Sudip Bandyopadhyay’s Blog

“Globality is not a new and different term for globalization. It’s the name for a new and different global reality in which we’ll be competing with everyone, from everywhere, for everything — mentions Harold L Sirkin, James W Hemerling and Arindam K Bhattacharya in their new and interesting book “Globality”.  This book from three Boston Consulting Group (BCG) consultants suggests that the future of competition is far more complicated and unpredictable. Ever since Goldman Sachs published its famous BRIC report, the conventional way of viewing the future of global competition has been to track what Brazil, Russia, India and China are doing.  This notion seems to fit in well with Thomas Friedman’s popular book ‘The World is Flat’ that made the narrow point that global dominance is no longer the prerogative of the West.  Companies in the BRIC countries may certainly be emerging strong contenders to the hegemony of western multinationals, but they’re not the only ones.  Whether it’s Mexico, Egypt, Hungary or Chile, potential world-beating corporations, their research shows that the spread of globalization has meant that competition can emerge from pretty much anywhere.  This is being called “globality” .  These “challenger” corporations, as the authors call them, are in a wide variety of industries, from the conventional, steel, textiles, mining, telecom, consumer electronics to the less common pianos, baby strollers, cosmetics, paper packaging.  As importantly, these companies are not, as commonly believed, only cost warriors cashing in on the China model of offering enormous economies of scale. They are also essentially learning corporations innovating and experimenting at a breakneck pace – and they are not afraid to fail.  This means that they have learnt to leverage their advantages of which cost is undoubtedly a part - innovatively and with devastating effectiveness.

India is uniquely positioned to benefit from this globality.  The huge educated manpower India possess can be a source for world beating innovations.  The culture of investing in developmental activities and in newer and newer technologies need to be continuously nurtured by the government and the private sector for harnessing this potential.  Investment spending has been a very significant contributor to India’s recent growth performance. The share of investment in gross domestic product (GDP) has risen steadily over the past few years, reaching a peak of about 28 per cent last year.  As the recently released advance estimates for the first quarter of the current year indicate, even as the GDP growth rate has slowed appreciably, investment remains at around 35 per cent of GDP.  From a macroeconomic perspective, the value of investment spending is two-fold.  In the short term, it helps increase demand for goods and services.  Over a longer period, it enhances the productive capacity of the economy, thus laying the foundations for sustained growth.  The fact that investment has remained relatively buoyant in the face of slowing growth and high inflation says something about the confidence of producers as far as long term business prospects are concerned.

Markets ended last week in the negative territory on sustained FII selling and the sharp spike witnessed in the depreciation of the rupee against the dollar battered the sentiment badly. In the early part of the week, the Nuclear Power deal getting cleared, saw the markets spurt by a gap up opening on Monday, but this upward market momentum was not maintained after witnessing huge FII stock unloading in front line counters throughout the week. Globally the US markets continued to remain in negative territory on reports that some more financial intermediaries including large investment banks were facing rising credit risks and some would provide for higher write offs soon. The biggest negative surprise came from the sharp rupee depreciation which breached the  Rs 45 level touching Rs 45.75 to a dollar, which is the lowest ever during the last 2 years. Added to this the FII’s were continuous net sellers in the week and sold stocks worth $ 612 mn which resulted in a big dollar demand putting more pressure on the rupee. Some large FIIs were seen selling to raise cash levels on their entire equity portfolio positions. This was also one of the main reasons one saw a sharp price correction in market heavy weights during the week which contributed significantly to the fall in indices.

On the positive side, both crude oil prices and inflation numbers continued to be on a downward trend. Inflation numbers during the week were lower at 12.10% from 12.34% previously with crude oil prices also correcting sharply to around 105 $ a barrel with India’s average oil basket price also moving below 100$ a barrel. More importantly although the OPEC meet at Vienna did not reach any conclusive agreement on cutting production levels, it however expressed concern on rising oil prices which had impacted consumption levels significantly.  On the domestic macro front, IIP growth numbers during July 08 were higher at 7.10% against 5.4% in June 08 and ahead of market consensus expectations of 6.5%. A major reason for the improved numbers was a good show from the Capital goods segment which saw output being higher by 21.9% as against 12.3% YoY, with the Consumer goods and the Mining sector growing by 7.3% and 5% respectively as compared to 7.1% and 3.2% YoY respectively.

Interestingly the FII sell off and the rupee depreciation saw a huge sell off in frontline counters which pulled down the market indices. However a major part of the FII selling was seen on the cash side and not on the F & O segment indicating that this was some sort of panic selling resorted by some FIIs in large cap-stocks. The crucial factor which would decide the market trend ahead is the extent of fresh FII selling, as this factor dominated last week entirely overlooking the positive IIP and Inflation numbers. With the F & O market segment not witnessing any dramatic increase or decline in open market positions and a comfortable put call ratio of one, it seems that once the FII sell off ends, the markets could witness a sharp bounce back as the supply of fresh stocks gets plugged. The present market conditions offer a good value buying opportunity for long term investors .

( ** this is the transcript of the weekly column I write for Economic Times )