Climate change

The year of scanty monsoon to incessant out-of-season rains and thrifty giveaways giving way to generous public payout

By Mohan Sule

It took many years of persuasion, prevarication and procrastination for the world to realize the dangers climate change posed for the survival of the human race. But, for India, 2015 was a year of sudden transformation, of paradoxes and contrasts. It took just days for the crescendo of infallibility and invincibility to crash into a pit of despair and dejection. If the high point was the feeling of smugness to see the world’s most powerful man braving smog and a drizzle to catch the Republic Day parade in the capital, the low point was the bounce-back into the political arena of a crusader from bureaucracy, one of the three strands choking the common man in their tentacles of quid pro quo. Not surprisingly, the market, too, took no time to come back to reality after reaching the zenith as the euphoria of India finally cutting the umbilical cord of giveaways to farmers and friendly capitalists got punctured by the second consecutive deficient southwest monsoon. Ironically, it poured and how in some coastal belts even as many parched states continued their tryst with famine and farmers’ suicides. The trepidation in waiting for the most powerful woman on earth to act outdid the plot line of a Hitchcock movie in its twisted suspense even as foreign equity and debt investors suffered a spell of vertigo. Nonetheless, foreign direct investment made a beeline on spotting of opportunities in insurance and defense and Make in India even as China collapsed under the weight of excess capacities and unbridled speculation in the primary market. If there was unanimity on the cause — excessive leverage — of the euro region’s recession, there was no such agreement on why India’s growth engine had lost steam. The reasons ranged from those with substance (the slow pace of reforms) to bogus (failure to build consensus with a recalcitrant opposition focused single-mindedly on stalling legislation to trip the economy).

The confusion was evident elsewhere, too. The ghost of Hamlet haunted the Fed as it wrestled with the dilemma to raise rates or not to without upending the emerging markets and so also our own central banker: tame food inflation or boost industrial output. Banks, though, shrugged off the benevolence, obsessed as they were in cleaning up their balance sheets, marked with years of generosity to customers with closeness to the movers and shakers as collateral. Squeezing margins, falling demand and spiralling food prices were not the ingredients to boost the spirits, despite plunging commodity prices proving to be a silver lining. The promise of operational autonomy in lending was as enchanting as a rainbow. In fact, the hard times exposed the unpalatable underbelly. In spite of rapid urbanization, villages held the key to savings and consumption. No wonder, financial inclusion became a buzzword, with attractive acronyms coined to capture the essence. Transfer of subsidy benefit and deduction of pension and accident cover premium were believed to be the recipe to bite into the banking habit. A welcome sign was the thrift on display, ranging from selling natural resources through bidding to reluctance in waiving loans and ramping up a minimal the minimum support price for crops. Yet, there was splash of indulgence. The hefty increments recommended by pay commissions transformed government and PSUs as sought-after employers as evident from the clamor to expand reservation quotas.

The Bihar polls demonstrated that getting the mathematics of caste and community equation right mattered more than the combustible composition of a corruption-free society. If the results underlined the limits of brand power and the downside of brand dilution, they also reinforced the adage of what it means to win the battle but to lose the war. It was triumph of parochialism (Bihari v Bahari), viewed as a legitimate concern when practiced by one set of players but not by others (presidential campaign in the US). Hypocrisy was perhaps the most enduring takeout of the year. For the sullen opposition, the idea of pulling India by the bootstraps came to imply sabka saath, ek family ka vikas. The indefatigable salesman, logging flier miles to make friends for India, was ridiculed for being an NRI and enthralling a constituency that was not going to vote. A 56-day sabbatical to mysterious lands, however, was considered necessary for reinvention and rejuvenation. Unwittingly, the argument exposed the chinks in the intolerant debate. The existential fear stemmed from the attack on holy cows of cronyism and appeasement of entrenched interests and the emergence of voices that were hitherto suppressed. There was shock and awe that many might actually like and share a new growth trajectory based on market intervention rather than the state-knows-best trickle-down economics. The climate in India surely underwent a change in 2015.

Factoring in the Fed

Increase in interest rates by the US central bank will eliminate uncertainty and correct stock prices that have outpaced earnings

by Mohan Sule

The question is not if but when. After seven years of keeping interest rates near zero, the US Federal Reserve is preparing to gradually ramp up the cost of money. Inflation is moving up, house prices hardening and jobless claims falling. So there is every chance that the US central bank might muster courage and take the plunge. The possibility of such an eventuality has been in circulation even before its October meet, when it put off the decision. The blowout in China and the recession-like conditions in the euro region weighed on just as the fragility of the US economic recovery, spurring speculation that the Fed might even postpone the rate hike to 2016. The uncertainty about its moves seems to be tapering, with near 80% of international money managers in a recent poll ascertaining that December might be the month signalling a U-turn of the monetary policy. Yet, going by past experience, the bounce-back of the domestic economy might not be the only factor to contribute to such a reversal in stance. The poor health of the euro region and Japan along with volatility in the emerging markets in anticipation of such a step is likely to be factored in. Besides, a sudden rush of fund inflows from different corners of the globe has the potential to fuel inflation faster than that might be desired by the Fed. The already strong dollar will become mightier still, jeopardizing American exports. The result will be the reverse of what happened pre-global financial crisis: cheap dollars and yen flooded emerging markets in search of better yields. The fear of formation of asset bubbles forced central banks of these countries to ramp up interest rates, thereby disturbing the equilibrium necessary for long-term money to flow around the globe smoothly.

Despite apprehensions about the potential of the undercurrents to capsize the emerging markets’ currencies, the increase in US interest rates will be a welcome development for many reasons. First, it will be an unambiguous affirmation about the recovery of the US. Second, a booming America has the force to pull China’s and other emerging markets out of the rut. Before China became the pivot to the world, the global economy was US-centric. The country was the largest exporter and importer. The double-digit growth of the mainland was mainly due to American businesses’ quest to keep prices of output low. This was done by shifting manufacturing to China and back-office services to India. With domestic consumption low due to high savings, China suffered as the US went into a tailspin after the credit crunch. Third, tech companies have emerged as one of the significant sources of foreign exchange earnings. A weak rupee will be an attractive proposition for US clients while placing orders, propelling the sector’s growth and hiring. Fourth, the domino effect will increase China’s consumption of commodities, helping economies of metal and oil producers such as Brazil and Russia to recover from the slump. The euro region, whose health is increasingly linked to that of China, will be able to rapidly climb out of recession. Fifth, dumping of China’s cheap goods into India and other emerging economies will slow down, boosting domestic producers. Local sourcing will be important for infrastructure spending. In the process, commodity prices will not remain untouched. Blunting the implications of a ballooning import bill will be robust exports.

Oil producers have kept their output intact despite declining prices to neutralize the threat from shale gas. With this mind, it is unlikely that they will take advantage of increasing consumption to ramp up prices to unrealistic levels to profit from the situation. For one, it will provide support to the comatose US shale gas industry. Second, the global economy could once again slide into recession. The response of the stock markets in emerging market is not expected to be dramatic. Many have factored in the imminent increase in US rates. Corporate India’s earnings have not kept pace with prices and further correction, if any, due to acceleration in foreign fund outflows will provide an opportunity to enter quality stocks at reasonable valuations. IPO pricing, too, will get moderated, leaving scope for appreciation post listing as local big-ticket and small investors are more finicky about getting big bang for their bucks. Importantly, domestic institutions are buying even at the current level, spotting growth potential going ahead and perhaps in the belief that any decline from the current level might be short-lived. Against this backdrop, investors should hope that the Fed begins its course correction sooner than later.

Safe and sound

The response to recent IPOs indicates that optimism about the future overwhelms the affirmative steps by the regulator

By Mohan Sule

The importance of foreign investors in the capital markets has been drilled into Indian investors’ collective conscience. Their presence in a stock is taken as a stamp of confidence in the corporate governance practices and outlook. They are known to prefer companies with liquidity on the trading floor. However, there is a downside, too. Just as they enter a stock with a big bang, their exit can play havoc with the valuations. Their departure is not necessarily linked to domestic issues and is often influenced by global events over which the local government and companies have no sway. Many of the foreign investors in India are pension funds or insurance companies, which can take exposure only to counters that meet the parameters laid out in their investment objectives. Most of them buy only index constituents. Many select scrips that are available in the derivatives segment so as to hedge their cash market positions. As a result, the price earnings ratios of quality stocks spurt so as to go beyond the reach of the ordinary investor. Deserving mid caps capable of delivering stupendous capital gains are ignored either due to the modest outstanding shares or because of the inability of these investors to breach their mandates. To ensure that the inflows of foreign funds are spread out across the board, it is necessary that companies expand their capital. An economic climate that holds the promise of increase in consumption can embolden enterprises to undertake fund-raising. It is at a delicate juncture when the economy is at the crossroads of bottoming out and bouncing back that the vacuum of retail investors is realized.


As small investors take small bites, the advance in prices might not be as sharp but then volatility is also low. Many of them hold their investments for several years and are happy with regular dividend payment, allowing companies the flexibility to plan for the long term without being bogged down by quarterly targets. Also, decisions are based on domestic considerations and company-specific events rather than second guessing the actions of the central banks around the world. Despite the global financial turmoil post 2008 liquidity crunch, China’s equity market did not panic like other emerging markets with large foreign institutional presence as retail investors constitute a majority of the investing community. It is not that our policy makers are not aware of the positive impact of the small investors on the equity market. Market regulator Securities and Exchange Board of India keeps on tinkering with guidelines to address the problems faced by the marginalized investors. These have included recalibrating the proportionate allotment of shares, increasing retail quotas, discount on the offer price, shorter listing period, debiting of subscription only on allotment, ban on withdrawal of bids by institutional investors, buyback of new shares by promoters and increasing the investment limit. There is also a move to direct companies to declare their dividend policies. Yet the revisions in various regulations were not followed by a spurt in retail participation.

There is a point up to which a safety net can work. Investors want transparency from companies and swift and visible penal action against errant promoters from Sebi. At the same time, it is wrong to create an environment that encourages small investors to believe that there are no risks and only gains. Mutual funds, unfortunately, unleashed this sort of hype and eventually became victims of investor disillusionment. There are already murmurs about the poor returns generated by equity schemes over the past year. Debt funds, too, have betrayed the trust by investing in low-quality, high-yielding paper to prop up NAVs. The response to two recent IPOs from the services sector indicates that investors know a value proposition. Both were richly priced. One flopped on listing as the scope for a high-end outlet was seen limited despite the rapid urbanization. At the same time, the premise that there is an untapped market waiting to be connected cost-effectively saw demand outstripping supply on the debut of the second stock. The conclusion is that, apart from a secure atmosphere being a basic requirement, optimism about the direction of the company going ahead is more important. If retail investors do not come into the market in droves, the fault is not because Sebi is lacking the will to enforce discipline. Confidence in the economy at large and the role of the issuer in the scheme of things are the pivots. The market is willing to pay a premium to companies that have survived and prospered even in tough times. That explains why some stocks fly high and some get grounded.