Hugh Young on India: corruption looks larger than inflation
Comment of the Day

September 06 2011

Commentary by David Fuller

Hugh Young on India: corruption looks larger than inflation

My thanks to a subscriber for this item from City Wire. Here is the opening:
Aberdeen's veteran Asian equity fund manager Hugh Young has championed efforts to tackle Indian government corruption and said lack of transparency is a major barrier to outside investment.

Investors in India are said to be dissuaded from investing in the country due to systematic government corruption. Although, Young believes this could change in the wake of widespread anti-corruption demonstrations.

Protests came to a head after prominent campaigner Anna Hazare undertook a 13 day hunger strike, which saw rising support and nationwide discontent. This led the Indian government to agree to discuss proposals for an anti-corruption framework.

Young said: 'It is a shame that the government itself could not clear up the problem and that it took outside parties to force the politicans.'

The veteran stock-picker said that high levels of inflation, which are currently around 9.22%, are also a major barrier to entry for investors but conceded that governance was an even greater concern.

'I think that in terms of trends, speaking as a cynic, interest rates go up and interest rates go down, but the most important thing for a country is to have proper governance in the broadest sense of the word,' said Young.

'We need transparent measures and a proper judicial system, for example, and that is really what is important and that is not what we are really getting. The government has obviously been quite helpless and that is one of the biggest disappointments.'

David Fuller's view Fullermoney certainly agrees with Hugh Young. Veteran subscribers will recall one of our most important investment mantras: Governance Is Everything.

Unfortunately, from India to Euroland and the USA, standards of governance are woeful, in our view. More importantly, this also appears to be the verdict of markets.

It need not be this way. The good news coming out of India is that the country's rapidly growing middleclass no longer responds to evidence of corruption with a weary sign of resignation. People are angry and this is increasingly reflected by India's media, as this site has pointed out on numerous occasions.

Subscribers temperamentally inclined to view the world as a half-empty glass may not feel comfortable about India's investment prospects. My suggestion: follow your own financial instincts, especially when they are backed by promising chart action. There are plenty of opportunities following bear markets.

Those who in the midst of today's economic crises, large and small, view the world as a half-full glass may share my long-term optimism concerning India.

Will India's citizens reverse the tide of corruption in their country before politicians in Europe or the USA are able to form the bipartisan consensus and wisdom to deal with their debt and entitlement problems? Well, I would not bet against it.

Fortunately, I do not need to and neither do you. Fullermoney likes successful multinational companies in both the USA and Europe, despite the moribund state of their home economies. Fullermoney also likes India, for the energy and creativity of its people, evidenced by the country's superior GDP growth rate.

Currently, we remain in a bear market, confirmed by a majority of price charts for stock market indices and individual shares. Bear markets are disquieting times, during which the worse fears of many are discounted. Those legitimate concerns are often over-discounted before stock markets bottom. That is when the best buying opportunities occur.

With every frightening lurch to the downside - when you see fear rather than complacency - you should also recall that stock markets are becoming more interesting, even after allowing for downgrades in corporate profits due to weaker GDP growth.

For those who are not buy-and-hold investors, the best time to buy in a bear trend is after stock markets have accelerated lower and become very overextended relative to declining 200-day moving averages. Conversely, the best time to sell in a bull market, I maintain, is when stock markets have clearly accelerated higher and are quite overextended relative to their rising 200-day moving averages.

Currently, there is very little evidence that stock markets have reached sustainable floors, as Eoin has been pointing out. Also, bear markets often prompt crisis-oriented governments and central bankers to adopt stimulative measures. This too has yet to occur, although forecasts of QE3, including additional printing of fiat currencies has increased.

This may not be good for indebted countries and their currencies but remember, we buy stocks, not economies. Balance sheets for the better multinational companies are the antithesis of their indebted home countries, as I have mentioned before. Low interest rates and money printing are tailwinds for equities.

It is very difficult to forecast how far stock markets will decline in a bear market panic, although we hope to recognise a floor as it forms. I do not think that we are seeing a repeat of 2008 for Fullermoney themes - from Asian-led growth to resources and leading multinational companies - despite weak GDP in the west and too high commodity prices.

Meanwhile, additional stock market weakness will increase interest among value investors. As downtrends are extended we should become progressively less bearish, even though it may feel counterintuitive at the time as crowd sentiment will also be deteriorating. Behaviourists will recall that crowd sentiment is one of the best contrary indicators.

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