Sudip Bandyopadhyay’s Blog

In his recently released book  “The World is Curved – Hidden Dangers to the Global Economy” Mr. David M. Smick, the Editor and Founder of International Economy Magazine, focuses on international capital flows & says,  “Forget decoupling; the world is intimately connected”.  The title is a reference to Thomas Friedman’s 2005 bestseller The World is Flat.  Friedman’s book focused on the “real” economy, where globalization has reduced distances and countries have become less important; all is footloose and border-free.  Smick sees his book as its counterpart, dealing with the globalisation of finance.  He thinks this has been a good thing; world growth has never been stronger.  But it also means that failures in one place can trigger avalanches on the other side of the globe.  This is what the “curve” of the title refers to; whereas Friedman’s world is a level playing field, Smick’s has a horizon beyond which we cannot see.  Smick veers towards Naseem Taleb’s “ Black Swan” theory of the unprecedented and the unpredictable happening and changing the world forever.  Events as well as ideas shape policy choices in democracies.  Who would have predicted a year ago that a Republican administration would demand that Congress make the largest set of investments in public companies in US peace-time history?  Would anyone have supposed that President George W. Bush would convene a global effort to renew Bretton Woods through strengthened international financial regulation?  It reminds us that in the economic sphere, as in the national security sphere, dramatic events can make the inconceivable become inevitable. The unprecedented creates space to address longer standing problems.  Just as patients hear advice regarding diet and exercise differently after a heart attack, so recent events should make it possible for the financial administration to accomplish more than what previously have been thought possible.  These broader goals aim at achieving the rapid and sustained growth that restores business confidence and generates the resources for investment.

Benjamin Graham suggested during the worst days of 1930 that Investors should look at “Value Investing” rather than attempt to time the market.  Investors should look at what exactly a company is worth and how much it would be worth in the worst case scenario.  One has to look at the Company’s assets, liabilities and its ability to produce cash. If the company is so cheap that its value would scarcely  be less if it were to go out of business,  there is a  Margin of Safety.  Thus, if a company looks cheap compared to the referred conservative forecast, it would be worth investing and creating a asymmetric bet.  If the market has mis-priced the company, the investor will make lot of money.  The similarities with what Benjamin Graham said in 1930 and current market conditions are striking visible.  We should not try to work out how long the market will take to recover or when it will hit the bottom – that task is impossible.  We should use basic balance sheet method to work out how much a stock is worth and how much it would be worth in the worst case scenario.  If that calculation leads us with a Margin of Safety, we should buy it.In a recent article in the New York Times, Warren Buffet suggested it was the time to buy equities despite uncertain times ahead.  In the summer of 1932, he pointed out, stocks started rising long before economic activity picked up.  In truth, equities almost always lead the economy out of recession.

The Indian government is proactively taking steps to ensure growth & stability. This involves creating ample rupee liquidity, ample dollar liquidity and ensuring that the currency derivatives offer opportunities to remove currency mis-matches. In the medium term Capital controls need to be removed in a phased manner so that more foreign capital can come into the country and assist firms.  The most important counter-cyclical lever that the Indian government controls is economic reforms. If India makes a break with the recent years, and embarks on economic reform accelerates, private sector both domestic and international will have the best reason to invest in India.  Remember that during the slowdown, 1997-2002, structural reforms had happened and that was the reason the economy took off when the cycle turned.  The same policies followed now, coupled with system-supporting policies when required, can make India a fine place to invest — never mind the Sensex and the Nifty today.

Indian markets witnessed a sharp bounce back during last week largely fuelled by improving global market scenario and aggressive ‘bargain’ buying by domestic institutions.  On the domestic macro front both inflation level and crude oil prices have witnessed healthy fall which augurs well for the Indian economy. Inflation has now declined to 10.68% and has witnessed a 100 bps drop during the last three weeks since end Sept 08.  The fall in inflation levels is definitely a positive sign and clearly provides a strong case for a interest rate cut which the markets are now keenly awaiting.  Also central banks across US and Asia announced interest rate cuts in a bid to reduce borrowing costs and infuse more liquidity to stimulate growth. The Fed lowered its benchmark interest rate by 50 bps, to 1% which is the second big rate cut this month. Also both China and South Korea reduced its one year benchmark lending rates to 6.66% down by 27bps and by 75 bps to 4.25% respectively to help support economic growth.

During last few weeks, the Finance Ministry, RBI and SEBI has taken multiple steps in different directions to increaseliquidity and create positive vibes for the market.  Steps like allowing promoters to increase holdings upto 75% through creeping acquisition route has improved the market sentiments.  Last Friday’s cabinet decision to increase FDI limit in Insurance companies is also very positive. The return of the FII buying on Friday was a very clear indication that Indian Capital markets are attractive at current levels for medium – long term investments.

The market players are drawing confidence from the fact that the Economic Administration of the country is taking all necessary steps to improve sentiments and support orderly growth of the market.  This reassurance should put the market back on a growth trajectory.

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