The Political Case to Short India 8 comments
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On Thursday morning, 18 bomb explosions created havoc in towns across India's north-eastern state of Assam; at least 70 people died, and more than 200 were injured. This latest act of terrorism, coming in the wake of similar serial-bomb explosions in a number of key Indian cities in recent months, raises two rather troubling questions for mutual funds managers investing in India, questions which perhaps need to be answered prior to granting credibility to any financial analysis of the India opportunity.
Is the Indian social fabric crumbling, one attack at a time? And will the terrorism, along with at least half-a-dozen robust domestic protest movements, force political changes which deserve to be recognized before dedicating investor money to Indian equities?
The unwinding of neighbouring Pakistan as a modern-day nation has already caused complete and undiluted chaos in the Karachi Stock Exchange. Credit default swaps for Pakistan have widened to unprecedented levels, with Asia reporting the absence of firm quotes even at 3,500 basis points for 5-year sovereign risk. Though the Indian economy can be distinguished from Pakistan in key fundamental respects, there are ample grounds to conclude that impending political changes in New Delhi spell trouble for India's risk profile. Moreover, Indian intelligence officials routinely blame Pakistan for the terrorism inside India, and the common (and logical) assumption is that the worsening economic climate in Pakistan will lead to even more terrorism on both sides of the border.
Facts from the ground in India are increasingly suggesting that extremist right-wing Hindu parties and their equally partisan regional allies will capture a majority in next year's general elections. And one does not have to dig deep to find out the reason why such radical entities are destined to make a strong comeback in traditionally secular India: growing middle- and lower-income discontent due to deteriorating living conditions in hundreds of big cities and small townships. Even committed leftist commentators have begun to draw parallels between the consequences of the Great Depression (1929) on the fate of Germany and the impact of today's global recession on the future shape of India.
India's rural landscape is another matter altogether, with extremist communist groups effectively controlling the majority of villages in at least 50 districts across 8 states. Despite 50 years of land reforms and poverty eradication programmes, more than 95% of the agrarian population lives in poverty, or extreme poverty, depending upon definitions. The success of their counterparts in Nepal has only emboldened those seeking social change through armed struggle.
It is important to understand how the political undercurrents will influence India's credit ratings, India's stock markets and, most importantly, future legislative changes which will alter perceptions governing the pricing of political risk insurance for those doing business in India. As of now, credit default swaps are being priced around 525 basis points, and political risk insurance beyond 2009 is unavailable. Thinly-traded far forwards contracts to buy dollars against the rupee continue to trend higher, from a low of 18% for 3 years earlier in the year to 25%-plus last week; this pricing shift is also being reflected in currency swap rates.
How then can India-friendly fund managers justify a medium-term position in India? Firstly, it is true that, regardless of the political transition to a 21st century version of Fascism, in this instance, select corporations can and will continue to record profits; so stock picking, as opposed to index-linked investments, should be critical. Secondly, taking post-1979 Iran as a classic example, religious extremism translates into massive government spending programmes, in economic terms; so infrastructure technologies should attract foreign joint ventures.
But specific situations apart, the case for an overall bullish tone on India defies logic.
Disclosure: None.
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This article has 8 comments:
On the long run the Indian growth story is intact. Look for India to emerge stronger and more competitive for this downturn in the Indian stock market
The case is simple:- a middle class of atleast 300M consumers with disposable purchasing power well north of $2000.
India has always had "incidents" (I remember the late 80s and early 90s when it was the greatest threat) but now the markets look beyond such issues.
Once this financial crisis passes, I think India is poised to break out with strong growth especially in infrastructure and services, alongwith the consumption class.
I am bullish on India in the medium term (3-5 years) and am buying IBN and HDB at these ridiculous cheap levels.
Propensity to write off India as a basket case exists to a large extent among western authors as they are unable to comprehend how such a diverse nation with so much of disparity can still exist as a nation. Especially in a recession. India has and has been working towards solving these issues. The issues are large and mind boggling no doubt. But a lot of progress has been made.
Those parts of India which are the least developed show the most Naxal activism and this is to be expected. The government should and it will continue to devote more resources to developing these areas to strengthen the nation.
India's private sector is vibrant, and its stock market is well developed. Private enterprise has led much of the recent gains and will continue to. I have no doubt India will emerge from this "global" recession stronger. It has grown over the last year and will continue to grow through the current "global" recession as well.
India's middle class will continue to enlarge, and will drive domestic consumption more importantly these next 5 years. It's a given the Indian economy will be stronger and bigger in the future. The recent sharp weakening of the rupee against the dollar will reverse. The appeal to send money to India to simply invest in CDs is enticing right now. The big question is what the impact of real estate speculation will have on the economy, and how long it'll take the middle class to absorb all the real estate currently being held vacant by speculators.
It is hard to predict, if India continues to grow or doesn't grow, but it is hard to imagine that above reasons can stop India's growth.
in India there are multiple positive factors at work at any point in time setting off the many negatives. A large growing middle class, one of the best productive demographics, enterprising entrepreneurial spirit and increasingly a cost base benchmarked to the best in the world, giving Indian companies a capability to compete with the best in the world.
In my opinion, for those who can, the best way to ride this is to go in for bottoms up strategy. Identify good solid companies with significant operations in India and managements with a global footprint and invest in them.
Valuations are correcting (not yet done with the correction in large caps) though it is the mid caps and small caps where i see best value as of now. There are companies which are not significantly impacted by the global mayhem and are not cyclical in the small caps sector. I think on a risk reward matrix, these companies will generate decent returns for the patient few.