Running with the hare

The volatile markets need not scare off investors. Hunt for takeover targets instead

With the world becoming increasingly fragmented, the focus of each bloc has narrowed to its survival. For the US, the problem is making available easy credit to boost employment. Bailouts and belt tightening are occupying policy makers in the euro zone. The emerging markets are grappling with the problem of excessive foreign portfolio investment. Yet, writing off the bond that ties the global economy would be premature. Though all these events appear unconnected, they are interlinked. The recession following the drying up of credit and the resultant fall in interest rates in the developed world directed investors to high growth areas of the developing world. If at all there is disconnect, it is in the pace of bounce-back of different pockets. Emerging economies’ ability to be up and about quickly was because of their low demand base of the earlier years. Nonetheless, this recovery could happen because of fiscal stimulus and liquidity injections even by countries with huge domestic markets as their economies require the fuel of foreign capital. The dollar inflow has put growth back on track but also brought with it problems of inflation and asset bubbles even as the export markets of this group are struggling with unemployment and implementing austerity measures. The moot question now is if the money tightening policies undertaken by China and India and ceilings and taxes on capital inflow by some other emerging markets will achieve the intended results: moderating the flow of liquidity and at the same time meeting the demand for capital to boost growth. The fallout could be alternate bouts of slowdown and brisk expansion.

The formation of islands of brightness and blackouts has complicated the task of investors. When the world was flat, choosing an investment option was much easier. Increase in industrial growth was reflected in the stock markets. Oil would heat up, stoking inflation. The central bank would promptly tighten money supply and make credit expensive. Investors liquidated stocks and diverted funds into fixed income instruments or gold. Eventually the market would cool down and become attractive to investors. This simple arithmetic has gone for a toss following the Great Recession in the developed economies. The instrument of interest rates to blunt inflation has lost its sharpness. The result is opposite: any increase creates arbitrage opportunities for investors in low yield regions. Let alone discourage inflows, higher rates attract hot money, further pushing up asset prices and thereby defeating the purpose of making money dearer. The upward curve of gold is another instance of how traditional behavior of economic cycles has skewed: bullion is seen as a cover for inflation and the subsequent bearish period and also to park funds from profit booking during a bull run to hedge against an obscure future. The cyclical lifespan of commodities, too, has been disrupted. Oil crossed $100 a barrel during the latter stage of the 2003-07 global bull run and it is once again poised to repeat the feat even as major industrial consumers — the US, Europe and Japan — are yet to fully recover from recession and the emerging economies are gearing up to temper their growth rates.

In this complex landscape, there is one silver lining for domestic investors: the increasing tempo of mergers and acquisitions as companies cope with growing uncertainty in global economy. Here, too, the picture is mix. Till recently, only cash-rich companies, particularly IT and, of late, commodities and automobiles, were aggressively expanding their markets and securing raw material sources by looking at acquisitions. Now even cash-strapped companies are in the fray, open to acquiring debt in the bargain. The pharmaceutical sector is cashing out while the going is good. The telecoms sector besides the financial services sector are considered the next battlegrounds for consolidation. Players in both operate in crowded fields in the throes of change. Telecoms is an emerging sector and the transformation has been quick though sometimes brutal. The banking sector, being handled with lot of care and caution, too is evolving as policy makers are veering towards the view that a few banks with global scale would be preferable to dispersed presence of hundreds of small players. This calls for fine-tuning of investment strategy by including another category: takeover candidates. These could be small — and even loss-making — players with marginal or niche presence or runner-ups with substantial share in the sector but not occupying leadership position. In fact, betting on leaders could prove counter-productive as they bloat their balance sheet to swoop on targets. The more volatile the markets become, more would be opportunities to spot preys trying to stay afloat in these turbulent times.

Mohan Sule

Lost in lobbying

Focus on the telecoms licenses scam needs to shift to how reforms in the interest of investors are being stalled

If 2010 ended on a note of cynicism, 2011 will be the year of uncertainty for investors, with global markets being pulled by divergent forces instead of acting in concert as at the beginning of the last bull-run. Disappointment with all the four pillars of our constitution — executive, legislature, judiciary and the fourth estate — will provoke investors to ask: Who is the last man standing? The anger over the whos and whats and whys of phone tapping, cronyism in awarding spectrum, bribes for loans, and rigging of stock prices will eventually dissolve into hurt and acceptance, the three classical stages undergone by typical trauma survivors. Hopefully, this should result in some soul-searching: Is our outrage fake? In ancient Rome, the emperors conducted gladiator spectacles as diversions for the pent-up frustration of their bored and disgruntled subjects. The history of pre World War II is full of instances of fascist rulers creating hate objects to take the blame for their nations’ misery. Our voyeuristic pleasure is not satiated with being privy to rhetorical chatter that could be thrown out of any respectable court if presented as evidence of the crime. It extends to deriving satisfaction from seeing on primetime television a glum Niira Radia and a defiant A Raja emerging from CBI grilling. In our self-righteous smugness, we brush aside concerns on the discretionary power of eavesdropping. We tend to ignore the plain fact that most of the parties in India are one-man/one-woman/one-family shows and allotment of ministries is the result of hard bargaining for their potential to generate revenue not for the economy but for the party to fight elections. Appointment of specific individuals to these posts vests with the head of the party.

We suppress suspicion that the dissemination of selected tapes could be an extension of the turf war between powerful industrialists to carve out the Indian economy as their fiefdoms. In the pre reforms period, these skirmishes were restricted to the corridors of North Block. Today, the stakes are much more higher, particularly in the emerging sectors, which present a first-mover advantage. The battle is not only to win the bidding round but for public perception. The high cost of entry is recovered from investors with richly priced IPOs and in the case of the real estate sector with bubble prices. Till a few years ago, reasonably priced IPOs were considered as means to gain an exposure to coveted companies. No longer. The investment horizon has shrunk not to a few months, but to the day of listing. To subscribe or go short on the debuting stock is based not on assumptions of forward earning but on subscription trends, grey market buzz and borrowings from organized and unorganised channels. Sebi has tried to bring about some order by tweaking rules for institutional investors, responsible for creating hype through inflated applications, by insisting on upfront payment. Another set of institutional investors too was disciplined: mutual funds, which, along with insurance companies, should top any ranking of mis-sellers of financial products. Entry loads were banned as well as commission to distributors and floating of new funds similar to those already in their basket of products frowned upon.

Leave alone being supportive of some of these investor-friendly actions, outgoing chairman C B Bhave has been demonized for not accommoding issuers and intermediates. Instead of giving him credit for spurring the overhaul of Ulips, the government’s decision to vest their supervision with Irda has been painted as a snub to him. Influential investment bankers have stalled another reform that tries to level the field for retail investors: a revised takeover code that mandates an open offer to all the minority shareholders instead of capping it at 20% on the specious plea that this step would favour moneybag multinationals. So a measure that would have unlocked value for investors is stuck. Other instances of lobbying derailing investors’ interest is the stalemate over decontrol of the sugar and retail sectors and the watering down of the Direct Taxes Code. All this raises the question: is the uproar over lobbying restricted to those who are caught in the act and are merely representatives (lobbyists or ministers) of those (companies and party chiefs) who deploy them? How is the work done by PR consultants different from that of industry bodies Nasscom, Assocham, Ficci and CII? The New Year is likely to present investors with many such contradictory choices as the government would be tempted to boost earmarks for welfare schemes, widening the fiscal deficit and draining liquidity by its market borrowings. The bill would eventually be passed on to the taxpayers (higher taxes) and investors (higher interest rates). Don’t be surprised if there are more installments of leaks of pitter-patter of irrelevant players to keep investors hooked.