Tuesday, June 29, 2010

Management Hubris - India Decoupling Stock Market Will Be A Myth

How ironic that HDFC's Aditya Puri's article prints today just when the China market is down roughly 5%.

Here is the link to HDFC Aditya Puri article "Decoupling is set to become a reality soon" a self serving media spin article by the head of HDFC Bank

I am going to deconstruct his comments.  Mr. Puri makes the argument - correctly - that European and American economies are struggling and the world has changed structurally.  True, no arguments there.

The financial markets, however, are slow learners, creatures of habit, and therefore, create confusion in the short-term or transition (defined as volatility) period.
Really? I would love to know when the markets corrected in Nov 2007 they foresaw a correction ahead in 2008.  I do not know if Mr. Puri made any such calls and protected his stockholders.  Fact is that yes, markets do forecast 9 of the past 5 recessions but they usually are smarter in sum than any one individual.  Anyone that considers himself smarter than the market is suffering from a God complex and has an ego problem.

The forecast GDP growth rate during the next 3-5 years for the following countries are (%): US: 1.8; Europe: 0.8; East Asia: 8; China: 8.5; India: 8. This reflects the level of structural adjustments required in the Western countries in terms of asset bubbles, financial contagion, stimulus, exchange rate, etc. 
I am stunned that any corporate executive would be out there spewing forecast statistics, that too from economists? Economists forecasting record for this cycle and most cycles in my lifetime has been dismal.  The fact that economists are forecasting 8% growth rates for Asia is meaningless.

These same economists were forecasting similar forecasts for Japan in the late 80s and the Tiger economies in the mid 90s.

Besides, investors seeking higher returns on their investment will flock to Asia; this will result in a flood of capital and Asian currencies will see a phase of secular rise against their G-7 counterparts. This could erode export competitiveness, and economies within Asia such as India and Indonesia that are more internally focused, will outperform the others.
Yes, investors will probably flock to Asia to seek higher returns.  However, in a bear market, there are no safe havens.  Just as almost every company benefited during the bull market from global market expansion, what I am seeing today is that there is deflation in Europe and the U.S. and wages are falling dramatically in these countries while wages are rising and inflation is rising in India and China.

Further, Europe has exported a 20% decline in its currency, the net result of which will be a deterioration in competitiveness for India and China.

It is shocking to me that the CEO of one of our major banks does not recognize the risks posed by a rising Rupee.  The consensus today is that India will decouple.  The consensus will be proven wrong in the near future, yet again.

Mr Aditya Puri might want to check the performance of China over the past 12 months and would see that the present market correction / selloff initiated in China.

We are entering a phase where the recession is about to be exported to Asia.  Europe and U.S. have experienced significant declines and a severe recession.  However, a double dip is likely headed.  This time around, emerging markets will suffer along side global markets.

There is no decoupling. 

Here is the first piece of news that Mr. Puri would do well to read. 
Chinese growth May Slow

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