Difficult to find safe haven for investment

The world is in a state of flux and it is very difficult to find a safe and eventually rewarding pocket for investment and savings. Saving have become of paramount importance due to uncertainties of future. The problem that we are in fact facing today is itself due to the attempts by a few generations gone by to have devised the means of continuous supply of money for maintaining a life style that world's resources could not have sustained for a very large population in affluent nations. The design itself was based on making the instrument of Sovereign Debt do the trick. Here what is a Sovereign Debt should be understood. It is a commitment by the state for repayment obligation for the borrowing by itself or its arms for the monetary resources collected for  incurring expenditure today for society. This obligation includes the interest also.

The capital and interest together later became a burden down the generation because the assets created were of no monetary value and were used up while the obligations kept increasing calling upon the present generation to keep footing bill by paying ever increasing taxes. When the proportions got distorted to the extreme or were nearing such situation, the trouble is being faced by the societies at large particularly in the developed nations. It has gone on for more time than otherwise possible due to the minimal consumption by a greater part of world's total population. With China, India and also others amongst the poorer nations caught up with the production and consumption practices the balance saturated to become fragile. The saving grace for the emerging economies is fact that the public debt has still not gone out of hands and neither the present debt happens to be for ensuring consumption by the retirees in general way because the savings were meagre and did not fill govt coffers unduly excessively.

The strained west found a solution by transferring resources or being serviced by the developing nations which was against sovereign guarantee of sorts by these economies. Neither this could go on for long nor there was an absolute comfort in shifting the bulk of saving into developing nations. It is for this reason that India finds it self a destination for the flow of funds and very quickly makes it less worthy. The assets base is not found to be large enough to absorb the flow. In the end every thing in the financial sphere has got distorted. The remedy is not easy to found. What will then happen may happen. Let's examine the facts,trends,views and possibility and assess impact on Indian stock markets going forward.

A) The US down grade as well as fragile condition prevailing with respect of Italy and a few others in EU will make the yield on bonds further go up as there would be clamour to sale bonds and investing in safety. While the interest rates have been kept low by the Central Banks in developed world, the fresh issue of debt paper will not be absorbed easily as the present bond holdings will be on offer at higher yields. If the funds are used for buying bullion, the risk element will not be avoided due to the prices are as such high level as may crash any time for reason or without reason. Similarly the equity stocks may be tried to be sold off but as buyer would be absent, these would only be sold at some good discount to fair value.

B) For India, it should not matter whether the US has higher rating or lower rating, the rating of India itself is in no danger. This would necessarily invite the capital to flow towards India which offers higher interest also. The big well-managed companies already have low leverage and would be tempted into borrowing at more favourable terms by the world's lenders. This will make the off take of loan funds offered by Indian banks. This will pressurise them into lending to consumers. The demand for consumer durable will be generated. Banks would simultaneously stop competing for the deposits further making case for higher consumption expenditure. The capacities that have stopped expanding for some due to higher interest rate regime will give back the pricing power to companies.  This should prove to be a positive for the Indian stocks in medium term.

C) The debt crisis will be attempted to be resolved and there is no means to resolve it than through quantitative easing which simply means that the lenders are punished and borrowers are relieved. This would suit US and will help EU. Inflationary pressures will remain but should enable the assets with companies also to be valued higher in dollar denoted terms. The pressure on equities in the heat of the moment would give rise to renewed optimism.

D) The investors in US treasury bonds are already in a soup and China is one such entity. Its trade with US will diminish leaving scope for India to fill the gap.

E) The oil exporter who have been investing heavily in bullion will start to convert some of it in to money to take care of needs as the oil market would have to down in light of present conditions. This will help India in managing. Its own inflation and finance.

F) The Japan is already at pains to keep its currency low in value vis a vis other currencies. The competition in keeping the currency values low for the sake of international competitiveness will be some thing important to deal with. India should be able to balance it better due to inflows and appetite on one hand and huge market of its own and also being a low cost economy.

G) India will be less corrupt nation in times to come is apparent. Lesser corruption will enable it post higher GDP number. The flight of good or bad money from India would stop too, one for tighter policies and secondly for lesser scope outside. Tatas and Birlas did it just before the meltdown of 2008 and would not want to go for similar risks today. Home turf will be found to be more safe.

H) The fresh issues of capital has become a trickle and would not damage the stock prices. Also, the fresh take over code okayed by SEBI will be a shot in arm for companies with surplus cash like Reliance. Once a company in a particular becomes a target it will be raising the benchmark for all companies in the sector. Some of the sectors are attracting so less valuation that they already have given signals to the predators.

I) The bullion prices have already gone so high that a natural question comes to mind as how it is possible for the productive assets with companies be so lowly valued distorting the parity completely. If companies are selling for as low as at under 10 PE without threat of business becoming unprofitable, it means when the bullion prices stop moving any further up, the companies will be adding 10pc value to present value every year. When the cycle will reverse as it would have to, the bullion prices will nosedive too.

J) The infra--structure spending has started to pick up and the potential is huge in that area. Telecom companies are have started to find their feet. The auto-sector is under pressure and would remain so for some time to come. NREGA and high food prices have transferred some of the economic power to rural India. This will spur an all-round economic activity in the hinter land with all the overall good effect.

K) Stock indices have been in a narrow range for a considerable period. This can be supposed to be time wise correction. The ratios also have become more solid (the PE and P/BV). When the markets were in narrow range between 2000 and 2003 , the market had simply doubled in about six months and doubled further between 2004 to 2006 . So 5000 Nifty level obtaining in early 2007 makes it technically possible to repeat the history, if conditions keep improving on the front of reforms here and there are calmer overseas markets.

L) One more positive for India is that it has established as producer of quality products and has weathered the Chinese onslaught. This competitive edge will keep us in good stead.

Those who can stand firm inspite of wind blowing against need to be active, nobody can predict precisely as to what may happen particularly when policy formulators are busy finding solutions which may favour one way or harm the other. The short term and long term fall outs may also be entirely different. The prophets of doom may prove right also. Who can guarantee any thing when sovereign guarantees have come to the verge of failing. Lending for earning interest seems to be rightly disfavoured in Islam ...kbk