Morgan Stanley has cited the TINA factor, or “There Is No Alternative” as one of the reasons why India could do very well next year
Morgan Stanley has argued in one of their recent reports that the Indian stock market is likely to perform well in 2013 as it remains the most attractive relative to other countries. In other words, while the Indian economy is in doldrums it remains more attractive than the United States and European Union as the last two undergo economic upheaval, and this is the reason why investors and foreign institution investors (FIIs) pour easy money into India. Morgan Stanley calls this the “TINA” factor or “There Is No Alternative”. It also said, “Our top-down forecast is higher than the consensus, putting earnings in an even better light”.
Since India is relatively better off than the rest of the world, Morgan Stanley cites Indian stock markets as an attractive destination even if there are plenty of headwinds as far as Indian economic fundamentals are concerned. It said, “Global investors argue that India is a place where they would like to put money to work because the other options do not seem attractive enough”. This is a peculiar approach because if nothing is attractive, investors wouldn’t investors be better off waiting and watching.
Despite this, it believes the Indian stock market offers good opportunities in terms of diversification and stock picking because it believes its corporate fundamentals seem more “stable”. Consider the chart below:
As you can see, Indian companies are at the top because they exhibit steady growth in earnings, without too much variation. Even the coefficient of variation is low which implies that earnings growth between all the companies across the years is not that widely dispersed. India has the lowest standard deviation of EPS growth at 13%, while US it is nearly three times volatile. Even India’s growth rate since 2001 trumps that of US as well as developed markets as a whole. This is one reason why global investors would prefer stable Indian shores rather than foreign ones. The report said, “Over time, not only has earnings growth been comparable with that of the rest of the world, but the earnings stream has also exhibited markedly lower volatility.”
Apart from this India’s recent performance, which has been one of the best performing stock markets YTD, has caught the eye of investors worldwide. This means more investors are keen and keeping an eye on upcoming corporate earnings, not to mention the slew of economic reforms and whether they’ll be passed in the parliament. Further more, Morgan Stanley has cited, “Unlike in 2011, the earnings trend in 2012 mirrors India’s long-term record in earnings.”
Having said this, Morgan Stanley believes stock picking opportunities exists, especially for passive investors. Diversification hinges upon having several stocks, with each having low degree of deviation within each other in order to reduce volatility. Diversification also will work if the stock market is not dominated by one sector alone. For instance, look at the table below:
You can clearly see that Russia has nearly 60% of the weightage in one sector alone—energy. It is billed as a gas and oil superpower rivalling to Saudi Arabia. From a top-down perspective, it makes little sense to diversify even if stock picking opportunities maybe there. India’s standard deviation across sector weights remains one of the lowest across emerging stock markets. It said, “India’s sectoral diversification seems the best across major emerging markets”, with low standard deviation on sector weights and low degree of single-sector dominance.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
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As predicted, the Indian government has started its divestment drive. The govt. is behaving like the corrupt and bankrupt zamindar in a Tagore novel, who has to go to the old r a n d i (prostitute) to satisfy his private needs because the younger fresher one is too expensive. As outlined earlier, this is part of its plan. It is talking up the markets, announcing reforms that can never be developed on, and then selling its paper. It will recover Rs 40000 cr. from divestment and Rs. 30000 cr. from spectrum auctions. They say, the money will be applied towards the deficit. In reality it will be used to fund further sops and giveaways in the next budget. The deficit will be kept at 6 % of GDP and they will take their chances with the rating agencies like S and P later. SELL ALL STOCK. ( post below)
India. Reforms. Really?
Much has been made of the “burst of reforms” unleashed by Finance Minister Chidambaram in recent weeks. The stock market has rallied and animal spirits it seems are back. Everybody’s babbling about how the UPA, after eight years in power, has found religion ie “reforms”.
The market is now at 21 times price to earnings (trailing twelve month free float adjusted as per the National Stock Exchange). Once more the mood swings violently. More interestingly the India VIX , the fear index is at 3 year lows of 15. This is usually an indicator of complacency, and historically such lows have signified a massive sell off. The combination of the stretched price to earnings and the VIX means the market is ripe for a big sell off. My two bit as an Ivy educated fund manager in Bombay who has worked internationally on some of the world’s major structural adjustment and economic reform programs.
In reality, the reforms amount to bureaucratic tinkerings with percentages – of a sort that only tax mavens and accountants can comprehend. Witholding taxes go down by a percentage point or two. Now an attempt's been made to increase the percentages foreigners can hold in insurance and pensions. (This last will never pass through Parliament given the unanimous opposition to it). Blah Blah Blah.
The government had no choice but to unleash this wave of tinkering and call it “reform”. It is trying to keep the capital markets buoyant because it needs to sell or “chipkao” (i.e. stick, as we say in the business) close to Rs 40,000 crores worth of equity. This with spectrum auctions, hopefully plug the budget deficit a little by March. More crucially, it will also free up resources for massive election giveaways in next March’s budget. This is especially needed if the Food Security Bill –Madame Sonia’s chosen strategy for reelection – is to be passed.
Real reforms for India will not happen for a long time. These include financial sector reform, and privatization of the banking system. Bankruptcy and exit laws will have to be introduced. Labour market liberalization and the freedom to hire and fire labour will have to be allowed.
The collapsed state of Indian cities will have to be addressed by building 30 to 40 cities to accommodate massive rural urban migration. Land acquisition which is impossible now will have to be addressed. This list does not even include the sector changes required in real estate and infrastructure and sugar, and so on and so on. None of this is happening ever, it seems.
Everybody’s babbling in the media about how crucial the February budget is going to be for the UPA because it will be packed with big ticket sops like the Food Security Bill. Remember game theory however. It is crucial to take your opponent’s reaction into account. The Opposition also knows that the budget will be crucial to the UPA’s reelection chances ! Why then will they allow the UPA to present the budget at all. Especially when they have the numbers and the government is already on life support and in a minority. !!!
The government therefore, will, in all likelihood, fall in November-December, during the winter session of Parliament. Elections will take place in March-April as India needs the school system for a general election. This will allow the Opposition the chance to deny the government’s attempt to pass a budget full of sops and giveaways. The February budget will consequently be a vote on account. This scenario will suit all parties except the Congress and hence it will happen.
Is the market discounting the possibility that in a few weeks, all these guys PC etc. etc. will be gone ? Looking at the way its going up, I think not.
The logical conclusion also is that this is the high point of the markets move this year. India has gone from having the most incompetent FM (Pranab) to the most cunning FM (Chidambaram). The later is deliberately doing all he can to talk up markets to implement his plan. There is little need to oblige him and his plans of using the stock market as a financing vehicle, by buying high and losing one’s hard earned capital.