Can Obama save 'laissez-faire' capitalism?

Barack Obama has taken over the reigns of the world's most powerful economy 'in the midst of an unprecedented crises'. His nerve-tingling oratory may have won him millions of fans around the world, but now it is the time to get down to serious work. The biggest task before him is to 'reinvent capitalism'. 'Laissez-faire capitalism' pursued by his predecessor may be as dead as the 'Soviet communism'. The entire politico-economic model of free enterprise, rugged individualism and small government on which America built its global hegemony seems to have broken down. How else can one describe a situation in which all of the country's main financial institutions and many of its biggest industrial companies are effectively bankrupt and on government life-support?

'Laissez-faire' is a term used to describe a policy of allowing events to take their own course. Laissez-faire activists support little or no state intervention on economic issues, which implies free markets, minimal taxes, minimal regulations and private ownership of property. The collapse of Communism as a political system sounded the death knell for Marxism as an ideology. The events of the past few months have proved that laissez-faire capitalism has been a monumental failure in practice. Bush administration's reliance on unregulated markets was a primary cause of ruin for the US economy.

Observers point out that US deficits have largely been financed by foreign governments who continue to pump in money into US treasuries. But many of the Arab countries who ran huge surpluses due to high oil prices may be in for tough times ahead. It is a matter of time before the money managers will have to look for safer havens as US treasuries offer near zero yields. However, with Europe also in the grip of serious depression, there is no imminent danger to the US dollar's supremacy. It is time for Obama to rewrite the principles of Capitalism. Capitalism may still survive but in a new avatar, where the state will be required to play a major role. The belief that 'markets are always right' has been shaken.

The markets have greeted the swearing in of Obama with a thumbs down, because they know that the road ahead is going to be really tough.

India tops Consumer Confidence Index

India has topped the recently released 'Consumer Confidence Index' for second half of 2008. The Nielsen Global Consumer Confidence Index covers internet users around the world and is conducted every six months. The latest round was conducted in September-October 2008 across 52 markets across the globe. It may not be representative of the Indian population due to the low penetration of internet users in the country. However, the important findings of this survey are:

• India has emerged as the most optimistic nation with an index of 114 against the global average of 84.
• Despite the economic crisis 51% of Indians believe that the country will be out of recession in the next 12 months (Asia-Pacific average 22%).
• Indians believe in saving (58% would continue to put money into savings), they are also relatively insulated against the global financial turmoil due to the relatively nascent financial market.
• A majority 77% Indians believe that the state of their personal finances is excellent to good for the next 12 months.
• Indian spending is mostly directed towards new clothes, home improvement & technology products, while there has been a decline in spending for holidays and out of home entertainment.
• The top concerns for Indians are Economy (25%), Terrorism (24%), and Work life balance (21%).

The survey may be a pointer towards the revival of the Indian Economy in the second half of 2009.

SATYAM saga: Section 388 of Companies Act invoked

7th January 2009 will hopefully go down as a special day in the history of Corporate India, just like 26th Novemeber 2008 marked a turnaround in the history of Indian politics. It was on 8th January 2008 Indian stock markets overcame 'Peak 21000' on the sensex. The clock has turned full circle since then, and exactly one year after that historic event Corporate India has woken up to the bitter reality: 'The method behind the unprecedented madness seen on our markets'. The Satyam saga continues, hopefully this would be the last time Indian investors would have been taken for a ride.

Investors across India have to unite to fight the evil designs of the unscrupulous promoters of India Inc. It is heartening to note that the Government of India has acted swiftly this time around. The govt. has used its powers under the companies act, to supersede the erstwhile Satyam Board and appointment of fresh set of directors. It is a unique case of board super cession in India under section 388 of the Companies Act, a provision which is used as a last resort. This section provides for a change of management if found guilty of fraud, malfeasance, persistent negligence or default in carrying out their obligations and functions under the law, or breach of trust. Earlier cases of CRB Capital and WH Brady had resulted in partial super cession of the board by appointment of nominee directors by the government. The govt. also enjoys powers under the companies act to amalgamate companies in national interest.

The Govt. needs to be appreciated for this timely step. It has also been followed up by the arrest of the Raju brothers under sections where bail may not be granted. Let us hope the new board will start functioning at the earliest, to restore the confidence of the vendors, shareholders and employees of Satyam Computers Ltd.

Satyam: Let the Truth Prevail

The ‘Satyam’ saga has turned out to be far away from ‘Satya’. The moral of the story is 'riding the tiger and getting eaten too'. Confessional statement by Ramalinga Raju has sent shock waves through the entire investor community. Raju's story seems to be half truth only, there's more to it than meets the eye. It is the story of a CEO trying to become a landlord and a politician overnight. Raju seems to have swindled Satyam shareholder's money to buy land for his family members and to bribe the politicians to fulfill his evil design.

Whatever has happened is history, law of the land will take its due course in the time to come. However, the new board of Satyam has a task cut out before them, in order to restore the confidence of vendors, shareholders and employees of the beleaguered company. Here is what they need to do swiftly:

1. Initiate criminal proceedings against Raju, to recover the swindled money. Try to get the accounts and assets of the Raju's freezed by enforcement agencies.

2. Recast the balance sheet, by hiring an independent firm, to instill confidence in the stakeholders.

3. No company will be able to takeover Satyam at this juncture due to the takeover code. Invite interested parties like L&T, M&M to nominate members on the board to lend it a semblance of legitimacy.

4. Take immediate steps to cut costs to keep the company as a going concern. Convince all employees to accept a 25% wage cut for the next 6 months at least. The directors should take the lead by announcing a 50% cut in their own remuneration. Manage efficient management of premises, rent out some space from company owned premises. The survival of the company is the main issue.

This issue is much bigger than a mere 'Corporate Governance' issue, as the image of India as a nation is at stake. Of course, it is bad news for the investors, as this may have laid the foundation of a prolonged bear phase ahead!

Interest Rate Mechanism

Interest rates reflect the price of money/credit in the economy. Banks have two main sources of income - the net interest income (i.e. income earned on loans minus payout on deposits) and the incomes they make on their investment portfolios. Since bond prices move inversely with interest rates and the bulk of banks' portfolios is in bonds, treasury incomes rise with a fall in interest rates and vice versa. However, the bank profits largely depend on their net interest incomes.

The key interest rate indicator, also known as the REPO rate has recently been lowered by 100 basis points by RBI. Repo rate is the annualised interest rate at which banks borrow money from the Reserve Bank of India (RBI) over a short term. At the same time RBI has lowered the reverse repo rate by 100 basis points, signalling the banks to cut their lending/ deposit rates. Falling interest rates are a boon for the borrowers in the long run, as they help sustain the profitability of the companies.

The recent rally in the global/Indian markets is a reflection of the fact that the markets believe that the profitability of the companies is going to improve with the steps taken by the monetary authorities recently. But we need to consider the under noted facts:

• Are these measures enough to revive the economic activity and the consequent demand for companies' products. The falling incomes and the uncertain environment are forcing the consumers to postpone their purchases.
• Are banks in a position to pass on the benefits to the end users. Unfortunately banks in India cannot lower the interest rates drastically, because of the administered interest rates of the small savings schemes which directly compete with bank deposits.

Keeping in view the above factors the falling interest rates may not have a significance on the revival of company fortunes for at least the next two quarters. This fact makes me believe that the rally in global markets may not sustain long enough.

India Inc.: Challenges ahead in 2009

The recession in the Global Economy that started in 2008 is likely to continue deep into 2009, causing a severe contraction in economic activity. Severe recession is likely to grip US, Europe, Japan and other advanced economies, even emerging markets will face a severe slowdown. The situation is grim and is leading the global economy towards 'Stagflation', a situation which combines the ill effects of economic stagnation and deflation, where aggregate demand falls short of aggregate supply.

India Inc. will have to grapple with this grim global situation for at least the first half of 2009. The internal signals available are not encouraging at all. Even as inflation is hurtling towards a five year low (it is expected to slide to a level of 2-3% by March 2009), domestic demand seems to be contracting at a rapid pace. The credit crunch has started hurting the growth plans of companies, uncertainty of employment is responsible for the decline in consumption levels. The stimulus package by the government is going to have a limited effect.

India's industrial production was down 0.4% in October '08, exports have declined by 10% in November '08 for the second consecutive month. There is a case for further rate cuts by the RBI in the wake of decelerating inflation, but the banks may not be able pass on the benefits to the end users unless administered deposit rates are cut by the Government. Banks will not be able to reduce deposit rates further as the interest offered on Govt. schemes (PPF, NSC, Post Office deposits) range between 8-8.5%. Prudence calls for a 0.5-1% cut in these rates but the govt. in an election year may not be able to bite the bullet.

The situation is alarming, the government is trying to boost consumer spending by 'Demand pull' factors, but to sustain the momentum supply side factors need to be augmented in the right earnest. Infrastructure spending needs to be boosted to remove bottlenecks in supply. This can be done by cutting costs through efficient management of resources. India Inc. would also have to cut costs to stay afloat in these challenging times. As far as investors are concerned, they can go for selective investment in cash rich companies which thrive on domestic consumption. However, keeping in view the turbulence in global markets, a 'buy on decline' strategy may be prudent.

Year 2008 in retrospect

Year 2008 will go down as the most turbulent year in the history of Capital Markets across the globe. Anyone who took the risk of making a prediction about the markets at the beginning of 2008 has been proven wrong by the time the year comes to a close. Here is a summary of the major events that made 2008 as an extraordinary year in the lives of 'Investors':

• Stock Markets in India registered their largest annual decline in history. The sensex recorded a decline of 52.5% over calender year 2008 (Falling from 20287 to 9647). Amongst its peers it is one of the worst performing indices, next only to Shanghai Composite which declined by 65.4%. The valuations of BSE sensex companies (PE Multiple) declined from an average of 27.7 to 12.4 by the close of 2008. During the year the sensex declined to a low of 7697 intraday, and the valuations went down to a pathetic level of 9. Foreign institutional investors took away over $13 billion from the Indian markets.
• Commodity Markets played havoc with the fiscal deficit of the Govt. of India. Prices of base metals the Copper, Nickle, Aluminium and Iron ore went through the roof during mid year, causing a lot of distress to countries like India that are net importers of many of these commodities. Crude oil jumped to a high of $147/ barrel in July amidst excessive speculation, only to fall back to under $40/barrel by the end of the year.
• Inflation played havoc with the budgets of invidual investors. In india WPI inflation peaked out at 12.9% in July, and closed the year at a comfortable level of 6.6%. Due to demand softening, inflation is likely to come down further to the levels of under 4% by the end of this fiscal. This leaves enough room for the Monetrary and Fiscal authorities to increase liquidity and cut interest rates aggressively.
• Gold emerged as one of the best performing asset classes during 2008 giving a return of 4%, making it a eighth consecutive year of gains. Gold continues to glitter and is looking to extend its dream run in the next year as well.
• Political Climate: After a lot of uncertainty and bloodbath, 26/11 marked a turnaround in Indian political scenario. The countrymen and the political leadership rose from their slumber to unite as a nation. The elections conducted immediately after 26/11 gave a clear message that sincerity and hard work will be rewarded by the electorate. By the year end the prospect of a new govt. in J&K under a young CM augers well for return of democracy in the troubled state. In the aftermath of terror attacks, Pakistan was pushed into a corner through diplomatic initiatives, and the involvement of LeT as the perpetrators of terror across the world was established beyond doubt. India also emerged as a strong nation by getting access to nuclear fuel without signing CTBT. ISRO's mission moon 'Chandrayan' also raised the image of India in the world.

The year 2008 has come to a close, let us hope year 2009 will bring a lot of cheer and prosperity to the 'Investor Community'.