Indian Equity Markets : Low correlation game.

What a tremendous show of strength and resilience by Indian Equity markets.  Not that they are reaching astronomical heights but low correlation with the weakness in the world markets is a definitely a positive from both Indian and Global investor perspective.

In a period of weakness in the developed world, particularly in Eurozone over looming sovereign debt crisis and thinly capitalized financial institutions, quakes and aftershocks are increasingly been felt both in the debt and equity markets worldwide.  A lot of negative global news has queued up in this week (US consumer confidence index, China’s growth rate tapering off and lack of clarity over the extent of damage in Eurozone) and equity markets have been volatile in pricing these risks and aftershocks. The world markets have ‘slumped’ more than a couple of time in the last one week while the Indian markets in the time of global weakness have held firm and shown resilience.  

The resilience shown by Indian Equity markets is not spurious and is fueled by strong fundamentals and increased focus on second generation policy reforms. The government is going through an extraordinary spell of very sound policy making which previous regimes have given a miss. Deregulation of oil prices, capital market reforms, fiscal prudence and proposed tax reforms have instilled increased confidence in a system which has always been plagued by bureaucracy and red tapism. There’s so much of positive news outflow in the Indian markets whether its in the form of a policy reform or government intention to push forward the reforms that Equity Markets have little reason to panic or price in the global weaknesses. India is still strongly integrated in the world economy and its significance is only growing. So why is this low correlation with the world markets?

The reason could be one, the Financial Institutions in India are in good shape and there is no concern whatsoever over a looming debt crisis. The concerns over liquidity are eased off and RBI has shown maturity in maneuvering its monetary policy. Two, the job market is strong and there is strong domestic demand. India is a net importer (rather I used it as a negative feature in one of my recent blog posts) and this insulates its domestic producers from vagaries of world demand.

Going forward it makes even more sense for a foreign investor to have Indian Equities as an asset class in their portfolios. Low correlation with world equities is likely to persist over time and having a low correlation asset in the asset will certainly drive down the over all risk of the portfolio. “Man” talks of no Tobin Tax on FIIs and FDIs, but he will mince his words as strong inflows are likely if the low correlation persists.

Can Asia remain unscathed ?

Will economic crisis engulf some Asia Economies too ?

Investment industry is sleeping, eating and drinking “Greece”. The obsession can partly be blamed for noise trading and gigantic credit default spreads on Greece’s government debt. We have unique situation in the world now where almost every developed nation (except Germany and to some extent Japan) has got itself drenched with dirt and filth. Lehman did it for US and swelling public debt and deficits in a recessionary environment did it for UK and Euro zone. Asia Pacific is still sitting pretty, but it’s not easy to do business with someone who’s covered with dirt. Asia is fidgeting the most at the moment with the question “Can it remain clean while its counterparts are covered with dirt?”. Its very difficult is my initial and only reaction.

Japanese public debt to GDP ratio is the highest in the world, its population is graying, it has battled near zero growth for a decade and going forward fundamentals are not looking very good; it’s looking at a dip right in the face. China is sitting pretty and rightly so, it ignored all that was going around in expansionary business cycle and continued its meticulous ride upwards. Currency revaluation for Rembimi will be slow and gradual, without hurting China in a big way. India is the only country in Asia with a trade deficit. The high growth, young population and reformist policies have some how bullet proofed the high fiscal deficit in India. But sharp and furious bullets could pierce right through its defenses. 

My sense is that it started like a tsunami in North Atlantic and is slowly coming towards the Asia Pacific region. Japan, India, Indonesia, Thailand, Philippines are vulnerable economies in the event of a flight to safety. Each has it own unique challenges and balancing acts but each is exposed to the vagaries of a nasty double dip. Add Dubai and ‘Cheabol’ to the curry and you’ve got a “Red Hot Chili Pepper” menu. I would buy a CDS on Japanese Debt with a medium term investment horizon and sell a CDS on German/ Chinese Debt (I know, I’ll find no takers for this sell order). I’m still bullish on long terms prospects of India, ‘Phir Bhi Dil hai  Hindustani”. 

"See, I Said So"

I was sensing this since morning.....

The first thing that came to my mind when I heard EGOM has finally given a go ahead for deregulation of petrol (and modest increase in Diesel and LPG prices) was “See, I said so”. Market's morning call gave a slight hint of what could be expected from EGOM. While some expected no headway on deregulation by EGOM at all, opening in the green by almost all oil marketing companies this morning was enough to indicate some activity. Shhh, I’m not saying people in the know were trading (but what I mean is not too different from what I’m not saying). Positives cues from people in the know propelled the stock in the morning and I had a Déjà vu feeling on partial deregulation. What has happened is not too bad; politics is a difficult business and ‘Man’ and team have treaded the tight rope carefully. With diesel being kept out to keep inflationary expectations under control, there’s a strong case now for duty on diesel guzzlers. Hitting four sixes in an over is not as good as hitting six sixes; but its no less feat either. Well done ‘Man’, this was long overdue.

Lionel Messi : The 21st Century Maradona

Messi is the player of the tournament for me, He is probably one of the few strikers who do not look for personal glory. Way to go "Messi".

Securities Transaction Tax: Traders/ SEBI, Love Hate Relationship.

What’s the big deal with STT, the World is not falling as yet.

Regulators and regulated are like husband and wife, you got to live together and the love hate relationship will persist. Wife will prevail in all likelihood and no prizes for guessing who’s playing the wife in the securities traders/ SEBI face off on STT.

Securities Transaction Tax (STT) is a small component of tax on each buy and sells securities transaction in the markets. Traders hate taxes as they too much like other investors wish to capture absolute after tax gains. It’s natural for them to cry hoarse over any new tax proposal. They’ve made a beeline of excuses and hectic lobbying to get STT out of the way in the Direct Tax Code. For the regulators and MOF, STT is just another device to mop up revenue from a profitable transaction. Plus thanks to PC, STT had a very successful dry run in the last two fiscal years.

Traders say STT hurt efficiency in the markets,( sure they should label everything that hurts traders profits as a trigger for market inefficiency ), the regulators and tax authorities say when UK can do it why can’t we. Both have a point, but I feel STT is not so bad after all. Sure it brings down absolute return by a few bips, but if it contributes to the tax kitty without hurting market efficiency traders should not try to fake it.

As responsible citizens (traders and responsible, I must be kidding!) we should stop treating discussions on DTC as a “trumpet” which anyone can blow at will and get away with it. Having studied STT implementation in other international markets, I don’t see it as a monster. Traders should get used to it and let regulators have their way on this one. My suggestion to traders: Bargain hard on things which matter more, think tax credits for capital gains reinvested.

"Anti Social Animal'

Of all the Television presenters, Fareed Zakaria of CNN is the one I admire the most and Barkha Dutt of NDTV is the one I relate to the most. Barkha and me have almost ‘grown up’ together (though not literally) and I take whatever she presents very seriously. Her Sunday evening talk show (I am bad at remembering names) discussed Twitter, an area foreign to me.

I am among the rare species that don’t network socially. In fact I am on the verge of being declared an ‘anti social’ animal by friends and family who find my abstinence from social networking sites disturbing and annoying. That brings me back to Barkha’s question “Is social networking any good”.

Well yes, it is brilliant for a girl friend for wants to track his beau’s past, present and future conquests. It is the most important innovation for people who have always slept with a loud speaker by their side, and for those who always itch to share, gossip or flit.  Some working professionals have balls of steel (eye balls that is) to stare at a screen for work and for pleasure. On the more serious front, there’s always someone for whom technology and innovation works in the real sense. I keep them off the shelve in this article. There’s another class of people who have a split personality disorder when it comes to social networking. They have two different personalities, one online and one in the real world. They are the real ‘bunnies’ and some confidence is lost in this medium when a ‘bunny’ is busted.

Not that all’s wrong with social networks. Splits and break offs are less painful, lost friends are found and a friend’s friend is a friend. Professional networking sites are ‘chawanprash’ for newborns in the corporate world and ‘chaddi brigades’ are a powerful force in mobilizing a public opinion. Celebrities have a place to spit and followers have a place to admire their spits.

It’s a great innovation and a futuristic approach to communication. It works for some and it doesn’t for others (I’m among the later half). It is a casual medium for exchange of information, ideas and thoughts and I would like it to see it grow as a casual medium. Official procedures needs to be adhered and policies formed to prevent abuse of network effect of this medium (think Tharoor, Modi split).  Barricades need to be set up for kids so that they socialize in the real world and learn to differentiate between virtual and real world.

For me it doesn’t simply works. In a typical day and a few hundred calls, messages and emails later I look forward to meeting friends and family in the real world. No offences to social networks and maybe one fine day I’ll jump on this bandwagon too. Till then my blog captures my thoughts and all invites for the ‘mama bhanja’ sites find solace in my trash box.

Wake up America ! It is Time.

Wake up America! You can’t have double standards fro everything. If one man dares to challenge your authority (Osama Bin Laden) and takes the extremist route to avenge what you did in Iraq, you bomb and ruin his whole country and kills innocent people. At the same time you share dais and form strategic and friendly alliances with countries that have been proxy heavens for extremists (Pakistan).  Every national and every citizen of this world has equal right of expression and right to self defense. Osama is not wrong when he tries to avenge the killing of innocent people in Iraq. His actions may have been exaggerated but your response was not too kind either.

A gas leak in a poor state in India by negligent behavior of an American company would prompt you to press diplomatically for a safe passage for your citizens and disclaim any responsibility by paying a negligible compensation. Even when extending a hand of nuclear cooperation you ensure to sneak I a minimum liability clause for American Companies. If that is how America wants things to be, why are the lawmakers, citizens and Congressmen pressing for BP’s blood. Congressmen believe BP’s commitment of USD 20 Billion is peanuts for the horrendous mistake and lack of oversight by its managers. We understand and are concerned with outmost seriousness the environmental damage this spill is likely to cause. We are also aware of the damage the “Gas Leak” inflicted on poor and innocent citizens of India a few decades back.

Equating Bhopal with Gulf of Mexico is an unfair and unreal comparison. But the loss of life in Bhopal and the continuing effects on people’s life comes cheap to you than the environmental damage ‘oil leak’ is likely to cause. The world looses confidence when the custodian of its rights openly defies them. Wake up America, It is Time! 

My Fav' Five at the World Cup Mundial !!

1. Brazil 

2. Spain (Oh yeah, even after they lost to Swiss)

3. Argentina (Messi and Diego only)

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4. Shakira's "Waka Waka"

5. Vuvuzila ......(It Rocks !)

FASB: Playing hard task master with banks.

Scanning FASB Proposals on accounting treatment of financial instruments by banks

Will we get more insight if the recent proposals by FASB on M to M of all financial instruments held as investments by bank make their headway into the patchwork of US GAAP? I doubt it, I seriously doubt it. It may give regulators a little more headway and peek into the nature and size of investment/ liabilities structure of banking institutions, but as has always been the case bakers would convince regulators to permit them to report separate figures and presentation formats to investors. What a disaster for the investors, it will be. There is already enough information asymmetry between investors and the company managers, do we need any more complications with the accounting standards permitting the companies only to show what investors want to see; stable and sustained earnings.

I am always in favor of transparency and reduction of information barriers between investors, analysts and company insiders. This instills more confidence in the system and investors are a less worried lot. More confidence definitely leads to more investments in risky assets and every one is better off (of yeah I know, I must confess this holds only in the short run). Marking to market financial instruments is as enjoyable a feature for me as my pre diwali teen patti game with a bunch of friends (its another matter that I always screw up my Diwali budget with the game). As an investor and analyst I am happy and satisfied that all that is reported on the face of the balance sheet is something I can rely on and these are not just mythological figures. So where is the problem, when FASB is proposing exactly what I am looking forward to? Well what FASB has proposed is like telling every girl to have sex only after marriage. It just takes away all the pre marital bliss and spookes the fun out of the markets. Super Analysts and Insiders will no longer be able to court the best girls in their swankiest Lamborghinis. 

"Do Try This at Home"

I'm back after a strenuous, high intensity and stressful eight months of being in "Hibernation". This "Stress Test" worked for me all this while; Don't Believe Me ? Try it for yourself