The Future Will Happen!




Michael Lewis wrote a famous book title 'Next: The Future Just Happened' which talks about how the internet has changed lives. Political leaders ought to read it. Willy nilly, the future will happen. All that they can, and should, do is to prepare as best they can for it.


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Consider the unpreparedness of the pension fund scheme, which, with a corpus of Rs 130,000 crores, has run up a Rs 54,000 crores deficit (even without the help of the organisers of the Commonwealth Games). This has happened because interest rates have been falling, and are now below the rate at which their corpus can generate the revenue required to meet pension obligations. The Finance Secretary has been urging them to start investing a bit of the corpus into equity, which can, over the long term, give them sufficient returns. The trustees of the EPFO (Employee Provident Fund Organisation) have, belatedly, and grudgingly, accepted the suggestion and will look at investing in shares of triple A rated PSU stocks. That, of course, begs the question; if EPFO trustees seek the assurance of triple A rating, then why restrict it to PSU stocks? The answer is obvious – to protect their rear! Much like the old adage 'nobody can be questioned for buying an IBM', they believe that their decisions to invest in PSU equity would be above reproach, were the shares to tank, as they often do. Failure to invest in assets that yield a return enough to meet their liabilities is a dereliction of duty and an insistence on investing in triple A PSU stock only is a dereliction of their obligation to think. This is how not to plan for the future.



The US, too, is finding out how poor planning leaves it unprepared to meet the future. When the financial crisis hit, especially in the housing market, and banks were left straddled with stocks of foreclosed homes which they were unable to sell because prices continued falling, the US Government offered tax credits for purchase of new homes.



Once the deadline for the scheme ran out, sales of new single family homes slumped; July 2010 sales were 32% below July 2009 and, at this rate, it would take a decade to clear the stock of foreclosed homes held by banks. Housing is unlikely to lead the US out of this slump, as it has, out of previous ones.



A similar thing had happened in the scheme 'cash for clunkers' to encourage American car owners to trade in gas guzzlers (like SUVs) for newer, more fuel efficient vehicles, by offering them a tax rebate. Consumers simply brought forward their purchases and sales slumped once the scheme ended.



There are several instances of good planning for the future, too. Brazil, for example, has, by transforming its cerrado, or treeless land, into farmland, thereby becoming, from a net importer of food, 30 years ago, to one of the world's largest breadbasket. The Government set up, in 1973, a company acronymed Embrapa, which did a lot of research and planning. It changed the acidic quality of the cerrado soil by dumping around 15 m. tonnes of limestone each year, it imported and modified, a strain of African grass that allowed for pastures for cattle and now has the world's largest but one cattle population (after India) and it pioneered and encouraged new farm techniques called 'no till' agriculture.



What is India doing about agriculture, on which 60% of its population depends, but which earns some 15% of national income? Busy diverting attention to cricket? We have not even provided for adequate storage for the subsidised grain that we buy, with the result that we have the largest population of well fed, subsidised rats in the world, even as the human population starves. Sure, the Ministry would love a junket to Brazil to 'study' the Embrapa methods, but little will come out of it. The future will happen, but in agriculture we will be mightily unprepared for it.



As far as the stockmarket is concerned, however, the mess in the pension fund planning is probably good news. For it will compel the Trustees to do what they are supposed to be doing, viz, think about the future, and thus to invest at least a part of the Rs 130,000 crore corpus in equity. They will then have to think a bit more, and revise upwards the pathetic management fee of 0.0009% granted to the 7 approved managers of funds. For, at this rate, none of them are willing or able to devote manpower resources to sell pension fund products. So, if EPFO continues to invest in low yielding assets, one of two consequences must inevitably occur. Either the pension liabilities will be unmet (hence payouts reduced) or the Government will bail it out and raise taxes for the purpose. For want of a nail, the battle was lost.....



Another piece of good news for the market was that the taxation of capital gains has not been tampered with in the new direct tax code, as was feared by some experts.



In corporate news of interest, ONGC states that its consent, as a 30% holder in the block, is needed for Cairn plc to sell its stake to Vedanta. The price for that consent may be that Vedanta be asked to pay, as it should, its share of royalty. This is now borne by ONGC, with the result that from the Barner, Rajasthan, oil block, whilst Cairn India gets $42/barrel, net of royalty, ONGC gets $2. This is, yet again, an example of a poorly planned future by the Government when offering blocks under the NELP. Should Vedanta agree to it, it would, in turn, pay a lower price to Cairn, as is correct. The price is based on current cash flows, which contains an artificially depressed share of royalty payments. This is similar to the huge gains made by some new telcos which were granted cheap spectrum and sold off their spectrum rights at a huge profit. The grant of cheap spectrum could be justified if it were used to bring down costs to consumers but not for profiteering by a license holder. This should have been planned for, by the telecom ministry, simply by inserting a clause that the spectrum was licensed only for use by the holder and not by any other party, and that, were the spectrum, or the management stake, to be sold or alienated in any manner, the spectrum allocation would revert to the Government. It does not take rocket science to insert such a clause, only integrity.



The sensex added 223 points, to end at 18,221, whilst the Nifty added 70, to close at 5479. Like in the previous few weeks, foreign investors were net buyers throughout. But interestingly, domestic mutual funds emerged as net buyers on a few days last week. This suggests that the retail investor is wanting to buy on declines. Given the high domestic savings rate, given the rising income levels thanks to an 8.5% plus GDP growth, and given the slow but steady spread of the equity cult (who knows, maybe even by the EPFO trustees when they awake to their responsibilities) the pool of domestic savings would be enough to stanch a big, globally led, decline. The US is pumping in too much money and creating asset bubbles. The biggest seems to be in US Treasuries, where yields are below 1%. Is that what is called gilt by association?




J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 19 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

source:equitymaster