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
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