Zaks Investment Advisory Service

Current Events and a Bit About India

Last week, the market gave us a chance to take a breather, which means that we will be able to get back to India today. But first, let us take a quick look back at what happened on our financial markets over the past four days (it was a short week due to Easter). You of course remember that the week began with the market facing a rather unpleasant fact: Bear Sterns, whose stock closed Friday at 30 dollars, was purchased Sunday by JPMorgan Chase for two dollars per share. Exchanges in Southeast Asia, which opened when it was still Sunday evening here, lost between three and five percent on the news. However, our market displayed remarkable resilience Monday: it did fall, but by a relatively small amount.

On Tuesday, March 17, the Federal Reserve lowered its rates by another 75 basis points. Many investors predicted a 100-point cut and no doubt felt some disappointment. Nevertheless, the overall market reaction was overwhelmingly positive: the S&P 500 index shot up by more than four percent. Just to keep everyone on their toes, the market lost almost 2.5 percent on the following day. But on Thursday, it pretty much recovered most its previous day’s losses. The market closed the week up 3.2 percent and currently trades at the same level as at the start of March. Theoretically, this is not something to cheer about, but one should remember that the market has just survived a series of traumatic events: the collapse of both a major hedge fund and an influential investment bank. The market’s reaction has been surprisingly measured. We should also highlight two other positive developments: the first is the dollar exchange rate, and the second are the prices of gold and oil. Despite the fact that short-term interest rates fell over the past week, the dollar still gained value against all of the other major currencies. This is a surprising reaction: usually, lower interest rates result in a lower exchange rate. There could be several explanations behind this. One of these is that the currency markets believe that our economy will not require radical new interest rate cuts. This presumes that the economy is generally better off than we had thought just a few days ago. A stronger dollar and the absence of inflation saw drops in both the prices of gold (its price fell by almost $100 over the past week from $1,010 to $910) and oil (from $110 to $101).

But now let us get back to India. We broke off in 1990, when India’s socialist economy was standing on the verge of bankruptcy. It was rescued from this state by reforms implemented by Prime Minister Rao. What did these reforms entail? Rao’s economic prescription may seem surprisingly commonplace: stock market liberalization, which allowed companies to issue shares at market prices; a permission for foreigners to invest in both directly in the country’s companies and in the securities; an end to government regulation over some industries; tariff reductions; privatization of some state companies; and state budget deficit cuts. If all of this sounds very familiar, no wonder: when we talked about Brazil, I described the reforms being introduced there at about the same time. The Brazilian reforms were very similar to the Indian ones. Moreover, Deng Xiaoping’s reforms in China, which almost stalled after the Tiananmen Square events and resumed in the early 1990s, were also built on nearly the same principles. All of this seems natural to us: these are the mechanisms behind open market economics. For India, however, these reforms marked a revolution. Far from everything Rao envisioned was actually implemented however (for example, India remains one of the most bureaucratic countries in the world). But the surviving reforms helped India’s economy overcome its crisis and opened the way for future growth. I mentioned that India’s economy remained pretty much stagnant for many years. The new, reformed economy has grown in recent years at an annual rate of eight to nine percent. According to CIA estimates, in purchasing power parity terms India’s 2007 gross domestic product stood at nearly three trillion dollars. This is more than the economies of Germany, Britain or Russia. On the other hand, the World Bank values the Indian economy at just one trillion dollars – smaller than Germany’s but larger than Russia’s.

There is one unique aspect to India’s economy: information technology. Over the past 20 years, India has created one of the largest information technology industries in the world. Its 2005 revenues stood at about 23 billion dollars. And it grows at an annual rate of 40 percent. Major Indian companies such as Tata Consulting and Infosys are successfully competing with the best American ones. But of course, all of India is not like Bangalore, the city where the country’s computer industry is based. Despite all its achievements, today’s India is still a very poor country. India’s per capita gross product ranks it 165^th in the world. However, it still offers interesting opportunities for long-term investors – otherwise, we would not even be talking about it. Despite the slump that hit its exchange in January 2008, India’s stock market has joined other emerging markets in enjoying tremendous growth in recent years. Between January 2003 and December 2007, the Mumbai exchange index has grown more than six-fold. On the other hand, the market has lost nearly 25 percent over the past three months: like all other emerging market exchanges, the Indian stock market is volatile. One should keep this in mind.

As I have just mentioned, despite the fact that most of the economic reforms have been put in place, India remains embroiled in rules and administrative regulations that limit the opportunities available to US investors. Next time, we will discuss which financial instruments remain open to us in India. But with this, we will draw today’s program to a close. This was Sergey Zaks. Thank you for your attention and until next time.