The Dance of the Elephant: India in Action

On an old park bench in the middle of December
Cold hard rain fallin', can't find no cover
That would be alright with me...

Hard days, good times, blue skies, dark nights
Baby, I want you to take me ... wherever you're going to
Maybe say that you'll save me ... a seat next to you

When Bon Jovi crooned his way to top-10 lists, little did the band know that the words couldn’t have been a better match for the situation investors are facing today.

For the investors caught in the ‘cold hard rain’ of an apparent recession, there is no cover against the possible downsides.

So what do you do in times like these?

Of course look for performing economies! But in times like these, when the liquidity crisis has gripped the world, how do you define performing economies?

Simple. Just look at the socio-economic system in place in those economies. Using social mood to gauge the investment method has been in place for quite some time.

From the socio-economic lens, India and Brazil form quite a formidable alliance of an investment option with immense returns in the coming years. Both have huge undercurrents of similarity and economic backbone. Both of them are making a transition from agro based economies to industry based economies and in the process have opened their economies for investment from developed countries.

The Dance of the Elephant: India in action

Delving a bit in history of Indian economy can give us quite an insight into the socio-economic mindset. With rampant corruption, lopsided infrastructure development and a strong embargo on business present, business outlook was bleak till a decade back.

True liberalization took off in the year of 1992 and gave Indians a brief taste of economic freedom.

Today India is clocking a GDP growth of 8.8%+ per year following the reform procedure since 2003. This has done wonders for the common Indian Diaspora. The huge rise in opportunities coupled with a rising middle class income has given a huge fillip to the optimism.

Technical issues apart, the social mood has been on a rising edge since 2001. With a marked change in the social entertainment tastes and a new found confidence level, the onset of a spew of economic reforms was but natural.

Films have moved from a clear socialistic perspective to consumerist, bold and courageous hues. This effectively shows a huge change in the mindset of the citizens of the nation. Fashion has moved to strong and chic colors again affirming an increase in social optimism. All these and much more are clear indicators of a booming optimistic economy.

These patterns although having a strong correlation, yet can’t be attached a quantitative value. So in the author’s opinion, one important metric can prove to be a bellwether marker of the social optimism. This metric being Consumer Confidence Index.

Consumer Confidence Index: The Metric

It is but obvious that, when the underlying social mood is optimistic, buoyant and upbeat, people tend to purchase more and have higher confidence in their consumerist decisions.

Let’s look at two cities in India which serve as bellwether for the financial and technological sentiment of India. Mumbai and Bangalore respectively are financial and technology capitals in their own right.

MasterCard Worldwide Index of Consumer Confidence for Mumbai is as follows:

click to enlarge

With the Master Index average for the last 3 years being 64.1, Mumbai topped this year with a score of 80.4 bps. It is a 3 year high and perhaps the highest of all time. With the overall consumer confidence yet to peak, Indian financial markets provide a huge space for foreign investment in key areas like technology, consumer goods, capital goods, infrastructure and FMCG.[Worth noting is that the rating is from 0-100, with 50 being neutral. Any number above 50 means optimistic and below 50 means pessimistic]

Bangalore scorecard in the MasterCard Index of consumer confidence has something far better to tell. It is optimistic to the level of being euphoric, (as per Dec 2007). It is hovering at an all time high of 99.0 as against a 3 year average of 90.1

It must be kept in mind that the consumer confidence index [CCI] taken in Dec 2007 is for the next six months. That is the overall social mood outlook for the next six months.

With the financial and technological hubs of India becoming hugely bullish on the overall economic situation, investing in India will never again be any more attractive.

Dare I suggest that the boldness quotient of India is at an all time high by observing the entrepreneurial activity going on in Bangalore. And the good news is, it has not even started yet.

One downside though is in the apparent bolt from the blue striking the Indian economy in April. Inflation has proved to be quite a tough cookie for the policy makers at the helm. With inflation data coming up as 7.84% [3 year high], the common man has burnt quite a lot of holes in his pocket.

Interpretation

With consumer confidence index hovering at an all time high and hopefully bound to scale higher, the economic boom which the country is going through now will be lasting for at least till 2012 and possibly more. In light of all these, it makes sense to invest through funds which focus on emerging markets and emerging currencies to post better returns in times like these. And what seems now is that, India is the darling of the new market. With a huge percentage of Indian population turning into baby boomers of the present dynamic era, the investment future seems to be a bright one indeed. [To note that, the present era in India is marked with the era of baby boomers from 1946-1954, this led to a high amount of individuality among its citizens.]

Disclosure: Author is long on Indian economy.

Sources:

1. MasterCard Worldwide index of Consumer Confidence Index
2. India Nielsen Consumer Confidence Index, Nielsen India Press Release, Jan 2008
3. India among the top three brand conscious countries in the world, Nielsen India Press Release, 26 March 2008
4. Popular Culture and the Stock Market, 1985, Robert Prechter

Comments

[bonchibuji]

I agree with the interpretation..."... has become the darling of the new market"...also the baby boomers are "daring" also....

[nickgogerty]

nice article. consumer behaviour is an important component for growth. I have more faith in private barometers than govt ones. Are there some good papers on consumer sentiment and consumption in India or cross comparative studies?

[hownow]

The data seems to be from 2007 surveys and is already dipping.

Also they need new investors surely

indiaplay.blogspot.com...

[Soham Das]

@hownow

The data shown over here from MasterIndex is six months forward projecting. So Dec 2007 consumer confidence index shows the consumer confidence for the next half yearly period of 2008.

[Soham Das]

@bonchi
True... but I think investors need to look beyond the projections and stories of media, to appreciate all the facets of an investment

[Soham Das]

@nick

Thanks.
And yeah definitely the private barometers are less likely to be skewed than the governmental. Nielsen India often comes up with Indian business news. But for papers you have to shell out some dough.

[Soham Das]

Nielsen India has released some new findings about the Indian consumer being the third most brand conscious in the world, as late as last month.

So I really don't believe that the consumer confidence is tanking... but yes any data to shed light on it can give us some perspective

[Normally Nielsen releases at the end of the year, so I don't think the latest ones are out yet]

[ivan]

I have never posted my thoughts before, but here goes:

I think the author is making a mistake assuming that since the mood of the people is bullish, the indian stock market is going to do well in the near term till at least 2012. Warren Buffett once said something to the effect that most investors always make the mistake of doing "rear-view mirror" investing, i.e. look at what happened before and project it into the future instead of looking to see what's ahead.

Looking ahead, what I see in India is:
Inflation
High interest rates to try and dampen inflation
Falling corporate profits
Populist government policies (due to upcoming general elections)
Political uncertainty (I expect a hung parliament and horse-trading after the elections)

So, short term I don't see how the Indian markets are going to perform well, unless there is irrational exuberance, in which case, it will just postpone the inevitable bursting of the bubble.

Longer term though, in the greater than 10 year time frame, I am bullish on the Indian economy.

It will be fun to see how things actually turn out! :)

[Soham Das]

Ivan,
Your takes are interesting, but my line of reasoning is not in the same line.

I am arguing more from the socio-economic point of view. In fact the article could have been better named had there been a byline for the article, socio-economic analysis of India.

I do agree inflation is burning a deep hole, I do agree that elections are going to happen and populist measures are taken by the establishment, but my analysis focuses on 'extra' long term something to the effect of 4-5 years of horizon. And this was justified via the socio-economic mood study, as done by Robert Prechter in his first seminal study in 1985.

As for the bullishness of the economy in the long run, I think we both agree here. Socio-economic moods can very actually predict the long term trends of a nation.

[ivan]

What I was implying is that people are confident and there is a general air of optimism because there is so much talk of India becoming a "superpower" due to it's economic growth etc. The performance of the stock market and real estate market has helped too.

You are right, we both agree that long term things should work out. Basically your 4 to 5 years horizon is closer to "short term" for me but I guess it is long enough for you.