The troubles in Greece, Spain, Portugal, Ireland, have forced these countries to refocus their priorities. On the other hand, so-called successful economies like Brazil, India and China may have to pay, perhaps very soon, for lop-sided growth
Investors don't like trouble. Instinctively, like vast herds of wildebeest running across the Serengeti Plain, investors will also often stampede away from assets, markets, and countries that are having problems. Although it often sounds both prudent and cautious to follow the herd, over time it may be a bad idea.
Recently, investors have been savaging the so-called peripheral countries of the euro zone. For one reason or another, countries' sovereign debts have been considered very risky, at least by the default swap markets. Certainly if you look at some of the numbers this appears to be true. However, it might also be prudent to think of something else.
As the American White House Chief of Staff, Rahm Emanuel, said, "You never let a serious crisis go to waste." What he meant was that crises, especially the ones forced on countries or companies by the market, create a climate where reform goes from should to must. The greatest contribution that the market can make to efficiency, and ultimately economic growth, is discipline. And market discipline is never as effective as during periods of economic stress.
One of the most economically stressed countries has been Greece. Prior to the recent economic crisis, the Greek economy benefited broadly from its membership in the European Union and the euro. It allowed the Greeks to borrow at lower rates without the requirement of fiscal prudence. But it was not simple profligacy that brought the Greeks down. Their monetary problems stemmed from an economically inefficient legal infrastructure.
The Greek regulatory environment is a major detriment to growth. The economy is filled with inefficient state-owned industries that were a heavy burden on both the economy and Greek taxpayers. Its tax system is complex and compliance was a bad joke. There are substantial barriers to entrepreneurship and the labour system fails to align wages with productivity.
Before the crisis, reform of all these barriers to economic growth seemed politically impossible. But the cost of international help required that the reforms proceed. The resulting strikes and riots were evidence that the political fears were justified. Nevertheless, the reforms have gone forward and they will increase Greece's productive potential and economic growth whether it remains within the euro zone or not.
Spain is another country that has recently been a victim of the markets. Like Greece, Spain suffers from inefficiencies within its legal infrastructure. One of the most severe problems is a two-tiered labour system. Centralised, compulsively collective bargaining agreements, indexing of wages and protection for permanent employment worked exceptionally well for those people with jobs, especially those within the civil service. But the system discouraged new hires and so discriminated against the young. The result is an unemployment rate stuck at over 20%.
Earlier this year, Spain's prime minister initially refused to attempt any reform and steadfastly maintained that Spain was not Greece. The recent troubles with the Irish banks and Portuguese sovereign debt have happily refocused his priorities. If market pressure continues, the result will be real reform followed by real growth.
In contrast to the problems of developing countries, economic growth in emerging markets seems positively stellar. The economies of Brazil, India and China were almost untouched by the global recession. They are all now growing at an impressive rate. This is a problem. Over the past two decades all three countries have undergone extensive and often painful reforms of their regulatory systems. The fruits of these reforms are evident in their more recent economic growth and resiliency. Sadly, their success has led them to rest on their laurels.
In Brazil, economic growth has created a new middle class intent on using credit to purchase imported consumer products whose price has been lowered by the strong real. The result has been a deficit and inflation. Since there has been little need, the Brazilian government has not dealt with its tangled bureaucracy, inefficient tax system and poor infrastructure.
The booming Indian economy and the stronger rupee have also pulled in more imports than exports. This trade deficit is being filled by short-term capital. Like Brazil this could easily lead to a disastrous balance of payment crisis.
China's growth has led to a new assertiveness which is based on the false conclusion that their market-controlled economy functions far better than a market system. The optimism and exuberance masks massive problems with their financial system, real estate market and mercantilist export strategies.
In time, perhaps very soon, the markets of China, India and Brazil may have to pay for their success. In contrast, the productivity forced upon Greece by the markets will no doubt reap rich dividends. What investors need to understand is that investment in regulatory reform during a crisis is a signal to change direction and run away from seeming success toward apparent failure.
The local market witnessed a lacklustre performance in the week ended 10th December on the back of a huge sell-off in the broader markets. However, the announcement of better industrial output numbers for October, on the last trading day of the week, provided some relief and helped the indices pare some of their losses.
Investors will keep a watch until the Sensex crosses the 20,000-mark to make any big moves. The wholesale price index based inflation for the month of November will be announced early next week, providing some direction to the market on that particular day.
The market opened the week flat, as the indices after having crossed their crucial levels in noon trade, could not sustain the gains. A sell-off in select blue-chip stocks kept the market under pressure on Tuesday, forcing a close with a marginal loss in a generally choppy session.
A sell-off in the broader markets on Wednesday, after a news report that intelligence agencies are looking at price-rigging in select stocks, pulled the indices lower at the end of the session. The broader markets were thrashed for a fifth successive day on Thursday on offloading by institutional investors. The losses widened in the post-noon session, sending the indices further southwards. But on Friday, the domestic market made a good comeback, recovering over half the losses it had suffered in the previous trading session. Gains by select blue-chips and stocks in the broader markets supported the rally.
The market ended the week with a loss of 2% with the Sensex declining 458.04 points and the Nifty falling by 135.45 points.
The top Sensex gainers during the week included Wipro (up 5%), NTPC (up 4%), BHEL (up 3%), Jindal Steel & Power and Reliance Industries (up 2% each). The major losers were State Bank of India (down 11%), Reliance Communications (down 10%), DLF (down 8%), HDFC Bank and Reliance Infrastructure (down 7% each)..
BSE Oil & Gas (up 1%) was the only notable gainer in the sectoral space while the BSE IT index ended flat. BSE Bankex (down 8%) and BSE Realty (down 7%) were the top sectoral losers during the week.
India's industrial output soared by 10.8% in October. Robust demand for automobiles, electronic goods and power equipment spurred the growth in factory output, which encouraged finance minister Pranab Mukherjee to exude optimism that industrial output growth would be in the double-digits on an annual basis as well.
The Index of Industrial Production (IIP) had registered a slowdown in the previous two months and was at a sluggish 4.4% in September 2010, after surging by 15% in July.
Food inflation rose again, albeit marginally, to 8.69% for the week ended 27th November from 8.60% in the previous week, which was the lowest since May last year. The upward trend in food inflation also marked a break of seven consecutive weeks of a fall in food prices.
After four consecutive record-setting months, vehicle sales in the country slowed down in November, growing by 17.81% as against 45.93% growth registered in October on a year-on-year basis.
According to Society of Indian Automobile Manufacturers (SIAM), the total number of vehicles sold in the country stood at 12,21,981 units in November this year as against 10,37,232 units in the corresponding month last year. The industry body expects lower sales in December from that in November.
State-owned oil companies are likely to raise petrol prices by Rs1.50-Rs2 per litre early next week, while a Rs2 per litre hike in diesel rates is under government consideration, according to a senior government official. A hike in diesel prices looks imminent as crude oil prices have inched closer to $90 per barrel, widening the gap between domestic retail rates and the import cost.
India's exports in November rose by 26.8% to $18.9 billion year-on-year. Imports also grew by 11.2% in November to $27.8 billion. The trade balance in the month was $8.9 billion. The increase in exports prompted the government to exude confidence that outbound shipments will touch $215 billion this fiscal.
India's foreign exchange reserves grew by $2.41 billion during the week ended 3rd December to $296.40 billion after two consecutive weeks of decline, the latest Reserve Bank of India (RBI) data showed. In contrast, the country's forex reserves stood at $293.98 billion at the end of the previous week. Foreign currency assets, a major component of India's forex kitty, rose by $1.98 billion to $267.23 billion during the week ended 3rd December.
In international news, China's inflation accelerated at the fastest pace in 28 months in November, beating analysts' forecasts. Consumer prices rose 5.1% from a year earlier, driven by food costs, a statistics bureau report showed on Saturday. In October, inflation was 4.4%. Meanwhile, on Friday, the People's Bank of China-the country's central bank-hiked the Reserve Requirement Ratio by 50 basis points. The revision will come into effect from 20th December.
Everybody has all but assumed that SEBI chief CB Bhave is not getting an extension. Will they be surprised?