India: When Was The Last Time You Saw A Meltdown?

It's unfortunate but Sardar Manmohan Singh has to contend with a unique set of foursome. The Harvard Twins PC and Montek, and the twosome called Kamath and Parekh. Between, the four of them lie $ 15 bn in Bank write-offs, a $ 500 bn Capital Formation and 8 per cent GDP growth ennui, ad infinitum and possible truckload of wishful thinking. The 2 per cent growth in Capital Goods production seen in Jan 2008 and the IIP growth of 5.5 per cent year on year makes one feel, that either Kamath and Parekh are deluded or they have some other work of mathematics at play which will make India's GDP grow at 8 per cent per annum yoy for 2008, given a negative growth in agriculture. If with this methodology Mr. Kamath is willing to finance a $ 500 bn expansion of the Indian industry, then he may save a few Rupees here or there to BUY a lock for the Bank he runs, for the lock may be needed soon. On the other hand, if by some virtuous way the Banks do lend out this kind of money then just like the 1980s, huge NPAs in the form of Steel, Cement and Petrochem plants will arise, which will be no more than White Elephants for the Economy but clobber down the lending Banks. To this troika of industrial segment, one could add in hindsight, Real Estate, which no one afford now and will not be able to afford more so six months from now. For nearly a year the World has been searching for the next "Bubble" and they seem to have found it in Asia. Emerging market stocks provided super returns in the period 2002-07, averaging 39.5 per cent leaving them perilously over-valued. Yes..look closer at the numbers. The Price to Sales ratios in Emerging Market stocks is roughly 120 per cent higher than the same measure in developed economies. That means, if PEs are about the same, profit margins in Emerging Markets are twice as high as in the developed world. The obvious risk here is that profit margins in emerging markets will decline to global average levels as new competition surfaces, says Robert Arnott, Chairman of fund manager Research Affiliates. "These stocks have soared beyond reason," he says. So what could cause a collapse? A market bust and recession in the US., which together were enough to trip up emerging markets six years ago. Or Credit tightening in China, or inflation and political instability in the developing world. There's nothing like an overseas crisis to make a little turmoil in the US seem rather tame, compared to what can happen in far-off markets like India, Russia, Brazil and Turkey. Why then if the negatives were known all along then did the speculative excesses continue? Countries like BRICs nations had fancy GDP growth of 5 to 11 per cent per annum between themselves compared to a miserly 3 per cent in the US, over the past 4 years. The run-up was fuelled by speculative money that presages typically a savage collapse. FDI moved at the rate of $ 213 bn into Developing Nations as per the Institute of International Finance New York during 2007. Added spark came from Hedge Funds, Domestic Mutual Funds and Private Insurers like Reliance Capital, Bajaj Allianz, Birla SunLife, HDFC Standard, and Max New York. Total assets under management for Emerging nations hedge funds jumped 8 fold to $ 270 bn in the four years between 2002-07, estimates Lipper Tass Asset Flows. Even this figure lowballs the true figure by amounts funnelled in by Non Hedge Fund portfolio flows into nations like India, which use portfolio flows as a mechanism to balance its BOP. "Such a scale of inflows are reminiscent of the flows into technology in late 1999 and early 2000," worries Robert Adler, AMG's President. Of concern, too, is how much of the recent years' stellar returns have been the result of price multiple expansion rather than of earnings. Since bottoming out six years ago, the PE ratio of Morgan Stanley's emerging market stock index has climbed 70 per cent to 18.5, just ahead of the S&P 500's multiple. Worse, this cumulative sum of money after appreciating 6 to 7 times in 4 years is now worth over $ 1 trillion. A small withdrawal from this pool could ensure that such markets especially India and other BRIC nations lose as much as 50 per cent of their index in a very short time.
Source: aiii