Talking About The All Scary Emerging Market, Market Perception and Investing in General

Posted on January 26, 2014. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , , , , , , , , , |

The markets are once again busy with chatter about Emerging Market ( EM ) and the sound of CHOAS seems to be re-emerging and many in the market are starting to wonder, what’s next ? A number of analysts have gone on record suggesting in their daily market commentary that emerging markets could now be a danger to global financial stability. No doubt, these are strong statements so it begs the obvious question, are we looking at another financial crisis, this time coming from the emerging markets ? And I do wonder if the fundamentals of EM have changed so dramatically leading some commentators to believe that a crisis is somehow imminent as evident from the way markets have reacted last week? Well, unlike our friends in the financial world, we ( I am referring to our group ) like many others who operate on a daily basis in the real economy can see and feel that the global economy is shaping up nicely and the IMF’s latest revised up global growth projection of 3.7% for 2014 and it’s growth expectation of around 5.1% for emerging markets from an earlier 4.7% GDP growth rate guidance, more or less reflects the ground the reality of the day.  So the obvious question, why this panic and uncertainty ?

Now one could rightly argue that the revised up guidance are just projections and the risks both known and unknown still remains. Also the recent volatility in the markets to a large extent has been driven by downward pressure on the Turkish LIRA as well as Argentine PESOS devaluation and the South African RAND, which is also come under a bit of pressure. And then there are obvious chatters around how good or bad China is doing and how will the leadership manage the US 4.8 trillion dollar worth ( estimated ) shadow banking system along with a relatively high local government debts, and then there are concerns about India as well as Brazil’s fundamentals. These are real and genuine concerns but having said that, I can’t help but wonder, how is all this a SURPRISE to anyone in the market ? For example most of us are aware of the ongoing political uncertainty in Turkey and based on our own common sense, we could safely conclude that if the political turmoil drags on then there will be consequences to the economy.

And also assuming the worst case scenario, one needs to ask and know, did the previous crises in Turkish and Argentine economy kill the overall emerging markets across the board ? the clear answer is NO, so in short it will be unwise to assume that Turkey will some how bring down the emerging markets of Asia, Africa or Latin America, the reality is a potential crisis in Turkey may be more damaging to developed European economies then China or India for that matter. Also it is important to emphasise that there is a crisis of leadership in Turkey today which is weighing down on the economy and a positive resolution could very easily change the overall dynamics of the economy. Now with regards to China, a US 9.4 trillion dollar economy growing at around 7.7% isn’t just going to fall off the cliff under the weight of its shadow banking system and the local government debt. Yes, there are real concerns about how the government may go about handling the whole situation but it will be unwise to assume that somehow the economy will implode bringing down the global economy. There are simply too many opinions on China both bearish and bullish but understanding the structure and behaviour of the overall Chinese economy is an extremely complex task and betting against the government’s ability to deliver on its set forth agenda never really works and this may be one of the reasons why foreign investors tend to struggle in China. And with regards to India, the Indian economy today is in a much better shape fundamentally than last year also the overall investors sentiment around India has improved significantly, the country’s real problem today is a lack of decisive leadership which will hopefully get resolved after the upcoming general election and also most CEOs representing both local and overseas companies are quite upbeat about India’s medium and long term growth prospect. The current government has also made a series of reform announcements aimed at opening up various parts of the economy to overseas investors.

So why then the market is projecting a risk of contagion and giving a sense that somehow an imminent crisis is brewing up in the Emerging market ? I must say, I do wonder if by holding an emerging market stock or bonds or taking up speculative positions in local currency an overseas investor is ever able to get the full picture and flavour of the overall economy ? And the answer is, most likely not because in reality most emerging markets are layered and quite different to each other and also it must be said that there is a reason why they come under the category of being classified as ” emerging markets ” but this is not to say that developed markets are somehow immune to crisis as evident from the financial crisis of 07/08.

In the big picture scenario understanding a market or an asset class isn’t just about reading opinions from various experts of the subject and one must not forget that even in good times people and companies do fail so yes some emerging markets may struggle but today the global economy is in a much better shape than it was few years ago and it is quite unlikely that from here on we are looking at an imminent collapse. However, the inherent risk in the global economic system as well as the financial markets by design still remains so the system isn’t CRISIS proof and never was. Also opinions and projections are part and parcel of how a markets operate but people do need to be rationale and honest because clearly there are those in the market who may prefer a free ride and to keep making  money on the back of easy money printed by the central bankers. This is not to suggest that the global economy has now reached a stage when all the loose monetary policy stimulus should be withdrawn right away, the tapering and tightening of traditional monetary policy tools will most likely be gradual.

But having said that the market will continue to make tapering related bets. Vanguard, PIMCO and BLACKROCK  lost roughly over 35% in value on their investment  in the last 6 months of 2013 by getting their inflation bet wrong on Treasury Inflation Protection Securities (TIPS ). These firms made bets on the assumption that Quantitative easing (QE ) will deliver inflation down the road and although it is quite evident that they got their bet wrong but we mustn’t  forget the fact that QE did in fact create Inflation in ASSET PRICING and also across various Emerging Markets, but obviously not where it was expected so clearly those who held a view that QE will create inflationary mayhem in the economy killing  the dollar down road most likely didn’t incorporate the fact that the economy of today works and behaves a bit differently. There  needs to be a realisation that too much money in the system and ultra lose monetary policy will not necessarily create an immediate spectacular growth trajectory especially when the economy is coming out of a MASSIVE HEART ATTACK. And there are clear evidence that QE has created ASSET pricing inflation through misallocation of capital and this may be what is eating up growth ( growth rate below market expectation ). Also while some managers did get their inflationary bet wrong they should also realise that central bank’s ability to create or control inflation in a 2014 world isn’t always guaranteed or straight forward but having said that inflation will slowly but surely show up in the real economy but most probably not tomorrow.

Investment is about taking risk by relying your own assessment of a specific risk and then taking a decision based on your own judgement. MARKETS OR COMPANIES are all run by Human ideas and thought process so the market or a company is only as good as people behind them. And without being philosophical, we all know that life comes with no guarantee so what do we do? well, we learn to take risks and the same goes for creating a business and how we invest. There are no guarantees and the guarantees you may have or seek could easily become worthless when the circumstances change. And whatever investment decision you make or take will always come with an inherent RISK so there is always a chance that it may or may not work out as planned. You can only make a decision based on what you can see and know today but there are always many unknowns that you may not be able to factor in and going forward  these unknowns may very well influence the outcome.

So investing in general isn’t all about following a trend or analysts reports or getting overwhelmed by the sound bites coming from various corners of the market or committing yourself to a fancy model. In most cases, a good investment is generally about following your own intuition or in other words your own inner radar just like many decisions we make or take in our lives and you can always use the information available in the market to make up your own mind in a similar way as you would seek advice from friends or family when taking an important decision in your life but always remember you will have to live with outcome and blaming others for an undesired outcome never helps although it might be quite tempting to play the game but if you do then you are denying yourself an IMPORTANT OPPORTUNITY TO LEARN and there is nothing scary about learning. So the all scary emerging market as projected by some in the market today in fact may not be that scary after all and remember a perception doesn’t always equal reality.

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A Historic Opportunity For India and the Indian society To Bring About a Change From Within

Posted on January 7, 2014. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , , , , |


Good to see the ongoing debate on governance, politics and reforming of the INDIAN TAX SYSTEM stirring up in India in the past few weeks. But by looking at the BIG PICTURE it’s clear that country isn’t just struggling cause of lack of good governance and good governance although essential but on its own won’t go far enough to move the country forward. It is quite evident that the country has been suffering from a severe lack of good reforms and efficient policy decisions but the again a good policy or much needed reforms can only be executed or delivered by an efficient delivery mechanism.And so far this has been India’s major problem because the existing administrative system is simply not fit for purpose. The reality is that a high percentage of the administrators(managers) coming out of the current Indian Administrative Services (IAS) program do not have the right training or the essential background on public policy administration and execution.

A good an innovative policy requires an efficient administrative infrastructure that is not just able to cope with the task at hand but also able to improvise by working closely with the relevant ministerial department on perfecting the policies if and when required. It should also be extremely reactive and responsive to its users / customers i.e. the citizens requirements. The administrative infrastructure created during the British Raj to govern India clearly needs to be revamped and updated. For example we can’t expect to run super fast trains on British Raj Era railway infrastructure without revamping and updating the existing railway infrastructure of the country and this is just common sense. So in short the existing policy delivery mechanism / infrastructure is quite simply outdated. And the problem is not that there is a shortage of talents when it comes to good public administrators but the system simply fails to keep the talent because it isn’t attractive enough. Historically India has produced amazing MINDS and even today the country has no shortage of Talents but the problem has always been the mindset of the Indian society.

Any good system requires a regular overhaul and upgrading and the current IAS program that more or less serves as an operating system to administer and govern INDIA is simply too old and is in need of immediate radical reforms to make it fit for purpose. And here is what the government of the day should look at, a good manager will need to be paid appropriately so what’s the harm in creating a private sector type bonus system linked to verifiable results and overall performance of an official. And the same should apply to ministers. The ministers and the managerial staff will need to work on making various administrative branches of INDIA INC more efficient and responsive and deliver better return on assets for the shareholders i.e. the citizens.

Corruption won’t go away on its own or by street protests or by a creation of new political parties. Also elections and governance etc won’t necessarily solve India’s problem in my own view. If you think the same way you will get to the same place so clearly the country needs to start the process of revamping it’s overall mindset and find a new approach. And this has to come and be driven by the society itself. So a lasting and sustainable change has to come from within. For example lets start with small things if people living in the same community decided to work together and started keeping their streets and town cleans then automatically the entire city will start to look and feel cleaner. Similarly, if people decided and encouraged their friends and families to look at the bigger picture and not to take short cuts for example when getting their kids admitted to a school or getting a normal job done or even when attending prayer events in temples the society will then start to look less messier and more organised as there will be less incentives for folks to ask for favours. It is important to understand that a vibrant bribe culture in India isn’t going to go away just like that and also on the flip side the fear of getting caught might in fact discourage the decision making process making the situation much worst so the people will need to take the initiative and lay the foundation that will bring about the required and essential change in the overall mindset of the Indian society. In other words the society of the day needs to get on 2014 bandwidth.

And obviously the government has a very important role to play by working together with the society and facilitating this change by starting with creating incentives within the existing system. For example, if the government comes with an investment or a social investment program then why not also create a provision where up to 10% of the allocated fund could be paid in bonuses to officials in charge of administering and executing that particular program or policy similarly if a government department is announcing a tender then why not create a BONUS pool of 5 % to 10% that could be paid to the department in charge of the particular project or tender irrespective of who wins the tender. This will mostly likely remove the need for companies to submit unrealistic bids in order to simply secure the project by finding a way to bribe the officials. Also the officials will know that irrespective of who wins the tender their bonus is guaranteed. This by no means should be taken as encouraging corruption but in fact these steps could provide the right incentives by taking away the motivation behind corruption and there are a number of practical, simple and innovative steps to create the right incentives. For example, every government secretariat could have a simple fast track service for citizens and people willing to pay higher fees will be able to access that particular service on fast track basis. Some of these incentives are probably already there. Also why not create a donation incentive so if customers are happy with the services provided by the officials in a particular department then they could donate towards the annual bonus fund. A Corruption that is under the carpet can kill any economy and unless we find a way to start paying people fairly we can’t take the moral high ground and expect people not to take bribe as most of them get involved in corruption because of their obligations towards the family and in a way they do have the right to do what is best in the interest of their family. So this is why it is important that we explore all the practical ways to remove the corruption embedded in the system say.

Now with regards to the TAX Code debate well a country where roughly only 4% of the population pays income tax clearly needs to do better and this will not only require the government of the day to make radical changes in the overall tax structure but also the people who are happy take to the streets to show their anger against corruption will need to have a serious look at themselves in the MIRROR and ask themselves what is their own contribution to the country that they claim to love so much. Talk is generally cheap and easy and most of us are good at it. A big economy like India can’t abolish the personal income tax system altogether, it is simply unrealistic and most probably a wrong debate.

Indian Tax system today heavily relies on indirect tax revenues including of VAT, sales tax, excise duties among others to pay the country’s BILLS. And no doubt the system is struggling cause of corruption but this isn’t just an INDIAN phenomena. Having said that it is surely getting entrenched in the DNA of the Indian society and people will need to realise that if you build yourself a US 100 million dollar mansion in a neighbourhood where the rest of them can’t afford even a US $5,000 house then you are making a serious mistake because you may end up having to spend millions on security etc so why not instead help build your immediate neighbourhood and by this I mean building a good road, a good sanitation system, may be a good school , a good medical centre and then build yourself a billion dollar mansion ( if you can afford it ) because in this case the new neighbourhood will be anchored around you and it always be grateful and most likely you will see significant benefits from your investment in the community. And this is not socialism but just smart and sustainable investment.

If you want to change the country then you will most likely have to start with changing yourself, your own family, neighbourhood and the city. So I will encourage the society, the government and the entrepreneurs to take the important first step and in a society where people like to follow and copy others it is highly likely others will follow suit creating a trend. Collaboration can help us climb mountains and help us get to the moon so the various communities will need to come together and work towards making a better India. A crisis also provides opportunity but it is important not to get overwhelmed by the CHAOS because a grinding process isn’t all smooth and beautiful so I believe it is time for the Indian society to look at the big picture knowing well that it has a truly historic opportunity to take the country forward by playing an extremely important role and in the process it could also set up a good example and precedent for similar societies living in the developing world going forward.

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