Emerging Markets: 2012-’18

26-Feb-12 Leave a comment

Foreign Institutional Investors (FIIs) had mostly stayed away from Indian equities during 2011. While around 20,000 crores were brought into the debt markets some 3,000 crore worth of net equity positions were withdrawn from India. I guess it took the softening of  inflation and the subsequent cessation of the interest rate hikes that got this hot money back to India. Its FII money that mostly contributes to the volatility of Indian stocks. So, the more one studies whats happening across the globe – what the top fund houses, hedgies etc are saying, the better prepared you are to take a stance wrt to the Indian scene.

This calendar year, we have seen the return of this fickle capital to India and other emerging market stock exchanges. They are saying that FII flows into Indian stocks have already reached $4 bn in 2012! Mind you, we have seen 56 days in 2012 till now – a good 300+ days are yet to pass us by. Will this deluge of foreign capital continue to build up? Most certainly not. But before the tap runs dry and the vacuum switches on, I think it looks likely for the NIFTY to at least climb right all the way up to 5900? While that’s a good 8.7% points away from current levels of the NIFTY, I think it’s certainly achievable given the very bullish set-up and the decent correction/pause in the rise of the Index given the option expiry/rollovers for the Feb series. So with all that covering up and rolling over completed, I am hopeful of another 7% – 8% rise of the NIFTY. It will then be a good time to unwind the non-core positions.

There is however an interesting view put out by Jeffrey Frankel (Professor of Capital Formation & Growth at Harvard University) who points out to the cyclicality in the occurrences of troughs or crises in emerging markets asset class. He serves on the “Business Cycle Dating Committee” in the United States – whose job it is to declare the official start and end dates of recessions. So, he has a view on past emerging markets’ economic cycles and where the emerging markets are in the current cycle. Frankel draws attention to the earliest references to economic cycles perhaps came from the Old Testament, where the Pharoah orders Joseph (the chief architect) to build stockpiles of food grains as the Nile flowed in plenty for 7 years and then it relatively dried up for the next 7 years. So there were 14 year cycles then. While I am not sure if Egypt of biblical times could be called an emerging market, but closer to our times, Frankel notes that during 1975-81 (7 years) we had a phase which marked plentiful capital flows to emerging markets [recycling of petrodollars in the form of loans to developing countries]. Then the period from 1982 – 89 saw the international debt crisis which spread out from Mexico with these 7 years being referred to as the ‘lost decade’ in Latin America. 1989 saw the issue of the Brady Bonds [where the Latin American countries dunked their currencies and issued bonds denominated in US Dollars] which helped the Latin American nations move over from the capital drought. The period from 1990 -96 was obviously marked by crazy capital flows to emerging market countries. Then came the East Asia crisis of 1997 and another 7 years of capital drought. So that took us to 2003/04. Now, the period from 2003/04 to 2010/11 has seen the third cycle of net capital inflows into emerging markets – will the period from 2011 – 2018 be the next drought period? We can answer these questions only in hindsight. A lone swallow does not a summer make – i.e. the eagerness which the $4bn of today has shown in coming over to the Indian stock market can easily turn into a nervous stampede out of the country. Then this would be a mere blip in the 14 year cycle charts. If you look at the chart at the start of this post, the period of rapid rise of the MSCI Emerging Markets Index during the period 2003 – ’08 was really the time when capital flowed in so freely into emerging party spots. Now, the preceding 7 year period was from 1997 – ’03 during which time the index lost ~50% of its value. Scary? So if this logic holds good then is it appropriate to surmise that A) we are headed down and B) the top of 2008 will not be taken out till 2018 at least.

There are ends of beginnings of ends and then there are beginnings of ends of beginning. It’s difficult for simple people like me to say what is beginning and what is ending, but there is a neat little tidal wave of money coming in on the bourses where my hard-earned money rests and I am going to ride the wave for now. Amen.

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QE2′s Titanic Voyage

16-Oct-10 Leave a comment

The QE2, now moored at Dubai is a magnificent ship. It is an awesome flotilla of human engineering with 5 restaurants, 2 cafes; 3 swimming pools; a pub, a nightclub and several bars; a casino; a 481 seater cinema; shops; health clubs; the largest floating library and a hospital – all comprising an ecosystem of 3000 people (incl full roster of passengers) that circumnavigates around the world in 80 days. Given the cacophony of the other QE2 (Quantitative Easing, proposed & hopefully stillborn Round 2) in the US, I try to compare this Cunard marvel to the US economy. I randomly switch between QE2, the ship and the Fed’s QE2 (the raising of a shipwreck)

I have been absorbing and echoing popular thoughts that the recent Indian market rally has been fuelled by Foreign Institutional Investment (FII) related flows and that once this spigot runs dry, we’ll have a nice juicy correction. A big enough gash to seriously bleed the short term traders. But I never counted on the Fed docks building and launching another armada of liquidity into the markets! The US docks, from this perspective just never seem to run dry. And now I am big time confused. The QE2 rush of dollars will only add fuel to the fire, right? So, will we be seeing a near parabolic rise in Indian equity? Will the Diwali rockets fire up real high this year? You may have noted my aversion to seeing parabolas in stock charts from some of my past posts and the accompanying note that parabolas are not self-sustaining. Good for the Indian Government really – considering the slew of paper that is about to be thrown into the ring.

Like QE2, the American economy moves slowly and consumes a lot. The QE2 reportedly moves a cool 40 – 50 feet per gallon of fuel. That implies a mileage of 3.7 meters per litre of fuel. A snail (if blown up proportionately) will be supersonic in comparision, I guess. Like the ship, the American economy is moribund and is crawling towards what many are calling a recession? The QE2 has been navigated by 23 Captains till date, the Fed on the other hand has seen only 14 Chairmen at its helm. The QE2 was introduced in 1967, the Fed came about in 1913. The Fed Chairmen are quite sticky: like barnacles I guess. The QE2, when it was floating around used to consume 430 tons of fuels per day. My back of the envelope suggests that the US drinks 2.3 million tonnes of gasoline a day. I guess India’s figure is at 100 million tonnes of petrol a year.

The other important point is that the Royal Navy recruited the QE2 in 1982 to serve the original Queen in the Falklands War. Similarily, the Fed Captain is pushing QE2 to prepare for war. Only this time it will be a war that will be played out on the currency screens of traders across the world. We seem to be bracing for a full scale global currency war as the QE2 sets float. The difference being that this new artifact from the Fed is being pressed into service on an already raging sea of liquidity. The voyage around Tierra del Fuego has always been notorious – imagine creating a tsunami on a particularly nasty day aross this southern tip of South America as a solution to taking ships over and around the bend! Davy Jones Locker, surely. That too a man-made artificial tsunami. That’s what the Fed is doing, I think. Raising the waves in the hope that domestic (read US) yatchs, boats, dinghies and sundry canoes will start ‘consuming’ the momentum by hoisting up their sails, revving up their motors, rigging up the tow lines and picking up their sculls. Really? What many think is that nature will always choose the path of least resistance and this extra liquidity will quit the Atlantic and flow down towards more Pacific waters. Whither QE2? What will it achieve if that happens?

And finally one last lesson to pick up from QE2. It’s new owner is the Nakheel Group – an Asian real estate group with diversified interests in asset management, liesure and real estate whose website, just like the QE2 seems to be quite slow. The lesson is that developing nations one day will get tired of having to bear the responsibility of mopping up all of this money that the QE2 is spilling out. Unfortunately, it’s not a cornucopia – it’s really a runny nose. And the virus is catching on fast. Emerging economies will one day realise that they’d be better off buying US assets and directly injecting equity into the US system as opposed to buying the rapidly falling US Dollar. If the US domestic investment does not get kickstarted by this QE2, can foreigners buy mines, companies, set up offices in the US and provide employment directly? Can they, is the other question. Arnold Schwarzenegger is touring Asia to see who can build a high speed train system for California.

 The war is on. We saw two wars around the time the gold standard was abolished and the major countries of that age took it upon themselves to support local inflation by printing currency to fund war. After the dust had settled down,  the US dollar was to be much more than just the national currency of the US. After the gold standard was abolished, the US was at its zenith, unscathed by the World Wars and it took it upon itself to make the USD a truly global medium of exchange. The people managing the USD (the Fed Captains) therefore, theoretically at least had a global responsibility. They still have. The point is that when the Fed does things like QE2, the pain is equally felt everywhere. That is why this unilateral stewardship of the world economy will make the recalcitrant new kids on the block itching to pick up a fight. The rednecks will stolidly hang on to their artifical currency pegs while the boys in blue will stoke up local inflation. Common man will get crushed under the weight of rising prices and a Government might fall.

Additional reading:

  3. A view from Infosys’ Think Flat blog: Will QE2 sail or sink?
  4. A caption that I do not agree with: QE2 to speed triumph of emerging markets

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Are we done yet?

07-Sep-10 Leave a comment

We are now at a 31 month high for the NIFTY (@ 5590 therabouts)!

And my mood is getting to be optimistically cautious. It surfaces immediately in my latest tweet which in turn was inspired by the recent tweet from Clifford Alvares, an Outlook Money correspondent.

Clifford Alvares Tell-tale signs of the next downturn: Slow-down in daily FII figures; market PE of 24+; unjustified run in small-caps — and free lunches. 5:50 PM Sep 6th via web Retweeted by you

Most of the people tracking and working the markets will be cautiously optimistic now, but I’m a worm. And worms have no spine. It’s getting to be a cacophony of dire predictions and upbeat prophecies. The more one reads and listens and watches, the more confusing it gets. But if you dont read or listen or watch, you might as well invest using your keen sense of smell or touch, maybe. Thats puts a weird thought in the wormy head. I am thinking of taking a leaf out of Curtis Faith‘s “Way of the Turtle“, where two stock market professionals recruited a couple of dozen bright men and women with no prior experience of trading and transformed them into star traders in two weeks flat (or maybe more). The basic premise being that trading is a skill that can be learnt just like any other academic/vocational course and that traders are made not born. So, what I’m going to do is recruit a dozen sharp blind men and women. Then as study material I’m going to give them thousands of historical stock charts converted into 3d, beveling up the stock price movement lines and make them trace their fingers on the line. The charts would run only upto certain arbitrarily chosen past points in time but I would urge my blind charges to carry on the “momentum” of their fingers….the future path which  the fingers take will be compared against actual historical movements and feedback will be provided….. if this experiment of mine ever gets done, then my hypothesis that blind people can make the best technical investors can be tested. Maybe this personal blind worm method of forecasting will work for me. I’ll write a book, become hugely famous and after a hundred years, people will falsely believe that the phrase “momentum investing” was coined off the tips of blind star traders.

The reason for this lunatic ambling within moving average envelopes is that expert opinions are certainly not helping:

The New York Times carries a story telling us all that the cloud of a double dip recession seems to have passed us by while Nouriel Roubini chastises the US economy planners that we are now defenceless against the looming threat of a double dip. A year or so back, if you’d have mentioned double dip to me, I’d have visions of Taj Mahal tea bags and “dip dip dip, and it’s ready to sip. Do you want it stronger, then dip a little longer. Dip, dip, dip..and it’s ready to sip”. But that’s a triple dip – maybe a new challenge worthy for Roubini. But for now, everyone and her pet poodle is talking of double dips:

Double Dip: the pet food of your pet bears. “Dip, dip and it’s ready to slip. For teddy to be stronger, dip a little longer. Dip, dip…and it’s ready to slip”.

I felt that this interview of the equity analyst, Sangeeta Purushottam dispensed some sane advice. It seems to say that there could be money waiting on the sidelines and it could come pouring in taking our local markets to euphoric heights. But the premise operating here is that there is indeed money waiting on the sidelines. Is there? A browse through global investing sites does not indicate a clamour to invest in the much discovered Asian bourses. Indeed, for all that noise about the NIFTY reaching it’s 31 month high, this country performance table by The Bespoke Investment Group is quite educative and humbling. But then the presses in the USA are printing and printing and printing. Strange things can happen.

So I crawled the SEBI website to ferret out FII net flows into Indian equity over time.  I left out derivative data and picked data representing the FIIs’ stock exchange investments and primary market data only. I think the chart speaks for itself. The main question however remains unanswered: is there is more cash coming India’s way via the FII route for the remainder of the year (net inflows)? Since Jan’10, c 60,000 crores of rupees have come into Indian markets via the FII direct participation in equity. Logic dictates that we should definitely get in more for the remainder of the 115 calendar days left in 2010. However, I noticed that typically there are 3 months (modal frequency) that see net FII withdrawals from the equity markets. We have seen two down months this year (January and May) – is a third one coming? So money will definitely be made, euphoria or not, but it calls for nimble trading and investing. That to me is a big problem since I am a worm after all. Any advise will be greatly appreciated.

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