Wednesday, September 10, 2008

Socialism for the Rich ?

Indians should take note of big changes taking place in the world economy. After the collapse of the USSR, capitalism of the American Variety became the popular method of economic policy. Now, the strongest advocate of capitalism, the USA, has done the unthinkable - Nationalization.
By taking over the two housing finance companies, America has made Nationalization, acceptable once again. But, blogs say that this move to socialism is really to protect the rich - since it protects the large investment banks which created the sub-prime crisis.

Kenneth Rogoff , a senior economist, writes in the Gaurdian : (Full article here)
There is also a fairness issue. The financial sector has produced extraordinary profits, .... Why, then, should ordinary taxpayers foot the bill to bail out the financial industry?

Nouriel Roubini, now world famous for correctly predicting the sub prime crisis, writes here:
This is the biggest and most socialist government intervention in economic affairs since the formation of the Soviet Union and Communist China......
(Bush, Paulson, Bernanke) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected.

My view: Lessons for Indians:
India has followed a model of extreme capitalism in the last four years. The poor and the middle class watched as the rich grew richer. This model is likely to end in early 2009, and a more equitable society will emerge. Investors should focus on PSU shares, as this segment will carry the least risk of uncertainty. Avoid brokerages, privately owned financials, real estate.
For Investors: There is likely to be more pain in the stock market. Rallies should be considered as bear market up moves, unless proved otherwise.
The FII's - in big, deep problems of their own, should not be expected to invest in India, in large amounts, in the near future.


suresh said...

Interesting advise on PSUs. IMO, Most of the PSUs have been good at giving dividends for investors, but i'm concerned that the quality of management at the helm of some these PSUs is questionable. Should i not factor that into my risk? Any recommendations on PSU stocks you have? thanks

Sudarshan Sukhani said...

Please note that your blog comment box does not work, and this is not something that has happened just once to me. Perhaps a bit of help from Blogger would set it right.
I posted this comment for your last blog post:
"I disagree when you say we are following the model of 'extreme capitalism'. We are a socialist mixed-economy in every sense. The control Governments have on our daily activities is incredibly deep and complex. This is incompatible with capitalism. Let us not give a bad name to capitalism that it does not deserve."

Shashank Jogi said...

It seems to me that we are witnessing watershed events in the western world. These developments might well be epochal in nature and are bound to have significant impact on the investing scenario worldover, India included.

I dont know how or when the pieces will fall in place and the picture emerge. Till then, we wait and watch.

The Great India Growth story became much of a hype...if you go to parts of India apart from the major towns and cities, you will witness how millions are unaffected by the boom in the economy. It is easy to make great sound bytes about India's prospects sitting in our air conditioned offices while being totally oblivious to the reality in rural and semi-rural India.

In the past, there have been period when stock markets fell and went sideways for extended periods (1986-88, 1995-98, 2000-2002) inspite of good GDP growth. Investors must realise that GDP growth does not always translate into stock market growth.

It is clear that foreigners drive the Indian markets. Since 2003 till 2007, FIIs made a total investment of USD 52 billion. Domestic funds invested about USD 9.5 billion. The sensex went up 7 times from 3000 levels. In 2008 till August, FIIs sold USD 7 billion while domestic funds bought USD 1.7 billion giving a net outflow of USD 5.3billion. The sensex was down 34% in this period.

FIIs are loath to investing in a depreciating currency. They have problems of their own to think about making huge investments in emerging markets like India.

The pain for investors in India could be more than most anticipate. There is a time to be in stocks and there is a time to be out of stocks. The key to success is to realise when.

Happy investing!