Mumbai Terrorism Clouds Templeton's 'Buy India' Call

As the Asian markets await full details on the plot behind Wednesday’s terrorism in India’s principal business city of Mumbai (aka Bombay), 5-year credit default swap spreads for 5-year government-owned State Bank of India widened to around 465 basis points, the cost of buying one US dollar breached the critical 50-rupee threshold and Indian equity futures quotes were dominated by selling interest in the Far East (the Indian stock markets were closed today).

In leading a recent charge to return to India, particularly after a 55%-plus drop Indian equity indexes, major mutual fund managers like Mark Mobius of Templeton Asset Management and Devan Kaloo of Aberdeen Asset Managers have been insisting that India’s democratic traditions are strong enough to withstand terrorism. But the crisis in Mumbai today cannot simply be explained away by the proposition that periodic acts of terrorism have only a limited and temporary impact on the Indian corporate spectrum.

On the contrary, the entire post-independence Indian social fabric is being gradually undermined by terrorism, separatist insurgencies, farm protests and far-left communist movements. It may be argued that India’s failure, over five decades, to make profound structural changes within its economy has now placed the country on the verge of a significant, and highly unsavoury, political transition in 2009.

The 2008 price lows in India-specific Exchange-traded funds (EPI, IFN, IIF, INP and PIN) are being widely touted as attractive buying opportunities given India’s 8% GDP outlook. And India ETFs did indeed hold up well in New York trading on Wednesday. But even before the Mumbai terrorist attacks, default risk perceptions on India have been rising; 5-year CDS coverage for sovereign risk is being priced at 310 basis points, and in the 800-900 bps range for ICICI and other Indian banks. The US$/Indian rupee “hawala” rate, the rate at which tens of millions of dollars worth of rupees are transferred in and out of India via non-banking channels on a daily basis, is edging towards 53.25. And US$/Indian rupee 5-year currency swaps are being priced at a whopping 42%-factor in favour of the dollar.

In the briefest of terms, the fundamental incompatibility between pockets of wealth on one hand and rampant poverty on the other has been held in check by 50 years of political promises backed by a series of 5-year national plans. Today, depending upon whom you ask, between 65 and 80 percent of Indians live below the poverty line, if the poverty line is calculated against a basket of living essentials. So, while the failure to remedy agrarian poverty has finally created powerful protest movements, urban unrest (and discontent) is being effectively translated into vote banks by religious extremists. On all present indications, a well-knit coalition of religious radicals will be in control of the New Delhi parliament within the space of a few short months.

History tells us that a government under the control and direction of religious extremists is not necessarily unfriendly to private capital (e.g. Iran and Sudan). But, in the case of India, the ascendancy of right-wing Hindu entities will be no smooth business-friendly transition by any means, since it will be met by a sharp spike in separatist activity, by more militancy in the countryside and, most importantly, by a steady spate of deadly terrorism from indigenous or foreign Islamic radicals.

What all this means for consumer demand and corporate profits in the midst of a worsening global recession is certainly not an open question, as some analysts would like to believe. The fact is that bullish calls by Templeton and Aberdeen do not incorporate inherent political risk; for the record, medium-term or long-term political risk insurance contracts (as distinct from CDS-type insurance) for India are unavailable below 5.50% (per annum) today.

This writer’s call on India remains unchanged: sell on healthy India-ETF rallies from current levels, and short the Indian rupee.

Comments

[hownow:]

Finally somebody gets India at SA.

The rest been just periodically issuing bottom buy calls last 6 months.

And Mobius looks like he's going to do a Buffett (on GS/GE) on India.

2008 Nov 28 11:21 AM

[notsosmart:]

markets are difficult enough without getting involved in china,russia,india,etc...

2008 Nov 28 01:58 PM

[Teak:]

I just don't get the pessimism. I invested in IFN two years and, of course, have watched the stock price yo-yo up and down. But since I am not a 'growth investor', rather a dividend investor, I have been pleased with the $4.89 and $14.63 per share distributions that I have received the past two years, respectively. So, something which I bought on average for $50 per share has returned to me $19.52 per share, or a return of 39% on my original purchase price. Reinvesting the distributions have purchased an additional 51 shares. What investment in the USA gives such similar returns?

India has a growing domestic economy that is less tied to exporting than other countries (e.g., China) which should insulate it a bit more from the world markets. Yes there is political risk, but where isn't there any?

What am I missing?

Teak

2008 Nov 29 03:16 AM

[jepittman:]

Investing in countries like India require a large volatility tolerance and a longer term investment horizon. For individuals it is probably best to participate through an ETF or a mutual fund. Keep in mind that markets are discounting mechnisms and share prices already discount a lot of bad news. Also India's GDP was recently running cosiderably more than 7%. It is a democracy with strong institutions and a growing middle class. Also there are many who are convinced the highest returns over the next 10 to 20 years will be in countries like India, China, and Brazil. These markets are highly volatile even in good times but for those who are adventuresom and long term oriented today's values may offer outsized returns.

2008 Nov 29 10:24 AM

[bearsfullof...:]

>>
History tells us that a government under the control and direction of religious extremists is not necessarily unfriendly to private capital (e.g. Iran and Sudan).
<<
You didn't have to go to Iran and Sudan for examples. India was under BJP-led government (party of religious extremists as you might be defining them) before and they were plenty friendly to business climate.

>>
right-wing Hindu entities will be no smooth business-friendly transition by any means, since it will be met by a sharp spike in separatist activity, by more militancy in the countryside and, most importantly, by a steady spate of deadly terrorism from indigenous or foreign Islamic radicals.
<<

Do you live in India or know anything about the recent history of India? If you did, you would know that the recent incident in Mumbai is by far the worst act of terrorism in India and it happened under the watch of the so-called "secular" party in power currently. Most of the other disruptive activities that you describe have only gotten worse during the current administration, not better, since they came to power after BJP-led coalition lost elections. What then makes you predict that it will get worse if a right-wing party comes in power next year. What is your historical basis? I would have guessed that without the weight of the Marxists fighting any kind of further liberalization, a new government will be indeed *more* business-friendly that less.....

2008 Nov 30 10:01 PM

[Natalie Le:]

Bombay Stock Exchange and National Stock Exchange was closed on Thursday after the attacks, which killed 101 people and brought the security forces into two luxury hotels in south Mumbai.

Aaron Lee Smith, MD of Superfund Financial mentions a rally coming soon but downside risks are there and eventually stocks are a dangerous place to be in.

www.youtube.com/watch?...

2008 Dec 03 03:06 AM