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This Article is From Apr 01, 2014

Opinion: The stupidest reason to explain a market rally

Opinion: The stupidest reason to explain a market rally
Shankar Sharma and Devina Mehra

(Shankar Sharma and Devina Mehra head First Global, an international securities firm)

We have been in the investing business for two and a half decades and have been witness to some amazing blind spots that supposedly smart, professional investors demonstrate with unfailing regularity. The other thing we have seen consistently among professional investors is their abhorrence for any data-based analysis or discussion.

This may seem surprising, but this is a fact. In fact, the easiest way to convince a professional investor (like a mutual fund manager) is to talk stories and easy generalities. Start talking hard data that contradicts comfortable notions and your meeting will end very quickly!

To illustrate with a few examples: In 2012, we put out a research that showed India's Current Account Deficit (CAD) was largely accounted for by gold, and shorn of that, our CAD would fall to a very manageable 0.5 per cent or so. Now, this is simple data. But believe it not, we received dozens of mails from purportedly very smart investors, congratulating us on this "insightful" analysis!

In the same report, we had highlighted how foreign direct investment (FDI) continued to be very strong, a publicly available data, to which a large global hedge fund replied, saying "Wow, didn't know India was getting such strong FDI flows!"

In the same year, we put out a report that showed that China, far from being a low-indebtedness country, was in fact, on the verge of technical bankruptcy, with debt/GDP at 150 per cent. This report was greeted with stunned silence from funds across the world (with billions invested in China), since they had all been sitting pretty with the government's "official" debt/GDP of 34 per cent!

And now we have this theory floating around as to how the UPA has ruined the economy, while the NDA was a massively reformist and growth oriented government. Simple analysis of publicly available data shows us that the NDA drove us to near bankruptcy, taking our debt/GDP from 70 per cent in 1999 to 85 per cent in 2004, even while growing an abysmal 5 per cent.

Forget the UPA. Even the generally reviled United Front government delivered eye-popping 6.5 per cent annual growth in its two years 1996 to 1998, while keeping debt/GDP down below 70 per cent.

Under the UPA, India has delivered a growth model unparalleled in the world: high growth of 7.6 per cent while reducing debt/GDP from 85 per cent to 67 per cent (at 7 per cent WPI inflation); while reducing interest/budget receipts from 50 per cent under the NDA to 30 per cent now; and very low reliance on foreign debt.

No country matches this high growth-low risk model in the past 10 years, and we issue an open challenge to NK Singh, Jagdish Bhagwati, Arvind Panagariya and all detractors of the UPA government: show us one country that has managed this high level of growth with declining indebtedness (hence lower risk), in the past 10 years.

We have watched with amusement how market participants have effortlessly attributed the Sensex's rally to a so-called Modi wave (reference to BJP's prime ministerial candidate Narendra Modi). This balloon has been tossed from hand to hand by the media and the intelligentsia, and has acquired a life of its own.

But as most balloons, it is full of hot air.

Indian markets have reached all-time highs for a simple set of reasons: India's current account deficit has now shrunk to negligible levels; as a result, the rupee has strengthened markedly, in sharp contrast to several other emerging market currencies; India's GDP growth of 4.7-5 per cent, in context of a global growth collapse is remarkable. The world has been mired in a once-in-a-100 years Great Recession since 2008, and has basically fallen off a growth cliff.

China was growing 13 per cent, is now growing at 7 per cent despite tens of trillions of dollars of stimulus. Every single country in the world has seen its growth rates collapse between 50-150 per cent. What is even more remarkable is that India is growing at this pace while keeping its indebtedness low. No other country of significance has managed this.

And just to put numbers in context, a 5 per cent growth today means that we are adding nearly $100 billion to our GDP. In effect, a Dubai every year. Or, more aptly, we are adding 25 per cent of the GDP under the NDA's rule. Now you begin to understand the sheer size of India's economy today and what a "mere 5 per cent" growth means?

It is this "reasonable growth-with low risk" model that has driven India to its highs.

To attribute the rally to a firm expectation that Modi will be Prime Minister, is being disingenuous. The outcome of an Indian election is simply too hard to call, rigged opinion polls notwithstanding. It is nonsensical to assume that the our stock markets and analysts/fund managers are smart enough to figure this out when they have a hard time figuring out whether the US will raise interest rates or not, or the sundry imponderables we confront on a daily basis on what can affect the global economy and markets.

But stock market participants are a shallow lot, as the examples at the beginning show. They will buy the dumbest loose talk, instead of relying on hard-nosed data analysis. But analyzing data is boring. Loose talk isn't.

To wind up, is it anybody's case that the Sensex would have been at all-time highs even if we were still running a CAD of 4.5 per cent?

Disclaimer: The opinions expressed within this article are the personal opinions of the authors. NDTV is not responsible for the accuracy, completeness, suitability, or validity of any information on this article. All information is provided on an as-is basis. The information, facts or opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

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