A lot of recent comments, including mine, have pointed out the lack of policy commitment from the government. I believe there is a reason to this policy logjam and it may reverse quite quickly, to surprise of many, making the current time most critical time to invest in the country. To warn this is a conjecture.
- Indian politics has undergone a change of mechanism in financing. A significant (non-trivial) percentage of money deployed in politics comes from stock markets where it remains invested in distributed accounts.
- This implies that the stock markets must have a good peak about a year before the election. Year being the approximate time required to oil the election machinery of the political parties.
- This also implies that there should be a good opportunity to invest around 2 years before the election without which the peak referred above will have no meaning.
- Political money is gained from rent-seeking and corruption and not invested in first three years as it is being collected at that time. It is usually available around 2 years after new government takes office, the bulk being available around 3 years time. (term of government = 5 years in India)
- Insiders inform me that Late Mr. Pramod Mahajan (parliamentarian of BJP) was amongst the pioneers of such strategy around 2002-03. Subsequently ruling party Congress, inducted relevant talent into this strategy. Some say, former finance minister P. Chidambaram, known for his investment sense, may have used this means earlier. Though I have heard conflicting reports that state branches of parties in South using similar means since 1998-99.
- While earlier efforts benefitted from a global bull market, current efforts require ingenuity to create returns in an adverse global macro environment.
- I hear that ruling party has taken an ingenious approach to current problem. The first phase of the strategy is to create policy misdirection, increase rhetoric and in general cause panic and injure investor sentiment (only enough to create a equity market). The second phase is to establish policy direction and build credible reform base that should lead to uptick in equity markets.
- The magnitude of money involved is not small. Even small district magistrates have wealth in excess of INR 50 million. Politicians have access to money in excess of INR 200 million each. There are tons of them. However, substantial amount of this money is in black (cash not accounted or declared) and thus cannot be funneled into the equity markets. However, the numbers are mind-boggling.
Thus, I expect:
- Reform process to gather steam from current levels.
- Increasingly positive policy news of reform and clarity coming from governments.
- In general improving investment climate.
- Proactive and improved response from government to cushion or even counter negative news coming from global economies.
- Government may talk the market up.
Implication for Equities:
- I believe this current level is a bottom for next year or more.
- From this point we will move up is a sustained manner till beyond March of next year (around).
- At that point we may see a sharp correction as money starts being pulled out of the markets.
- So, this is time to be long India and get out by March next year.
- Risk is that if all start working on the same strategy exit needs to be critically examined.