Wednesday, April 9, 2014

Market betting on continuity, not reforms

Thought for the day
“All modern American literature comes from one book by Mark Twain called Huckleberry Finn.”
— Ernest Hemingway (American, 1899-1961)
Word for the day
Bedash (v)
To dash or spatter (something) all over;
To demolish or ruin; obliterate.
(Source: Dictionary.com)
Teaser for the day
When the US started quantitative easing, I said right away it will not end before we have QE-99. Usually, when government introduces a programme, they don't end it, and my sense is though they have implemented some tapering, the moment US stock markets drop 10 per cent-20 per cent, they will actually increase active bond purchases. (Marc Faber) 

Market betting on continuity, not reforms

“Tere Vaade par jiye hum toh ye jaan jhooth jana;
Ke khusi se mar naa jaaate gar aitbar hota.” (Mirza Ghalib)
(Make no mistake that I believe in your promises. If I did the thrill would have killed me.)
BJP finally released its much awaited manifesto on Monday.
The best thing about the 50 plus page document is that it strongly supports the continuity and does not promise any radical shift in policy paradigm. Amidst an overdose of generics laced with usual rhetoric and confidence of a winner, the document focuses strongly on sustainability, indigenization, true federalism, decentralization, and e-governance.
The comforting part is that traditional BJP issues like 370, Ram Mandir, Cow slaughter, and common civil code etc. have been dissipated to last half page and seem to have been incorporated to address the old school internal BJP constituency only. Avoidance of other contemporary controversial issues like Section 377 (IPC) and decriminalization of politics, Jan Lokpal, Autonomy to CBI etc. is also conspicuous. In this sense the Congressization of BJP appears almost complete.
The worst part (or is it good?) is that the manifesto does not propose any major economic reform. It just talks about administrative simplification of processes and better use of IT on delivery of various public services. In my view, markets should take cognizance of this.
This brings us to very hotly debated issue amongst my readers – whether the recent upsurge in equity market is in response to the “continuity” and strengthening of recent corrective monetary and fiscal measures; or is it a hope driven rally – hope of radical shift in policy paradigm under the new regime.
I have been openly siding with the school which believes that market is not at all ready for any radical reforms. It is seeking continuity of extant policy regime with a “friendly” implementation apparatus.
The reasons are obvious. Any radical shift in policy paradigm will essentially involve move away from “crony capitalism” and/or “crony socialism”. This would certainly (a) hurt the economic viability of many businesses surviving and thriving on administrative patronage; (b) challenge the sustainability of many businesses that exist only because of the systemic inefficiencies; (c) increase overall cost of doing business and therefore impacting the profitability adversely; and (d) lead to higher and deeper competition from global players.
And if it is continuity we are hoping for, politics (and Narendra Modi) will cease to be a major consideration for the markets 6months down the line. The market will increasingly look to global cues for determining its direction. In my view, these cues will most likely be positive. I therefore would continue to avoid domestic reform story and focus on global bubble theme for next 12-18months. And I promise to come back home much before cows do. (See here and here)
Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com
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