Straws In The Wind Redux
Stock market veteran Shankar Sharma of First Global
thinks many Indian small and midcap stocks are poised to return 100% growth
over the next year, while large caps will give over a modest 15%, just a tad
higher than fixed income, at a comparatively handsome 8 to 10 % .
Sharma said this in the backdrop of the crises in
Greece and China, implying that, for the moment, India may gain rather than
lose from the turmoil internationally. Shankar Sharma is usually known more for
his bearish projections and close adherence to the Congress line politically.
He is to be remembered for being the early financier
for Tehelka when it ran those spurious and intrusive stings during the Vajpayee
administration. And so, this refreshing and positive public
outlook, coming from Sharma, is indeed a pleasant surprise.
Other major brokerages are confidently predicting a
10% rise in the main indices by March 2016, and the continuation of the ‘long
term bull market’. There is a tentative renewal of interest in India from the FIIs,
and the domestic institutional money, mainly from the reflated mutual funds, is
also in evidence. People seem to be finding ‘pale green shoots’ appearing at a
policy level, and feel that private investment must therefore follow in one or two quarters from
now. Some have made bold to expect another interest rate cut from the RBI in
early August, citing lower wholesale price inflation.
What is definitely missing for now is a growth in
company earnings. So, once again, the indices are running ahead on optimism
rather than valuations, but still, the speculation here is tame compared to
China.
The money market outlook, wherein India has enough
reserves to pay for 11 months of imports at this time, predicts that the rupee
may well slide a little, to 65 to the dollar, particularly if America raises
interest rates. RBI governor Rajan is widely credited for managing the macro
position of India’s finances very well, though industry is languishing, and
complaining of very high interest rates.
While America is now on the mend, the economic
survival of Europe is crucial to it. If the EU as a whole, or any of its less
solvent constituents, goes under, it is America that will have to jump in to
save it from drowning. Such is the
umbilical cord interdependency between the ‘old world’ and the ‘new’.
But no such obligation extends to China, way over
there in Asia. And if it finds itself in continued trouble, it will just have
to trim its ambitious sails and concentrate on surviving.
That China’s overall debt is in the region of $ 28
trillion, some three times the size of its economy, is of course, quite
daunting. Most of the debt is to do with domestic real estate that is now no
longer selling.
China may also find it difficult going forward,
because its domestic consumption has not grown sufficiently to take up the
slack from its collapsed export markets. Its infrastructure building,
manufacturing and armament building capacities are also largely idle. China
needs new and viable markets that can pay, and these are few and far between
today.
The Chinese establishment may want to reassure the
world that all is well, but the fact that Chinese stocks, owned over 90% by
domestic players, have been soaring above their underlying values for all of
the last eight years, is a consequence of massive speculation, and not company
performance. Given the present situation, the Chinese currency too is likely to
suffer great volatility if it is floated to join a basket of international
currencies.
In Asia, it has all happened before, there is a déjà
vu. It broke the backs of the so-called ‘Asian Tigers’ who had built their
raging, double digit GDPs on the development of golf courses and luxury tourist
resorts, till that vacuous business model collapsed.
In China, with both its property sector and
financial markets in trouble, and its manufacturing cum export story finished,
there may be a big bubble waiting to burst. In 2006, it happened in America,
first with the housing bubble, followed by the financial markets, in 2008.
India, of course, is an exciting, primarily domestic
opportunity, catering to 1.27 billion people, projected up to 1.50 billion by
2030. This internal appetite is far from met and is mouth-watering, rather more
than a modest export performance, even with the much vaunted IT included.
This could change, of course, as the massive Make in
India programme gains traction, particularly in defence manufacturing. This
government wants to take up the share of manufacturing in the GDP from 12% to
25%. But right now, and put another way,
if India was a small domestic opportunity, with the same level of exports as it
has currently, it would not figure in the global discourse at all.
The Indian IT capability is indeed impressive, both
domestically and through people of Indian origin in Silicon Valley, but this is
a human resource advantage, and many international IT companies have, and are,
setting up wholly-owned establishments in India to leverage it. Besides, the
buyers in Europe, America and Japan are themselves recovering from huge lows.
And yet, perhaps due to the halving of oil prices
and the stepping up of government spending on infrastructure, the IMF forecasts 7.5% GDP growth in this
fiscal for India, a full half per cent above the China estimates.
But will India chug along reasonably unaffected by
China slowing down and the EU struggling? It is, on balance, regarded as the
‘cleanest dirty shirt in the emerging market’. But how many dollars will flow
in remains to be seen.
Iran too, coming out of its punitive sanctions after
a decade, will keep the downward pressure on oil prices and afford new business
opportunities for India. But low oil
prices will make it impossible for OPEC and other major oil producers elsewhere
from dominating any discourse for a long time to come.
So who, or what, will rule the roost now, or is the
world truly headed towards being governed by committee?
Lord Meghnad Desai starts off his new book named Hubris-Why
economists failed to predict the crisis and how to avoid the next one,
with: ‘Economics was born in a whirlwind of change’.
Today’s world is indeed changing faster than many of
the powers-that-be can grasp! Too often, these yesterday people are applying
their tried and tested poultices to scars, instead of to the fresh wounds.
We still take a year or more for a sanctioned
project to begin implementation, for example. And we have a clutch of nearly a
dozen or more TV 24x7 channels devoted to business, in English and the
vernacular , almost as many in print and online, to tell us all the ways we can
be difficult!
There is, of course, a substantial opportunity to
mirror the renewed optimism on the Indian bourses. Just as the 2% to 5% of
foreign portfolio investment jumped in blind into the opaque but multi-trillion
dollar casino of the Chinese bourses because the real economy was then growing
in double digits; the possibilities in India are massive too.
Right now, the government could work to fan this
windfall optimism, a second wind, bestowed, after Modi’s election in 2014, with
much bolder implementation on its many initiatives. So much so, that the many
initiatives, cascading at us on a near daily basis, are being mocked, as if
they were just fond fantasies.
It is implementation that could be the tipping
point, the credibility builder, and the force multiplier for the India story.
Everyone is aware of the reformist and business friendly intent of the Modi
administration. Apart from the tentacular and most resilient red-tape, India is
far more transparent and boisterously democratic than most other countries in
the first place. The problem is it still moves at a snail’s pace, no matter how
often it protests otherwise, and how clever are its slogans.
For: Swarajyamag
(1,324 words)
July 17th, 2015
Gautam Mukherjee
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