India : Where "The Inevitable Never happens.......It's Always the Unexpected"* - Madhav Dhar

India : Where "The Inevitable Never happens.......It's Always the Unexpected"*

Joan Robinson, the great Cambridge economist and India watcher once astutely observed - "Whatever you may rightly say about India, the exact opposite is also true".   As a professional macro investor, with a long history with Emerging Markets,  I have been attuned and trained to focus on the boom and bust cycles and the "madness of crowds" inherent in investing, especially in the emotional and volatile Emerging Markets.  India is an unusual developing country on a variety of measures and a rather unique contrary conundrum - a genuinely poor and a genuinely democratic country; a country with the oldest stock exchange in Asia but at the earlier stages of economic reform; one of the rare countries to grant complete political freedom to its citizens but little economic freedom (in every other developing country economic reform preceded political reform - China being but the latest and largest example - more on this topic another time....).   These very pertinent philosophical musings notwithstanding, my focus recently has been on understanding the rising revulsion and pessimism about India - its politics, economy and especially the pricing of this its financial markets -  by locals and globals alike.  India is once again completely off the investment radar and India shining is replaced by India whining. 

So, is India a miserably poor, illiterate country with such vast ethnic, sectarian and religious fractures that render it ungovernable, especially as a coalition democracy? Is our collective character so crass, corrupt and contemptible that we are permanently condemned to poverty and squalor?  The perennial country of the future that will always be?  Or is India the second fastest growing, English speaking, continental sized economy that is maturing and rising with its unique, inclusive, diverse and vibrant democracy.  One that stands a beacon to the developing world in upholding human and property rights, in fostering a free and dynamic press with a powerful and independent judiciary ? Are its entrepreneurial, technical and mercantile people a real asset both at home and as economic and diplomatic agents abroad? Has the future finally arrived?

The answer ala Robinson is clearly - "Both".  Or as Shakespeare's Hamlet observed with a quixotic flourish, "nothing is really good or bad, but thinking makes it so".  I contend that India is never as good as it looks and it's never a bad as it looks. Its unusual color, chaos and contrasts make for dramatic alternate realities and one can pick the image to fit the mood of the moment.  Today, the image through the mutating kaleidoscope that is "general consensus" is that of country that has lost its oomph and sparkle and India appears dark, dismal, dissolute and desolate.  I will admit that as a citizen, I am disappointed at the missed opportunities over the past few years and how the Aam Aadmi has been screwed at the altar of political expediency, absence of leadership and courage, and collusion between politicians, bureaucrats and big business (More on this another time...).  But has this continental sized economy of $2 trillion and 1.2 billion people truly changed as dramatically as the press and public perception of it has?  Was 9% growth the aberration and 5% the new revised "Hindu Rate of Growth"?

Some facts and a little analytical examination into the innards of the economy and the markets can be enlightening: India has averaged 6.4% GDP growth over the past 30 years.  The average over  2004 - 2009 has been 9%.  Clearly some of that acceleration was due to a strong global cycle aided by debt, but structural factors such as demography, technological and financial deepening and accumulated economic reforms were also important forces at play. Moreover, growth has in fact been marginally better during coalition governments.  The recent 5% average growth comes amid a global financial crisis and recession and a secondary shock from the Euro crisis (and clearly and admittedly our own substantial policy self-goals).  India has not only been the second fastest growing major economy in the World, and important to my observations, it has the second lowest GDP volatility of its peer group - second only, and inevitably, to China.  Moreover, India boasts the highest ROE (Return on equity - an important measure of corporate profitability) in the EM's and higher than even the inventive United States. Astonishingly, the volatility of its corporate profits is the lowest in the World -  not just in the emerging world - the entire measurable stock market universe over the past 15 years including the USA.  But India's stock market volatility is above average, even for EM's and more than twice that of the S&P 500 Index.  This makes India the country with the  highest ratio of stock market volatility relative to earnings volatility. Simply put, the economic reality of India is far more stable than the market and public perception of that stability.  Of course human greed and fear cycles lead to booms and busts.  Markets are indeed inherently manic depressive by nature, but our home boy is borderline psychotic!  What explains this extreme behavior of our stock market?

I think there are perhaps three reasons for this: One, India is indeed a vibrant democracy with a free, proud and raucous press.  There are some 105 news channels and 12 dedicated 24X7 stock market channels on TV.  As such, "all news all the time" leads to stories, both positive and negative being excessively hyped and marketed.  Two, as a country of "twin deficits" (current account and fiscal) , financing needs, both domestic and foreign are acute, and thus the flows in and out of India dramatically exaggerate the market cycle relative to the underlying state of policy, economy, inflation and profits.  Three, perhaps culturally and historically we are conditioned to see extremes - heroes and villains, princes and paupers, good and evil, Tendulkar and everyone else - our movies being the obvious mirror to this trait.  Subtlety, complexity, nuance, shades of grey doesn't seem very Indian. We may be argumentative and opinionated, but we are not innately an empirical people.  

As a professional investor these swings in the emotional pendulum within what I am convinced is a secular uptrend, are to be embraced and exploited. It is as important for a an investor as it was to Kipling's "young man" to keep one's head while others are busy losing theirs.  At a recent investor conference in Dubai I was mocked at my bullish construct, the comparison with China from the heady "Chindia" and Davos days of 2008 were ridiculed, and Pakistan was put forward as a more appropriate competitor.  When India is compared to China, the prudent contrarian investor may choose to sell the Sensex; but when the popular comparison becomes Pakistan, you know it's time to buy.

Currently the Sensex sells at a significant discount to its historical average relative valuation, inflation has come off dramatically with rates inevitably to follow, and the Rupee has stabilized.  The economy has bottomed and growth and earnings expectations are grudgingly, reluctantly being raised.   An awful three period of retrograde policies amid a tough global backdrop appears to  have ended, and even the current administration has introduced a flurry of reforms over the past 6 months.  Expectations of India, both locally and internationally are at absolute rock-bottom.  My bet is that the ascent of Modi and the Hazare/Kejriwal/RTI phenomenon have ensured that the next general election will be fought more over 3 G - Growth, Governance and Graft - rather than over handouts and communalism.  In addition, unproductive competing assets to stocks and bonds over the past decade are dying of disease and old age - gold has cracked and lost its luster; and property sales and prices appear to have stalled the other mania. Globally, oil and other commodities are rolling over, helping inflation and our import bill.  At home, petroleum subsidies are being phased out.  GST and tax reform is on the horizon, and Aadhar, when fully implemented will be transformational.  Valuations are attractive, fundamental change at the margin is positive, gloom is pervasive and market positioning is light and skittish.  I  have rarely seen such a perfect bullish set-up.  And best of all.....almost everyone thinks I am nuts.  India has a long history of two steps forward and one step back. I think we just finished our one step back.  India Shining anyone?

The Indian 6 (ish) year itch: History doesn't repeat itself.....but it rhymes

1979: Second oil shock: Macro imbalance - BUY

1985: Rajiv Gandhi & the "Computer Boys": Reform 1.0; India Shining 1.0 - Sell

1991: BOP crisis: Macro imbalance; Economic Reform 2.0 -  BUY

1997-Tech bubble; IIT; India shining 2.0  SELL

2003 - Nasdaq Bust - Game Over; India property bottom, Gold at $300 - BUY

2008 - "Chindia", India triumphalism at Davos, property & billionaire boom, India Shining 3.0 - SELL

2013 - Macro imbalances; Scams, decision paralysis, retrograde policies - BUY

 * Apologies to John Maynard Keynes

** Thanks to Morgan Stanley India and Ridham Desai for data

Madhav Dhar

An investor’s manifesto

An investor’s manifesto

Successful investors have a game plan, and they stick to it through good times and bad

I am an investor. I do not trade my assets frequently. That's speculation, not investing.

I am also a saver, fueling my investments with continuous savings from current income.

I know that every kind of asset entails risk -- even cash, which can be eroded by inflation.

I know that higher returns entail higher risk, in every kind of asset.

I accept those risks, but I mitigate them by owning a diversity of assets.

I regard my home as a place to live, not as an investment. It is not a substitute for retirement savings.

I have an investment plan and a plan for asset allocation, in consultation with a financial adviser.

I invest regular amounts every month, in both rising and falling markets. I know I can­not gauge market tops and bottoms. If I receive a windfall -- a bonus, bequest or gift -- I gradually feed it into my regular investment mix.

I don't pour more money into hot markets nor completely cash out of plunging markets.

I spread my investments among several asset classes, in a mix fitting my age and risk tolerance.

My share of bonds roughly equals my age. I will allocate to stocks a declining portion of my financial assets as I get older.

I rebalance my portfolio every quarter. If the stock market plunges, pushing my stock allocation way below its target percentage, I sell bonds and use my cash to buy stocks.

I force myself to sell high and buy low by periodic rebalancing -- just what is temperamentally difficult for most investors to do.

I know that stocks are risky in the short run, so I hold in equities no money for which I have a likely need in the next three years.

But stocks are not too risky in the long run. They have outperformed all other commonly traded assets over periods of 15 years and longer.

Foreign stocks account for at least 15% of my stock allocation. I believe that developing economies will enjoy much higher growth than the U.S. in the decades ahead.

I never borrow against my stocks. Margin calls could force me to sell good assets at a bad time.

I stick with my game plan. I do not check the value of my investments every day or even every week.

I try to keep my cool when other folks are losing theirs.

I remind myself often: I am an investor.

Google chairman: 6 predictions for our digital future

Google chairman: 6 predictions for our digital future

(CNN) -- Google Chairman Eric Schmidt has been thinking a lot about our digital future. Maybe that's not a big surprise for a man whose company has played a major role in shaping our 21st-century lives, from how we find information to how we use our phones.

It's that role, perhaps, that has made Schmidt's new book, "The New Digital Age: Reshaping the Future of People, Nations and Business," so widely anticipated.

The book, out Tuesday, is co-written with Jared Cohen, a former U.S. State Department terrorism adviser who now heads up Google Ideas, the company's think tank. In it, the authors consider what our world will be like when everyone on Earth is connected digitally. 

A universal Web, the authors say, will be an inevitable outcome of a world that's increasingly being driven by technology. But instead of an ominous sci-fi vision of a planet run by robot overlords, they envision a world that will be shaped, for better or worse, by us.

"This is a book about technology, but even more, it's a book about humans and how humans interact with, implement, adapt to and exploit technologies in their environment, now and in the future ...," they write. "For all the possibilities that communication technologies represent, their use for good or ill depends solely on people. Forget all the talk about machines taking over. What happens in the future is up to us."

Here are six predictions Schmidt and Cohen make about the future of the Web:

Online privacy classes will be taught alongside sex education in schools.

"Parents will ... need to be even more involved if they are going to make sure their children do not make mistakes online that could hurt their physical future. As children live significantly faster lives online than their physical maturity allows, most parents will realize that the most valuable way to help their child is to have the privacy-and-security talk even before the sex talk."

Conversely, they say, "Some parents will deliberately choose unique names or unusually spelled traditional names so that their children have an edge in search results, making them easy to locate and promotable online without much direct competition."

The rise of the mobile Web means the entire world will be online by 2020.

"What might seem like a small jump forward for some -- like a smartphone priced under $20 -- may be as profound for one group as commuting to work in a driverless car is for another," they write. "Mobile phones are transforming how people in the developing world access and use information, and adoption rates are soaring. There are already more than 650 million mobile-phone users in Africa, and close to 3 billion across Asia."

One example they cite of how mobile is already changing lives: Congolese fisherwomen who used to take fish to the market, only to sometimes watch their catch spoil, now leave their fish in the water and wait for calls from customers.

News organizations will find themselves out of the breaking-news business, as it becomes impossible to keep up with the real-time nature of information sources like Twitter.

"Every future generation will be able to produce and consume more information than the previous one and people will have little patience or use for media that cannot keep up," the authors say.

"News organizations will remain an important and integral part of society in a number of ways, but many outlets will not survive in their current form -- and those that do survive will have adjusted their goals, methods and organizational structure to meet the changing demands of the new global public."

Online "cloud" data storage will continue to emerge as the norm, and that's going to radically change how we view privacy.

"The possibility that one's personal content will be published and become known one day -- either by mistake or through criminal interference -- will always exist. People will be held responsible for their virtual associations, past and present, which raises the risk for nearly everyone since people's online networks tend to be larger and more diffuse than their physical ones," they write.

"Since information wants to be free, don't write anything down you don't want read back to you in court or printed on the front page of a newspaper, as the saying goes. In the future, this adage will broaden to include not just what you say and write, but the websites you visit, who you include in your online network, what you 'like,' and what others who are connected to you say and share."

As the Web expands, revolutions will begin springing up in nations with oppressive governments "more casually and more often than at any other time in history."

"With new access to virtual space and to its technologies, populations and groups all around the world will seize their moment, addressing long-held grievances or new concerns with tenacity and conviction. Many leading these charges will be young, not just because so many of the countries coming online have incredibly young populations ... but also because the mix of activism and arrogance in young people is universal."

More people will use technology for terror. But a Web presence will make those terrorists easier to find, too.

"Many of the populations coming online in the next decade are very young and live in restive areas, with limited economic opportunities and long histories of internal and external strife. ... Terrorism, of course, will never disappear, and it will continue to have a destructive impact," the authors write.

"But as the terrorists of the future are forced to live in both the physical and the virtual world, their model of secrecy and discretion will suffer. There will be more digital eyes watching, more recorded interactions, and, as careful as even the most sophisticated terrorists are, even they cannot completely hide online."