Safe Harbour Incorporated

Safe Harbour Incorporated

Dalal Street, populated by people with money in their veins, is not renowned for its sense of irony. Still, notwithstanding volatility, ham-fisted government intervention and the occasional devastating rumour; it could, for 2008 and beyond, hang out a shingle bearing the legend “Safe Harbour Incorporated”. And, supported by a real economy growing at 8.5% to 9% per annum (p.a.), Dalal Street can do it with a straight face.

India is currently benefiting from a number of local and global currents that will see the Sensex and Nifty 50, representing as they do, a relatively narrow base of operations at around $1.5 trillion total market capitalisation, scaling much higher levels than the current 20,000 and 6,000 levels respectively.

That the Indian bourses have been receiving unprecedented amounts of foreign exchange from America, Europe and Japan for over three years already is old hat, although, the flow has intensified significantly of late. This is because these developed markets, though much bigger than ours, have their prospects of growth restricted to around 2 % p.a. for the foreseeable future. And while India was long seen as a relatively risky Emerging Market (EM), realization has since dawned, particularly after the “sub prime” contagion spread all over the developed markets, that the EMs were perhaps safer than the home markets! We were not unknown by then, thanks mainly to the older FIIs and intrepid Hedge Funds showing the way. And then, when comparisons were made within the celebrated EMs of Brazil-Russia-India-China (BRIC), it emerged that only India and China have the depth and size to deliver large quantum real profits in addition to impressive looking percentages.

In the meantime, the Indian domestic investment scenario too has also put on some heft and is exerting its own influence, buying when the foreigners sell and vice versa, thus imparting stability and a measure of perceptive balance. With the sharp growth of Mutual Fund investments and the Unit Linked Insurance Plans (ULIPs), this trend will only strengthen. In addition, domestic savings, rated amongst the highest in the world at some 32% of household income have also deigned to get involved with an inflow of some 6% of its corpus this year. Domestic government administered pension funds too are making a tentative beginning.

Apart from the traditional West and gradually enlarging domestic kitty, we are also increasingly seeing financial flows from the oil producing nations. These have, of course, benefited hugely from a 54% and counting appreciation in oil prices this year alone.

In addition, we are now also attracting monies that were earlier earmarked for China and even arbitrage and hedging investment funds from China herself. This is because China, which is growing at 11% p.a. currently, has already seen an over 100% rise in its Hang Seng Indices this year. But, with the sharp run up, China, which attracts $60 billion p.a., now posts an average price-earnings (P.E.) ratio of 38. In comparison, India with a P.E. ratio of 22 seems relatively cheap, particularly given the robust results of between 25-30% earnings declared by most companies in the second quarter recently.

This particularly because it is anticipated that China and all of South East Asia could see a down turn because they are all export based economies dependent on the somewhat beleaguered US economy. But India, uniquely among the Asian and BRIC economies, has only some 12% dependency on exports on an 8.5 to 9% p.a. growth path. This makes it a particularly convincing safe haven for foreign investment.

But even at 20,000, the Sensex has only appreciated some 40% this year, so far. For the rest of this fiscal, another $ 10 to $15 billion could still arrive in addition to some $16.5 billion that has already come in. This, if it happens, in part or full measure, will push the rupee higher; to 39 to the US dollar or beyond, and end up attracting yet more funds!

Having said all this, one cannot underestimate official India’s capacity for being party poopers. Short term dampeners can also come in the event the present government falls and a new one takes time to find its feet and policy bearings.

(700 words)

By Gautam Mukherjee
Thursday, 1st November, 2007

Also published in The Sunday Pioneer in the AGENDA> DIALOGUE section on 4th November 2007
This and all other essays on GHATOTKACHSERIES are copyright 2005-2007 by Gautam Mukherjee. All rights reserved.