Emerging markets are emerging
13 SEPTEMBER 2010
Timothy Moe, strategist at Goldman Sachs, says that the market capitalisations of emerging markets will cross $ 80 trillion in next two decades, rising 5 times and overtaking the valuations of developed markets. Emerging markets have a 31% share of global market cap. which can go up to 55%.
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We have been witnessing a continuing net inflow by foreign investors. FIIs were net buyers all of last week, driving the sensex up 578 points to 18799 and the Nifty up 170 to 5640.
What about domestic savings? Our household savings rate is consistently above 30%. However, most of this goes into bank deposits, in the belief these are safer, since they do not lead to value erosion, as stockmarkets sometimes can. The percentage that goes into equity investment can, and should, be increased. One of the main drivers to do this in America was the mutual fund industry, and the growth of this industry has been so phenomenal that institutions now hold 3/4ths of corporate equity and individuals 1/4th. However SEBI has marred its growth by doing away with commissions to distributors to grow the business. So the growth of the domestic mutual fund business will be hampered.
The organised workforce puts a part of its savings into the EPS (Employee Pension Scheme), started in 1995 by Narasimha Rao. The EPS is in a big big mess. It has a huge deficit, of over Rs 50,000 crores. It continues to invest the corpur of over Rs 100,000 crores in fixed interest instruments or in bank deposits, which give a far lower rate of return than needed by EPS to meet its obligations. They are now looking at investing a part of it into equity, but only in triple A rated public sector companies (thus senselessly reducing the universe). There is no reason for them to be doubly cautious, especially since they have approved 7 firms to invest the funds for them, all of whom are into money management. Since reality ultimately triumphs over dogma, a part of the EPS corpus would get invested into equity, thus becoming a further bullish factor.
The saving of the corporate sector will add to this. The Indian economy continues to grow well and is estimated to grow at over 8.5% this year and 9% next. The IIP grew at 13.8% in August.
There are several factors preventing a higher rate of growth, none of which is lack of consumer demand, which seems insatiable in India (not so in developed markets like the US). Poor infrastructure is one and the Government should allow a larger role for the private sector in it. The abysmal state of city roads in Mumbai and Delhi is quite visible, and is the consequence only of horrendous greed and pathetic governance. It is time a new vehicle owner petitions the court to allow him to pay the life time road tax (meant for road improvement and collected upfront at the time of purchase) into an escrow account under control of the Court, to be released only when the Court is satisfied about the conditions of pot holed roads. If thousands of car buyers were permitted to do that, and there is no reason why the Court would not permit such a petition, the roads would be repaired overnight. Potholed and waterlogged roads have led to an outburst of dengue, the human cost of insatiable greed by corporators.
Dr Kaushik Basu, the Chief Economic Advisor, has pointed out another factor hampering growth of industry, viz. our rigid labour laws, which benefit a small percentage of the workforce. He wishes an open debate on this. The result of rigid labour force can be seen on West Bengal, once the most prosperous state, but now bereft of industry, which has moved to other states. Changes in labour laws, even if they were to happen, which is doubtful, would take years.
The reason FIIs would like to invest more in emerging markets is simple; the developed economies are growing at a snailís pace. August sales of cars in the US has been the slowest for the past 28 Augusts, not a particularly august performance. The number of foreclosures has gone up from 2 m in 2008 to 2.8 m in 2009 and expected to be much higher in 2010. US politicians and Governments have started playing to the domestic gallery. President Obama wants to remove tax breaks for firms which outsource and states like Ohio have banned the offshoring of IT projects by Government departments.
With the developed world having slow economic recoveries, and with fiscal stimuli ending, it is now left to Central bankers to use monetary policy to revive their economies. Central bankers are pumping in money. A part of that money finds its way into emerging markets like India. Some day the musi will stop, as it has to, since not even the US can keep pumping moner forever.
In corporate news of interest, the Bombay High Court has held that Vodafone Essar would have to bear a tax liability, for failing to withhold tax at source, when it bought a controlling interest in Vodafone Essar, in an offshore transaction, from Huthison Whampoa. This is on the ground that the underlying assets are in India. The tax liability is likely to be $ 2 b. in the $ 11 b. transaction. Vodafone would appeal to the Supreme Court, and cut the phone lines of its tax advisor.
Just as the EPS trustees have run up a huge deficit by not thinking, and planning, ahead, so, too, has MTNL. It has 45,000 employees, compared to 18,000 of Bharti Airtel, ten times its size, and is unable to pay the salary bill. This is similar to the situation in Nacil (Air India). MTNL is seeking permission to prune its workforce by 2/3rd s. It wonít be easy.
The sensex has risen 578 points last week, on the back of foreign investor buying. The FII flow would pause only in the event of a global crisis. This cannot be foreseen. The monetary laxity in developed world, to prop up their economies, will lead to asset bubbles. There is one forming in the US Treasury Bill market, where yields have dropped to ridiculously low levels. This bubble may pop. But until such asset bubbles pop, punters are busy popping the bubbly.
J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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