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INDIAN ELECTIONS ARE POSITIVE FOR INDIAN INVESTMENT

INDIAN ELECTIONS ARE POSITIVE FOR INDIAN INVESTMENT

Every five years, assuming there are no failed confidence votes, the Indian electorate goes to the polls for a month long voting exercise where over 400 million voters (out of about 700 million eligible voters) decide the country’s leadership.

The election that just ended this past weekend will return the Congress party coalition and the incorruptible Manmohan Singh to the position of Prime Minister.  The Congress party coalition will have close to a majority and will be able to make a strong coalition without the communists or the radical right.  We expect a pro-business, pro-growth economic policy, a pro-western foreign policy and an improvement of the government’s ability to achieve its stated goals.  For the last several years the Congress party has ruled in a coalition with radical left parties.  These parties slowed or stopped much economic progress that Congress had initiated.

This election will make India a stronger investment destination, strengthen its economic growth rate and strengthen an already stable democracy.  As everyone knows, India is located in a turbulent region.  India is surrounded by several small, unstable, and sometimes warring states.  Their neighbors include Sri Lanka to the south, Nepal to the north, Bangladesh to the north east, and Pakistan to the west.  As we have suggested in past letters, the U.S. should look more to India and less to the corrupt and weak government in Pakistan for a dependable ally in the region.

REUTERS NEWS, Sunday May 17, 2009
BUOYANT CONGRESS EYES NEW ALLIES FOR
By Krittivas Mukherjee

    NEW DELHI, May 17 (Reuters) – India’s Congress party held talks on Sunday to identify allies for a stable new coalition government after a sweeping election victory at a time of sagging economic growth and regional instability.
    Prime Minister Manmohan Singh’s coalition defied predictions of a tight election and was only about 11 seats short of an outright majority from the 543 seats at stake, according to election commission data. (For more stories click [nSP437509])

    In a country where unwieldy coalitions were becoming the order of the day and hobbling policy, the electoral verdict this time means Congress will call the shots in coalition building rather than being dependent on the goodwill of regional parties.
    The Congress’ top leaders, including Singh, party chief Sonia Gandhi and Foreign Minister Pranab Mukherjee, met on Sunday and discussed potential allies.
    They were expected to talk later on Sunday with the regional Samajwadi Party, which is based in the northern state of Uttar Pradesh, for a possible alliance, local TV channels said. The party had backed the Congress-led government over the last year.
    "I can only tell you that there are a lot many smaller groups, many political parties or independents who are more than willing to support this government in national interest," Congress spokesman Rajiv Shukla said.
    Pollsters had predicted controversial regional chieftains like Mayawati, a lower caste leader in northern India, could have held the balance of power after the election, stymieing economic policy and demanding ministerial portfolios.
    A strong Congress-led coalition, free of pressures from its former communist partners, has boosted the prospect of reforms to encourage growth in Asia’s third largest economy.
    The new government will also have a strong mandate to deal with security issues in a region overshadowed by instability in Pakistan and Afghanistan.
    Singh’s coalition will be free to pursue closer ties with the United States, which the communists had opposed. They  eventually walked out of the alliance over a civilian nuclear energy deal.
    Indian markets were set to surge on Monday on expectations the clear election victory would lead to a strong and stable government that would accelerate the pace of economic reform.
    The rupee was expected to strengthen past 49 per dollar and bond yields were set to fall as the outcome should encourage foreign investors, analysts said.
    "The markets could go up anywhere between 1,100-1,300 points over the next two to three days because you cannot have asked for a better combination," Arun Kejriwal, strategist at KRIS, said of the share market
    The Congress must form a government by June 2.
    CAUTION

    While a strong mandate gives the reformist Singh the freedom to pursue market-friendly reforms, Congress party leaders struck a cautious note saying they would rather focus on reviving domestic demand.
    "Some of the icons of the financial world who were advocating financial reforms have closed shop. We have to be cautious this time," Trade Minister Kamal Nath  said in a telephone interview.
    During the election, the Congress had campaigned on a record of spending on the rural poor, including a public jobs programme in the countryside and a costly loan waiver programme for indebted farmers, and was unlikely to give up such a platform.
    "Inclusive growth was the mantra of success," wrote political analyst Mahesh Rangarajan in The Mail Today.
    The Congress leadership was also expected to discuss a cabinet role for Rahul Gandhi, heir apparent of the Gandhi-Nehru dynasty. He is seen as the architect of the Congress party’s resurgence, particularly in the northern states.
    Though Singh, 76, will retain his office for now, Gandhi is projected as a potential future prime minister.
    "Verdict 2009 has also been a decisive judgement on the 39-year-old Rahul Gandhi as a campaigner, political tactician and as the ordained one who would be king," wrote the Times of India. "And the judgement is overwhelmingly in his favour."
(Writing by Sanjeev Miglani; Editing by Alistair Scrutton)

CURRENCY MARKETS

The currency markets are discounting mechanisms…when will they start to correctly discount all of the unwise maneuvers currently being taken in the U.S?  Currencies are a strategic indicator of the economic health of a nation, a society, and a culture.

Gold has, in the past, alternated between acting as a currency (when government’s management of currencies has been unwise), and acting like a commodity when well- managed currencies have been the rule.  We believe that in coming years gold will act like a currency.  Gold will become a currency destination for those who doubt the integrity and wisdom of the governments which mange the world’s major currencies.  Gold will be bought, along with other well managed currencies, as a hedge against poorly managed currencies.

We expect strong non-U.S. currencies, especially those countries with oil production, stronger emerging economy currencies, for example the Chinese Yuan, gold, oil, food, non U.S. bonds, and stocks to move inversely to the U.S. dollar.  We expect them to rise as the U.S. dollar continues its recent decline.  It is our opinion that strong currencies, gold, food, oil, selected foreign bonds and well managed U.S. and foreign stocks will acquire more investor interest as people seek to hedge against a weakening U.S. dollar.

For the last several years, every time we have seen political, military, or economic crises, investors have plunged into U.S. dollars as a safe haven.  Has this been rational, based on economic and financial facts?  In our opinion, the answer is no.

Financially and economically, the U.S. dollar is being badly mismanaged.  It is being diluted and undermined by irresponsible fiscal and monetary policies, and it should have declined in value as U.S. economic fortunes have declined.

To understand why the dollar has not declined more, one must consider human psychology; the part of human psychology that creates the desire to stick to what is known and what is big, even when the known and big is faltering.  From this perspective, one can see how some frightened investors have bought dollars when crises occur.

However, if we examine the situation, without emotion, there is little justification for a long term positive view of the U.S. dollar.  Many important figures are embracing this realization, including President Obama, who recently warned that China may not keep loaning the U.S. money forever.

Let us look logically at the case for owning currencies or gold instead of the U.S. dollar by asking a few questions.

1. Why is the U.S. taking the primary role, and practically taking sole responsibility to restructure the world banking system?  The U.S. is spending more taxpayers’ money than is rational, and the U.S. is damaging the future of all its citizens in order to help other nations.  The only logic for this is that the U.S. leadership believes that they are the world’s dominant nation, and have a responsibility for everyone else.  At GIM, we take strong issue with this logic.  When did it become wise to keep others from receiving the fruits of their actions?
2. Why does the U.S. continue to buy their own debt via quantitative easing?  This is the approach that has been pioneered by many Latin American countries that later experienced run away inflation.

3. Why does the U.S. Congress attack the productive portions of society, the earners, in favor of the unproductive portions the recipients of state aid?

4. Why does the Congress of the U.S. make it hard for the best industry in the country (the technology industry) to get the foreign technology workers that they need by withholding visas?

5. Why has the U.S. elected more and more tax and spend politicians?  Numerous economic studies have shown that socialized economies do not grow as rapidly as free market economies.  Tax receipts and standard of living grow more slowly…or shrink.

6. Why does the U.S. insist on continuing its role as world policeman?  We do not wish to take a position on the wisdom of the world policeman role, but the truth is that this role is financially beyond the means of the national treasury.  This view has been more than adequately corroborated by the announcement of a minimum $1.8 trillion U.S. budget deficit for the current fiscal year.

In effect the U.S. is a nation that has lost its way economically and fiscally.  It is behaving like a banana republic.  The U.S. has only its former glory and its size to make it a psychologically attractive port in a storm.  The U.S. economic empire, like all previous empires that have approached the end of their power, rely on the memory of past glory and the repetition of its past patterns of power politics.  How much longer can memories of past glories outweigh the reality of diminished current finance in investors’ minds?

We believe that a country’s future always follows the money.  In the U.S. the money is leaving for China…and so is the power.

WORLD STOCK MARKETS

Most world market rallied for about eight weeks.  China has been the exception.  China has rallied for a couple of months longer.  In the last week, world markets have entered a corrective phase, while investors catch their breath, take some profits and await a return of the rally.

If you are a fundamental investor, today there are only a few areas with strong investment fundamentals.  India, China, and investments which will benefit from a weaker U.S. dollar, such as oil, gold, and agriculture related investments are more attractive in our opinion. Capital will be available for companies in these countries and industries.  If you wish to invest in markets other than these, be sure to invest in only those companies with strong cash flows; those which are self-financing.  Wherever you invest, take advantage of volatility to buy the dips and sell rallies for part of your positions.

BASE METALS

We are not excited about the demand for most base metals.  Apart from China, there are few buyers, and although buyers will appear as world economies bottom in late 2009 or 2010, the demand will not be huge.  The glory days of 2007 will not be soon repeated for most base metals, unless inflation becomes even more virulent than we foresee.  In this case, gold and oil will go to prices many times higher than their current levels.  If you wish to invest in base metals companies, we suggest that you focus those companies owned by China, or those which have strong relationships with the Chinese.

SUMMARY

India’s election was good news for investors. World stock markets need a breather and India, China and those investments which benefit from an inevitably declining dollar as mentioned above, remain our favorites.

Thanks for listening.


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