Vivek Kaul
If foreign investors into the Indian stock market are to be believed, India is currently in the midst of a Modi rally. Goldman Sachs had explained this phenomenon best in a note titled Modi-fying our view, published on November 5, 2013. “The BJP led National Democratic Alliance (NDA) could prevail in the next parliamentary elections that are due by May 2014. Equity investors tend to view the BJP as business-friendly, and the BJP’s prime ministerial candidate Narendra Modi (the current chief minister of Gujarat) as an agent of change. Current polls show Mr.Modi and the BJP as faring well in the five upcoming state elections, which are considered lead indicators for the general election next year. Even though the actual general election outcome is uncertain, the market could trade this favorably over the next 2 quarters, which argues for modifying our stance,” the Goldman Sachs note pointed out.
Every bull market has a theory behind it. But ultimately any market goes up when the amount of money being brought in by the buyers is more than the amount of money being taken out by the sellers. For the Indian stock market to continue going up, and for the so called “Modi” rally to continue, the foreign investors need to continue bringing in money into the country.
The foreign institutional investors have made a net investment of Rs 72,791 crore since the beginning of the year. During the same period the domestic institutional investors have net sold Rs 65,694 crore.
In fact, numbers for the month of November make for a very interesting read. The foreign institutional investors during the month have made a net investment of Rs 6108 crore. During the same period the domestic institutional investors have net sold stocks worth Rs 9376 crore.
Through this data we can conclude that foreign investors have been more bullish on Indian stocks than Indian investors. Why has that been the case?
A possible interpretation of this is that the domestic institutional investors are worried about the overall state of the Indian economy. The Goldman Sachs summarises these challenges well as “the macro challenges that India faces in terms of external and fiscal imbalances, high inflation and tight monetary policy.” And given this, they have been net sellers during the course of this year.
The foreign investors are not bothered about the state of the Indian economy and that is why they have been buying Indian stocks. Why is that? A possible explanation is the fact that they have access to all the “easy money” in the world at very low interest rates.
They have been borrowing and investing this money in the Indian as well as other stock markets all over the world. This has been possible because of all the money being printed by the Western central banks. This has led to a situation where there is enough money floating around in the financial system and hence, kept interest rates low.
So for the foreign investors to continue investing money in India, it is important that interest rates in the Western world continue to remain low. For that to happen the Western central banks need to continue printing money. And that is the most important condition for the so called “Modi” rally to continue.
In case of the United States, which has been printing $85 billion every month, the decision to continue the easy money policy rests primarily in the hands of Janet Yellen, who is currently the Vice Chair of the Federal Reserve of United States, the American central bank, and will take over as its next chairperson early next year.
So will she continue printing money? Jeremy Grantham, the chief investment strategist of GMO, and one of the most acclaimed hedge fund managers in the world, believes that Yellen will continue to print money, and follow her predecessors Ben Bernane and Alan Greenspan, and ensure that the Federal Reserve continues to run an easy money policy in the process.
As Grantham puts it in Ignoble Prizes and Appointmentshis most recent quarterly newsletter “My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up.”
And this will mean stock market rallies not only in the United States but all over the world, including in emerging markets like India. “My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up,” writes Grantham.
What is interesting is that another veteran of the US markets and one of its foremost investment newsletter writers Richard Russel has had something similar to say in the recent past. Russel in a recent note titled Get Ready for the Mania Phase explained that there are three phases to any bull market. In the first phase the wise and seasoned investors enter the market and pick up stocks which are going dirt cheap, because of the previous bear market.
In the second phase, which happens to be the longest and the most deceptive phase, retail investors flirt with stocks and buy them very carefully and not on a regular basis. In the third and final phase of the bull market investors really take to stocks. As Russel writes “The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed.”
This third and final phase of the bull market has started in the United States, feels Russel. “This is where I think we are now in this bull market. I believe that during the next 12 months we will experience a surprising and ever-expanding rush by the “mom and pop” public to enter the market. At the same time, veteran investors and institutions will seize the opportunity to distribute stock that they may have held for years,” he writes.
And this phenomenon along with the easy money policy of the Federal Reserve will lead to a global rally in stocks. As Russel puts it “All primary movements are international in scope, and this bull market will be no exception.”
The trouble of course is that this rally will not be based on any fundamentals, but just a lot of easy money chasing stocks. And that is something that cannot last beyond a while. The bubble will burst and there will be a lot of pain. As Grantham puts it “And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve.”
The article originally appeared on www.firstpost.com on November 30, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Chidambaram
Chidambaram has a dual personality when it comes to inflation
Vivek Kaul
It is interesting to follow the views of finance minister P Chidambaram on inflation.
While addressing a banking conference in Mumbai on November 15, 2013, he had this to say: “Monetary policy has no impact on food prices…The only way we can contain food inflation is to augment supplies, but supplies are not entirely elastic. Supplies won’t increase dramatically in a short period of time. For supplies to rise we need great investment, great production, better distribution and better logistics. So we have a challenge.”
Inflation as measured through the consumer price inflation number has ranged between 8.4-12.4% over the past six years. What Chidambaram was essentially saying here is that a major reason behind inflation was food inflation. And there was no way the Reserve Bank of India(RBI) could control food prices by raising the repo rate i.e. the rate at which it lends to banks (or what Chidabaram refers to as monetary policy in his statement).
Fair point. Take the case of vegetables where the demand has risen risen much faster than supply. As Neelkanth Mishra and Ravi Shankar of Credit Suisse write in a report titled Agri 101: Fruits & vegetables—Cost inflation dated October 7, 2013 “Supply did respond, as onion and tomato outputs grew the most. But demand rose faster, with prices supported by rising costs.”
That being the case, there is nothing that the RBI can do about food inflation. Since food inflation has been a major reason behind overall inflation, there is not much that the RBI can do about inflation as well.
Now here is another statement that Chidambaram made on inflation in Singapore on November 21, 2013. “Several steps, including increase in the policy rate, have been taken and we hope that the WPI-based inflation rate will moderate to a level below 5 per cent,” Chidambaram said while addressing the second South Asian Diaspora Convention.
On November 15, Chidambaram felt that increasing the repo rate had no impact on food inflation. But six days later on November 21, he says exactly the opposite thing i.e. the RBI raising the repo rate will help control inflation. The wholesale price inflation (WPI) for the month of October was at 7%, the highest in this financial year.
Food items constitute nearly one fourth of the WPI index. If the wholesale price inflation has to fall from 7% to 5%, there needs to be major drop in food prices, which as Chidambaram said cannot be controlled by the RBI raising the repo rate.
The point is that within a week Chidambaram has made two exactly opposite statements on inflation. On November 15, he felt that the RBI raising the repo rate, had no impact on inflation. But by November 21, he was saying exactly the opposite thing i.e. the RBI raising the repo rate would help control inflation.
So the question is what does Chidambaram really believe in? Or does he change his message as per the need of the audience he is addressing? Does he say one thing in India and another abroad?
It needs to be pointed out that high inflation has been a part of our lives for more or less six years now. And six years is a long period of time to tackle the challenges on the supply side, that Chidambaram feels are the major reason behind inflation. Also, it is worth asking, where did this food inflation suddenly come from?
Economist Surjit Bhalla tackles this issue in his latest column in The Indian Express. As he writes “The logic of Indian inflation is relatively simple…What happens when the government raises the minimum support price (MSP) of foodgrains, especially that of rice and wheat, two crops that account for almost half the value of all the crops for which the government sets the MSP? When the government raises the MSP, the prices of factors of production involved in the production of MSP products — land and labour — also go up. Is it any surprise that rural wages have gone up so fast as to cause labour shortages in an economy with relatively jobless growth for the last nine years? For the last six years, rural wages have gone up by an average of 16 per cent. We don’t have reliable data on rural land values, but anecdotal data suggest that the price of this factor of production has also been rising faster than most prices in the economy. ”
And this in turn has pushed up the price of food, leading to food inflation and in turn consumer price inflation. Initially, the rural wages rose much faster than inflation. But finally the inflation has started to catch up. As Sonal Varma of Nomura Securities points out in a note dated October 24, 2013 “After adjusting for inflation, the decline was even more stark: real rural wage growth moderated to -0.1% y-o-y in August from 9.3% y-o-y in 2012 and 13.4% in 2011.” (y-o-y = year on year).
What also hurts is the fact that rural India spends a larger portion of their income on food, and with food prices rising at an astonishing pace, the rise in rural wages hasn’t been good enough. As Bhalla puts it “a dominantly large share of the expenditure of the poor is on food, and food prices have risen much faster than the average CPI increase of 10 per cent, resulting in a real wage increase of less than 3 per cent per year at best.”
To conclude, this is the real reason behind the high inflation of the last five years. And the RBI cannot do anything about it. And as far as Chidambaram is concerned, the least he can do is stick to offering one reason for inflation.
The article originally appeared on www.firstpost.com on November 25, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)