Ashu Dutt's "The Boom & Bust Journal International" - July 2009 Edition

Ashu Dutt's "The Boom & Bust Journal International" - July 2009 Edition

THE CALL – FOOLED BY RANDOMNESS

Is US the cheapest market in the world? Is China ready to “blowout”? Is India one big PR exercise?

Questioning conventional wisdom on Asian business media is just not the done thing. Given that most of us have a “long bias”, channels and business newspapers (specially in Asia) simply shunt out anyone who has contrasting views (I don’t mean the “performers” who seem to have contrasting views but those with truly contrasting views). What ends up happening then is that you only see or hear views that suit or fit the media’s priorities. That is extremely dangerous when you are investing your money based on such views. Because the views are by default highly skewed.

Having said that, my reading is that the US markets are perhaps the cheapest in the world. Beyond that they provide the only play in the world on cutting edge innovation and technology. Take a look at US stocks and you can see how numerous companies are in the “winner take all” mode. Show me a single Apple, Microsoft, Google, Amazon, ebay (just to name a few) in India or China. These countries are full of what would be considered “fossilized” plays in the US. Power, Infrastructure, textiles, automobiles etc. Yes, Yes, I know about the domestic demand in India and China. But domestic demand can only do so much. Without innovation and a system that allows the next Google and Microsoft to rise (read Twitter etc), stocks in these countries are way way overpriced (i.e. they factor in everything that has to be factored in the price)

US markets may be the cheapest in the world. It remains the center of innovation and no one is even close to making things like Operating Systems (“Chrome”). The US has moved deeper into the “long tail” than anyone and when the dust settles, it is still the worlds fastest innovating economy.

India and China are doing what they did anyway for 3-5 decades. Providing cheap labour. First for textiles, then manufacturing now IT. But it is not innovation. Perhaps their local markets for consumption have developed. But it is overhyped.

Its not just innovation. Why in the world is anyone buying third world banks in India and China while a Citibank or a Goldman Sachs go at bargain basement prices. Or for that matter why is a McDonalds or any other such iconic brand not showing the valuations some of these local brands are showing. Demand is not a proprietary domain of local companies. All these iconic brands with way superior technology can easily be players in India and China (as many have already demonstrated)

China is a “hyper bubble”. The impact of its economic splurges will be visible by late 2010 or early 2011. It is an established fact that “centralized” economies make bad economic decisions (they need to keep up their appearance). And China is making a ton of them. To start with who in a market economy would go around piling commodities when you know you are the only buyer in town? Why not just wait for commodity prices to collapse before entering and buy at bargain basement? But who can explain that to countries who don’t have a two way flow of information or any healthy debate on why such decisions are made. This is just one example of why China for all their breakneck growth remains one of the biggest threats to the global economy

Now lets look at India. Promise. Promise and more promise. Yet exceedingly short on delivery. Take a look at the kind of money that is being raised (and has been raised) for power plants, roads etc etc. Where is it? Where are the roads? Where are the power plants? Riot like situations result in the capital New Delhi as people can’t hold their temper having lived for decades with little power and water. Mumbai is a pothole paradise. And yet foreigners pour more and more money on some dream. The Indian market is sure to disappoint and may be one of the worst performers in the next 2-3 years (even though I expect economic growth to continue at a 7-9% rate). This may sound like a paradox. 7-9% growth and I still think India is perhaps long on promise and short on delivery? Well just calculate 1.3 billion people, a very low GDP base and its clear why even “inertia” can generate 7-9% growth. India is nowhere near what its potential is. But I don’t see it getting to that potential. Management (specially macro management) is not a great local skill (and any help from foreigners seems like a personal affront).

What foreigners do is to look at a bunch of successful Indians (who in any case were the best of the best locally) and extrapolate on what India is all about. That’s really ivory tower thinking. Think about this. How difficult is it to find 1.3 million exceedingly brilliant people among 1.3 billion (that’s about 0.1%) or even 13 million. But that’s not India. India still has huge legacy issues and development or return on capital is and will be exceedingly slow. If however, the only goal is to flip investments (i.e. play the market), India may not be a bad story. A lack of a diversified investment thought processes (among local investors and even institutional investors who are in this market) and herd like buying and selling behaviour make it an ideal trading market very well suited for directional traders.

India as a country is severely undervalued and Indian stocks are overvalued. You see the India that is emerging will be filled with “innovation” companies in technology and pharmaceuticals. Those who innovate and come up with “destructive technologies”. Yet, India’s stock markets are filled with archaic relics of the past that should be valued like relics. There is no reason why power companies, oil & gas companies should be valued at even half of their current valuation. And that’s precisely where they will head. As we go forward, global companies will crowd to India (as their own markets offer little growth prospects), taking a lot of Indian companies to deliver mediocre returns.

RANDOM MOORINGS

The China and India stories are severely overblown. Even more the valuations of stocks in these markets. Before we believe in our self creating maxims about how India or China will overtake the US, lets ponder how true that really is

- Both China and India are stuck with historical legacies. Specially India. Celebrating other people’s success does not come automatically (something the US has been able to do exceedingly well). Its rise lies in its ability to attract and keep the best minds in the world

- US universities are way ahead of anything India or China has. They remain centers of creativity (something universities in India and China rarely do). How many nobel prize winners come from Indian or Chinese universities?

- Indian and Chinese stocks are largely from the old economy. The US is filled up with “Innovation” stocks like Google and Amazon (to name a few)

- While India and China may have moved up, the US has leapfrogged into an entirely new plane. Google, Amazon, Flickr, Twitter may perhaps set the tone of how things will shape out.