India’s ruling Congress Party has a goal of helping India’s poor and pushes free-market reforms.

After this election, India is apt to open up its retail, insurance and banking sectors to more foreign investment.   Moreover, the government may reduce its ownership in refineries, banks and fertilizer companies.

This election could pave the way for a large amount of capital to flow into Indian stocks.

Bombay Stock Exchange stocks are taking off as investors look optimistically at a critical election victory for the Congress Party-led alliance.

The best way to play India: PowerShares India (NYSE: PIN). This Exchange Traded Fund holds a nice basket of Indian stocks and seeks to mirror the Indian stock market measured by the Indus India index.

A weaker oil price reflecting poor economic demand ahead shut off a rally in world stocks on Friday while government bond yields sank.

Wall Street looked set for a poor start and the dollar recovered from early losses.

Oil fell below $54 a barrel, on course to end the month down more than 20 percent, as OPEC ministers prepared to meet in Cairo to discuss potential further supply cuts to combat a global fall in demand .

Indian stocks were higher as a siege in Mumbai between police and Islamist gunmen continued, but India’s 10 year bond yield fell to its lowest level in three years on expectations that the attacks will an impetus to rate cuts.

Globally, the MSCI all-country world index was flat, although it had gained around 11.6 percent, the first weekly gain in four weeks.

“On a range of measures, there is undoubted value to be found in many of the world’s equity markets,” said Sarah Arkle, chief investment officer with Threadneedle Asset Management.

But economic woes held back an earlier rally.

The pan-European FTSEurofirst 300 was down 0.3 percent, led lower by oil-related companies.

Earlier, Japan’s Nikkei average climbed 1.7 percent for its best week in a month. It gained 138.88 points to 8,512.27, while the broader Topix was up 0.7 percent to 834.82.

A monthly Reuters survey found that Japanese retail investors became slightly less pessimistic about domestic equities in November, fitting with other signs globally that recent market sell offs may be bottoming at least temporarily.

OPEC TO MEET

Oil fell below $53 a barrel for a while before recovering slightly. The Organization of the Petroleum Exporting Countries is to hold an informal meeting on Saturday in Cairo, as it struggles to slice output fast enough to keep pace with a recessionary reduction in fuel demand in the West that has sent crude prices down nearly two-thirds since July.

U.S. light crude for January delivery stood at $53.32 a barrel, down $1.12.

The dollar regained traction against major currencies after early losses.

It was 0.2 percent higher against a basket of six major currencies, while the euro lost 0.4 percent to $1.2838 . The dollar lost 0.1 percent to 95.22 yen .

Euro zone government bonds rose, reflecting concern about the economy and expectations of interest rate cuts. Two-year Schatz yields sank 10 basis points to 2.213 percent.

By Jeremy Gaunt, European Investment Correspondent
LONDON, Nov 28 (Reuters)

I visited the musical town of Salzburg, Austria in 1988. That was 20 years ago. The memory I have of Salzburg is one of music. I recall seeing a lot of young people walking around with musical instruments in black cases.

Salzburg is where the famous Wolfgang Amadeus Mozart was born in 1756. This quaint city is also the home of the Universitat Mozarteum Salzburg set up in 1841 which trains musicians, amongst other things.

But, 20 years later, I walked the cobble-stone streets and – there are no musicians. Maybe they are on holiday. Maybe, over the 20 year period, they all became bankers with CFAs and MBAs. Maybe some of them set up hedge funds. Maybe they all started buying Indian stocks and became rich and bought villas on the lakes in Austria.

Investing in India: ending on a bad note

But wait a minute that cannot be possible. If all the musicians in Salzburg had become investment managers with investments in India, I don’t see them on the streets of Bombay either!

And, more importantly, I don’t see their money sloshing around the Indian stock markets anymore. Alas, what is true of the musicians turned investment managers from Salzburg is true of many of the foreign investors.

Since CY 2003 (see Table 1), they have been buying approximately USD 10 billion worth of shares in the Indian stock markets. And their buying drove the markets wild. And more wild.

Then in a mad frenzy between mid-September 2007 and mid-October 2007, the foreign investors pumped in USD 6 billion. Pause and review that number.

From an average of USD 0.8 billion of buying every month (a 5 year average), they bought USD 6 billion in one month. That is 8x the normal monthly inflow.

But the music stopped – it must have been the cold winter and the desire to stay home huddled up in blankets. Heating oil is expensive these days.

In January 2008, the foreigners sold USD 3 billion. They bought small amounts since then.

But now in May they are out of the door again – the foreign investors probably sold USD 800 million worth of stock. And the Indian markets are not in the best of health.

Investing in India: tired of waiting

So I asked a few foreign investors: don’t you like India any more? “How can we like it”, exclaimed one investor, “the Indian market has done nothing.” “It is the worst performing country in my portfolio”, yelled another, “I am tired of waiting.” And we are not even in a bear market.

It seems like it has been many years since foreign investors could not get enough of India. But – as Table 1 indicates – it was only a few months ago when the foreign buying of Indian stocks was 5x the buying by local mutual funds.

For every one rupee the local Indian put in the market via the mutual funds, the foreign investor pumped in five rupees. The poor Indian investor is still putting his money in but the foreign investor is tired of waiting and is heading home with the cash.

The price of a share is determined by many factors, some of which are:

1. The business prospect of the company – how profitable is it likely to be?
2. Does a company borrow from banks or issues more shares to fund its growth?
3. Will the managements of these companies share the wealth they create fairly with the non-family members (what we call “minorities” – the people like you and me who don’t run the companies but are shareholders)?
4. Are there many IPO’s about to hit the market – will the supply of shares increase?
5. Is there anyone willing to buy the shares – is there a demand for shares?

Well, by the sounds of the noises made by some foreign investors I spoke to, the demand for Indian shares seems to have dried up.

That is not to say that India is bad; or that the Indian businesses will do badly; or that Indian managements are not worthy of investing in (some definitely are to be avoided – but that is a global phenomena!).

All that it means is that the foreign investor is not buying because he or she is not buying. Like the spouse who says: “abhi mood nahin hai”. That is also – by the way – a global phenomenon.

Investing in India: keep at it

No one has a clue when the foreign investors will come in. Or what will make them jump back into India.

Just like no one has any idea why they pumped in USD 6 billion into the Indian stock markets in September/October 2007. Or sold USD 3 billion in January 2008.

And no one has any idea when India will no longer be the worst performing market in someone’s global stock portfolio. You should not worry about it. Don’t brood on it.

Keep on buying into shares you like or mutual funds you like (have you made an investment in Quantum Long Term Equity Fund? You should consider it!).

Don’t borrow money to invest. Don’t try to hit “sixers” – or you will be bowled out. Just go for the steady batting. A regular rhythm of strokes, taking every ball as it comes. Seek professional help to confirm what you are investing in matches with what you should be investing in. India is on sale. And it may be for some more time, who knows.

In that ad hoc comment, we wrote: “The crux of the thesis of our latest book, The End is Not Nigh, is simple and goes something like this: a) Asian central banks continue to manipulate their currencies and prevent them from finding a fair value against either the US$ or the Euro b) this manipulation triggers an accumulation in central bank reserves which, in turn, leads to low real rates around the world c) the combination of low global real rates and low Asian exchange rates amounts to a subsidy for Asian production and Western consumption d) in the US, the subsidy has by and large been captured by individual consumers e) meanwhile, in Europe, the subsidy has been cashed in by governments whose debt has skyrocketed f) we see little reason why, in the near future, the subsidy should be removed but g) if it were removed, the US would most likely encounter a consumer recession (not the end of the world) while h) Europe could go through a debt crisis (far more problematic).”

We went on and wrote: “Last week, and against most observers’ expectations, the Indian central bank did not raise rates at its meeting. Instead, it seems that the authorities are allowing the currency to rise and hopefully thereby absorb some of the country’s inflationary pressures (linked to energy and higher food prices). In recent weeks, the rupee has shot higher and now stands at a post-Asian crisis high. And interestingly, the local market is loving it. While Indian stocks had been sucking wind year to date, the central bank’s apparent policy shift (from higher interest rates to higher exchange rates) has triggered a very sharp rally.

This of course is an interesting turn of events and we would not be surprised if Asian central banks were to study developments in India carefully over the coming quarters. After all, India is blazing a path that a number of Asian countries may yet decide to follow.

One could argue that a change in monetary policy in Asia could end up being a “triple whammy” for Western economies. It would mean that:

• Asian central banks would export less capital into our bond markets and this would likely lead to a drift higher in real rates around the world.
• Asian exchange rates would move sharply higher, which in turn would likely mean higher import prices in the US and Europe.
• As Asian exchange rates start to move higher, Asia’s private savers would likely start repatriating capital, further amplifying exchange rate and interest rate movements. This would also likely lead to collapses in monetary aggregates in the Europe and the US.

Finally, we concluded the paper by saying: As we highlighted in Part 1: Why We Remain Bullish, we are not worried about valuations. And we are also not worried about “excess leverage” in the system, or the threat of a “private equity bubble”. We also do not fear an “economic meltdown” or a brutal end to the “Yen carry-trade” (which we did fear in the Spring of 2006). Instead, if we had to have one concern, it would have to be a possible change of monetary policy across Asia and the impact that this would have on real rates around the world. As we view things, the only reason Asian central banks would change their policies is if food prices continued to increase (in that respect, owning some soft commodities — a hedge against rising real rates — makes sense to us – as does owning Asian currencies). Interestingly, such a turn of events seems to be unfolding in India, yet no one seems to care. Monitoring changes in Asian inflation, monetary policies and exchange rates could prove more important than ever.

Nine months after that paper, we have indeed just gone through a period of a) rapidly rising food prices which have led to b) faster inflation rates across Asia, which have triggered c) a change in Asian monetary policy, notably a willingness to let the currencies appreciate faster than they have in the past. And if Asian central banks are now finally allowing their currencies to rise, then one thing is sure: Asian central banks will no longer need to print large amounts of their own currencies and accumulate US$ and Euros. They will thus also no longer need to buy US Treasuries and European bonds to the extent that they have.

Is it a co-incidence that, as Asia starts to allow its currencies to rise, US mortgages have been hitting the wall and spreads amongst European sovereigns have started to widen? The subsidy that Asian central banks have been giving to consumption in the US and governments in Europe (see The End is Not Nigh) is now disappearing.

Indeed, for the past five years, spreads of Italian ten-year government bonds to German bonds have hovered between 15bp and 25bp. But recently, spreads have started to break out on the upside.

And, of course, Italy is not alone. All across Europe, we have seen a widening of spreads between the “stronger” signatures (Germany, Holland, Austria, Finland, Ireland) and the “weaker” signatures (Portugal, Italy, Greece, Spain, Belgium, France) including those of Eastern Europe (Latvia, Romania, Hungary, Poland…).

“And”, she continued, “it is the same with clothes. They have fashion seasons and every fashion season is shorter so they encourage you to add to your wardrobe more often. All this marketing – for what?”

My wife is not a shopper, so this was not a hint to buy clothes, for sure. I thought about what she was saying and realised that she was onto something. Something to do with the world we live in.

Investing in Indian stock markets: a fashion?

Let’s take the field of investments: investing in the Indian stock markets. Why is it that we cannot sit patiently with a few stocks and watch them evolve over a ten or twenty year time horizon? Maybe make some changes to some of the stocks we own in our portfolios every 5 years or so. Sure, if a really new idea comes along, and you like the stock of the company involved in that business, go ahead and add it to your portfolio. But, generally, if you did your homework well before you invested in a stock owning the stock for a long time could work well.

But the system won’t let you. The system – the financial system geared up to service the investor – is not built on a “let the client buy only once” strategy. The financial system is geared to help you make profitable investments in the Indian stock markets by investing in a list of Indian stocks or Indian mutual funds.

And then help you change your mind the next day about what you should really do to make profitable investments by giving you a new list of Indian stocks and Indian mutual funds. And then help you change your mind again before the week is over.

For each time the system helps you change your mind, that creates an action: the selling of one stock and the buying of another. Or the selling of one mutual fund and the buying of another mutual fund. They are making you buy what is “fashionable”.

Your investment portfolio for the Indian stock market is your fashion statement. Just like owning the CD of the newest song. Or owning the latest style of shoes or clothing.

So, when you go to a party to meet the parents of your daughter’s school friends, you can discuss the latest fashion statement in investing.

Investing in Indian stock markets: or in your broker’s wealth.

You are not really investing in the Indian stock market anymore. You are investing in the wealth creation for the people in the system. Every time you trade, you generate a revenue stream for your broker. You may have a loss or a profit on your latest, fashionable trade. That is your problem. They have a guaranteed profit.

Come to think of it, there are two rules to be happy and successful:
Rule # 1: say “yes, dear” to your wife and nod your head in agreement.
Rule # 2: say, “no, thank you” to your broker and do not nod your head in agreement.

Most people seem to treat their broker as their wife – and nod in agreement to everything they say. And they seem to treat their wife as if she were a broker – and do not listen to their views.  A recipe for disaster: emotionally and financially.