imposes a 26.9% sales tax on petrol (other states vary between 25 to 33%) and, were she to have so much empathy for bourgeoisie care owners, ought to be able to reduce the sales tax.

Markets would climb each time global investor nerves are soothed by monetary balm and sharply correct each time there is a crisis. With several potential crises on the horizon, and disappearing jars of balm, it would be unsafe to emulate Aamir Khan and sing all is well.

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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Nov 5, 2011


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