Was in Dubai for a few days on work and had the chance to witness the view from the top of the highest building on earth – the Burj Khalifa. And, there couldn’t be a more apt metaphor for the situation in Dubai than the Burj itself. While there has been much drama about both the tower itself and the opening ceremony with the last minute renaming and all, which purportedly has more than meets the eye, standing at the top I couldn’t help wondering what the economic rationale for Dubai to host this otherwise magnificent tower could be.

For, as you peek from the 124th floor of this 160 floor 800 odd meter engineering marvel (which is where the observatory is located), you can’t help notice the vast stretches of unoccupied desert land all around. Which begs the question – is there a need at all for such monstrously tall buildings in this place? I mean, if it were New York or Hong Kong, where space is a constraint, one can understand, but Dubai? And while the tower itself is both awe inspiring and elegant, again, it gives the impression that its tall for the sake of being tall and has more resemblance to a television tower than an actual office building. In the words of my colleague who was accompanying me, “its all one big macho game.” And the other striking feature of the city is the number of fountains that are there. Apparently, the water lost in evaporation from all the fountains every day would be enough to fill many large swimming pools. Talk about a water starved desert. History has been consistent in chastening those who have put showmanship over economics and its been no different this time with the consequent debt crisis. Dubai has a genuine scope for becoming the regional gateway for an important and wealthy part of the world on lines of a Hong Kong or a Singapore provided sound economic reason doesn’t go out of the window and oneupmanship take its place.  Hope the city manages to keep its tryst with destiny.
And by the way, for those who plan to make a visit to the Burj, make sure you book the tickets a day in advance. Or, you could be moaning like a couple of Australian tourists who I met, who had to shell out AED 400 per head for an immediate entry as opposed to AED 100 otherwise. The personnel manning the counters apparently told them that the tickets were sold out. But, the thin attendance at the top said a whole different story.  

Morgan Stanley’s annual technology report has been released for the year that just passed i.e. 2009, downloadable here. This edition focuses on the mobile internet. I have been a regular reader of these reports for the past few years, and have to admit that the 2009 edition has been the best so far. The theme this year has been the mobile internet. The report throws up some very interesting statistics on the phenomenal growth of the mobile internet such as the following:
* The penetration of technology in every computing cycle has been 10x the previous one in the following pattern – Mainframes:1MM+ units, Mincomputers:10MM+ units, PC:100MM+ units, Desktop internet:1B+ units. Therefore, the anticipated adoption of mobile internet is expected to be 10B+ units.
* The cumulative wealth creation of the top 5 companies that dominate each era has been higher than the previous one
* Mobile internet adoption on iPhone has been 8x that of desktop internet adoption on AOL in 9 quarters since their respective launches
The report also goes on to sing praises of the phenomenal success of the iPhone and hints that it could become the dominant player of this era given the critical mass of voulmes and applications built on that platform with Google Android becoming a key challenger. As an aside this article by another research firm reports Android adoption to be picking up steam rapidly.
A couple of observations from my side:
a.  An interesting question that arises is whether Apple is making the same mistake with the mobile that it made during the PC era by adopting a closed approach for the iPhone as it did in the case of Mac. And therefore, by extension, could Google do to the iPhone, what Microsoft did to the Mac. This becomes especially pertinent given the reported uptick in Android adoption per the ChangeWave research report. The answer to that, in my view is that the mobile ecosystem is very unlikely to evolve the way the PC market did, and unlike the Windows/Intel (or Wintel as it is more popularly called), which became the dominant platform by far of the PC era, the mobile platform will be far more fragmented with Apple, Android, Symbian and the rest all cornering their slices of the cake. The reason for this is that the need for a standard format for applications is much lesser in the case of the internet than the PC. In the case of PCs, it is imperative that the documents that are created such as word docs, spreadsheets or presentations be readable across PCs, which results in enormous incentive for a standard sofwtare patform to emerge, which obviously got addressed by Windows. However, on the mobile, there is very little peer to peer exchange of documents and most activity is centered around either running native standalone applications such as games, music, multimedia etc or accessing the open internet. Therefore, any single propreitary platform is unlikely to become an industry standard a la Windows.
b.  The other interesting possibility is that the mobile could actually become a more viable monetization mechanism for services such as Facebook and YouTube rather than the advertising led model on the net. Most telcos these days have embedded applications of these popular services as a part of their offering and as the mobile internet grows, the revenues from fee sharing arrangments with telcos for these could surpass the ad dollars earned through the net.
c.  The last one is more a prediction from my side. Given all the activity that is happening on the cloud, I feel that it won’t be long before the “Mobile Cloud” becomes the new buzzword. The reason for this is that cloud applications such as Google Docs or Zoho are a natural fit with mobile since memory and processing resources are much more rationed on a mobile than a PC, which makes it ideal for thin client based services such as these to gain adoption on the mobile platform.

Financial Information Networks and Operation (FINO) has raised Rs 70 crore in a new round of private equity funding from HSBC Private Equity. Existing investors Intel Capital and International Finance Corporation (IFC) have also participated in this round. FINO provides transactional systems to the unbanked sector and also provides enrollment for customer acquisition. It provides these services to clients like banks, microfinance institutions and insurance companies.

“The current round will help us meet the demand both at the back end like servers and the front end like biometric cards,” said Rishi Gupta, CFO of FINO. HSBC and Intel have also purchased the entire stake of Legatum Ventures, which invested in March 2007.

“Legatum has exited at a far higher price than their entry,” said Gupta, without divulging the details of the transaction. HSBC has invested through its wholly owned subsidiary HSBC Asian Ventures Fund 3.

FINO is expecting to breakeven this fiscal year and is eyeing an initial public offering (IPO) in next couple of years. It plans to invest the funds in implementation of two big projects – Rashtriya Swasthya Bima Yojana and National Rural Employment Guarantee Act (NREGA). Both of these programs are now being developed electronically and under contract from Central Government.

Besides the PE investors, other shareholders in FINO are ICICI Bank, ICICI Lombard and Institute for Financial Management and Research (IFMR). The public sector investors include Life Insurance Corporation of India (LIC), Union Bank, Corporation Bank and Indian Bank.

FINO already has 8 million customers and expects to add another 7 million by the end of this financial year. The company is also targeting the unbanked population of India, where it expects 500-600 million people are financially excluded. FINO plans to reach 25 million customers and expand its business correspondent network to over 25,000 locations in the next 3 years.

“The new equity in FINO has come at an opportune time when Financial Inclusion is being seen not as desirable but as a necessity for growth and stability of social fabric in the country,” said Manish Khera, CEO of FINO.

The news flow this week and the manner in which media, especially Indian media has reacted to it has in many ways corroborated what’s been on mind for some time now, which is – the media’s role in precipitating boom bust cycles. From the “World is coming apart, again, because of the Dubai debt crisis” to “We are back in business thanks to smashing GDP growth in India”, the difference in projected moods could not have been starker. One could argue that it is expected of the media to report actual happenings and if that’s the way things are unfolding, so be it. However, it is not the Dubai crisis or the impressive India GDP nos in particular, but the general manner of news reporting in India itself that I’d like to touch upon.

The book “Irrational Exuberance” has a chapter that deals with the impact of the emergence of dedicated business news channels like CNBC on stock market valuations. It notes that as business TV channels brought the stock markets to the drawing rooms of households they went from being the preserve of finance professionals to a matter of interest for the common man and as a result all of a sudden, there was a huge surge in retail stock participation leading to a recalibration of valuation benchmarks. Many finance professionals, who didn’t perceive this ongoing dynamic and viewed the high valuations in traditional light lost money on shorting the market. So, the point is that the ripple effects of such media frenzy are not trivial. They could have some serious bearing on the way the markets and even economies function. Another interesting book released recently related to a similar topic is “Blinded by Optimism”, which discusses how inordinate optimism and relentless encouragement of positive thinking in the US has turned people into unrealistic dreamers and worked against real American interest.

Coming back to the point on the banality of media reporting in India, the sad part is that unlike other major global markets, the market leader in India (who I don’t wish to name, but should be easy to guess) itself suffers from a syndrome of exaggerating our own accomplishments (by our, I mean India’s). Actually, it goes a step further – it is their stated editorial policy to mostly report “feel good news”. As an example the said media house recently reported as headline cover page news that a commerce graduate in India had secured an analyst job in an investment bank in London for a salary of $69k p.a. To lift a contemporary phrase from popular lingo as response to this – “Dude, gimme a break!” Is this really worthy of headline news in a national newspaper? An Analyst job in an investment bank in an advanced country is akin to a s/w job in an IT company in India. While it is somewhat sought after, it is not exactly headline worthy. I mean, guess what impression you’d have of a country where you land and see newspapers screaming that someone there had been recruited as a programmer in TCS. In similar vein, the frenzied manner of reporting issues by the leading newspapers in India, especially when it comes to favorable news like GDP growth leaves a lot to be desired. The ball-by-ball commentary on b-school placements that the media indulges in being another example of the same penchant. And India is somewhat unique in that respect. Think WSJ in US or FT in London, who have yet maintained a some gravity in their reporting in contrast to most of Indian media, which mostly seem to play to the galleries. Do I mean to suggest that the healthy growth GDP growth in India not be highlighted – “No”. But, what we could do with (much) less of is this whipping of frenzy stuff and the “now we are bust, now it is rock-n-roll” business.

…and had pitched to a VC, he would’t have been funded….because the VC would have asked the following:

Where are you going?
Why?
With whom?
Why you?
How are you going?
To discover what?
What is the market for discovering India?
If if is really so lucrative to discover India, why is Microsoft not trying to discover it?
What if Microsoft also tries to discover India, how will you beat them to it?
What if you reach India first and Microsoft follows you and throws you out of there?
Show me the route you’ll take…
No no… I want the entire route… along with the exact days between each stop…
I think this is a very aggressive route… you should budget more number of days in Portugal…
Who will accompany you on the boat?
But Joe doesn’t have experience in steering small boats… he has only been on big ships…
Ok, who’s the cook?
You mean you don’t even have a cook on board? So, what will you eat?
What if you run out of pasta on your voyage?
But, you said the same last time when you were trying to discover China and abandoned it half way…
I still don’t understand what else is balance to be discovered…
Ok, I am willing to fund you if you give me half the loot from India if you get there, or allow me to sell your boat if you come back emptyhanded…

Had gone into a slumber for long (as far as blogging goes i.e.) partially due to increased work loads and partially because of laziness. Had a few ideas I was contemplating on to blog about. But, thought I will resume with a post on the “creative” world of advertising. Was watching an interview on a business channel recently of one of the most prominent creative directors of a leading ad agency. The journo asked him on whether he thought that having an understanding of business or domain knowledge of the client’s industry was a requisite for being a good advertising professional, to which the expert’s answer was an emphatic “no”. He said in as many words that he viewed an ad agency as a “factory of ideas” and that just as an IT company produces s/w code or an auto company makes cars, ad agencies “made ideas”. Therefore, it was not expected of them to really have too much understanding of specific industries or companies. I have to admit that I was almost petrified by that answer. I have had the chance of working with media companies in the past as a consultant servicing them. And coming from the IT industry at that point in time, it was some kind of a culture shock to me. Every industry has its idiosyncrasies. If pinstripe decked, tiepin adorned “suits” typify the now much maligned investment banking industry, then the pony tailed, floater flaunting “creatives” are their professional cousins in the media world. And any professional manager working in the media industry will probably admit in private that keeping reins on them is as unenviable a chore as managing a bunch of unruly kindergarten brats.
Which brings us to the more pertinent point here. I really do believe that advertising is a completely bloated and inefficient industry and in need of a complete overhaul. It is hard to think of any other industry of that size, which has thrived for so long despite having such poor accountability and transparence. It appears that ad professionals are more driven to use their professions merely as a means of fulfilling their creative urges and to maximize the number of trophies they carry back home from award ceremonies than make any real tangible impact on their clients’ businesses. If creatives had some means of taking on the same kind of risks that CDO traders did in the financial world, a Lehman like bankruptcy would almost certainly have occured there a long time back. The statement by the creative head of the ad agency referenced above exemplify their callousness. Which is why I believe that Google is just a beginning as far as disruptions to the advertising industry go and I wouldn’t be surprised if in short order, we see a complete overhaul of the advertising world. As an interesting aside, I was reading that a creative head of another agency has decided to go on his own and launch his own shop under the name of “Cut the crap”. Hope he really delivers on the promise of his agency’s moniker.

This is a graphic depiction of what has happened to the market values of the top banks over the world. RBS, Barclays and Citi in particular make for an “interesting” sight. (Click on image to enlarge).

Just finished reading Malcom Gladwell’s “Outliers”, where he describes the role that unaccounted events/circumstances play in bringing about extraordinary results. He uses this mostly to elaborate on the achievements of exceptionally talented individuals, but what was also interesting is some of these examples that he uses to describe the causes for human accidents such as airplane crashes and industrial disasters. For example, he analyses the Three Mile Island nuclear accident in Pennsylvania in 1979. He states -

No single big event went wrong at Three Mile Island. Rather, five completely unrelated events occurred in sequence, each of which, had it happened in isolation, would have caused no more than a hiccup in the plant’s ordinary operation. The first minor problem was a blockage in the plant’s polisher (a giant water filter of sorts). This blockage caused moisture to enter the plant’s ventilation system which tripped closed two valves thus preventing cold water from entering the plant’s steam generator to control its temperature. These two problems by themselves would not have caused a problem since the plant had a backup cooling system set to activate in such a situation. However, for some unexplained reason, the valves of the backup system were closed that day. But this too should not have caused a problem since there was a light on the engineer’s control panel that illuminated indicating that the backup system’s valves were closed. Unfortunately, the warning light was blocked by a repair tag hanging from the switch above it. But there was still another backup system in place that should have cooled the reactor when it started heating up. But, as luck would have it, the relief valve wasn’t working properly that day either. It stuck open when it was supposed to close, and, to make matters even worse, a gauge in the control room that should have told the operators that the relief valve wasn’t working was itself not working. By the time Three Mile Island’s engineers realized what was happening, the reactor had come dangerously close to a meltdown.
In other words, for a “perfect storm” to form, a variety of unlikely factors have to align in an extraordinay manner. One could probably argue that the current financial meltdown that we are living through is an example of that. The string of events which has led to the current state of affairs would probably be as follows:

1. The dotcom meltdown in the early 2000s leads to a severe downturn in the U.S. economy
2. The fed reacts by sharply reducing interest rates and pumping up the money supply
3. The huge increase in liquidity results in a credit glut and leads to an era of extremely cheap debt
4. The cheap money finds its way into the consumer home loan market
5.Meanwhile, the Glass-Steagall act, which had stringently limited the risk on commercial banks by barring them from trading of risky securities is repealed in 1999
6. Taking advantage of this, commercial banks like Citi, have invented a means of offloading much of the risk on their loans from their own balance sheet through a mechanism called securitization
7. This gives them an incentive to sell as many loans as possible with the hope of increasing their profits. As a result, they go after anyone who is willing to accept a loan including those who were traditionally uneligible  i.e.- the subprime customers
8. The rating agencies, who were supposed to act as watchdogs for the credit industry fail to discharge their responsibilities because of misaligned incentive structures, wherein more debt being issued translates into more fees for them. To complicate matters, these fees are paid not by the buyers of the debt, but by its sellers (which results in an obvious moral hazard for one cannot obviously bite the hand that feeds him). As a result, what was supposed to be low quality debt, is passed of as high quality
9. Other traditionally conservative institutional like insurance companies (such as AIG), also decide to play along and “insure” these securities against losses
10. Meanwhile, the large investment banks, which traditionally acted only as agents or brokers, have now also assumed the role of principals or investors putting their own capital to work

What follows from above is what we see today – a financial hurricane that has sucked every entity into its fold. Had any one of the above not happened, it is arguable that the current crisis would not have unfolded in this manner or at the very least with this serverity. Truly, this has been an extreme example of an “outlier event”.

At the outset, I have to say that this post is not motivated by any patriotic fervor. In fact, I have been extremely skeptical about the exaggerated claims of India’s emergence as an economic superpower. On many parameters, (share of world trade or per capita GDP for instance) we remain an economic minnow. However, like a prominent PE investor remarked in a conference that I recently attended – for India, God seems to be planning in lieu of the government (in his words, how else can you explain the fact that China and India both launched their family planning programs at the same time. They got it right, we got it wrong and we are left with one of the best demographic profiles in the world). Its in this context that I am inclined to say that the current global economic malaise may actually be a blessing in disguise for India.
First of all, lets recount the risks that any investor faces today. The two biggest questions on the top of every investor’s mind are – a) how much more downside remains in today’s already beaten down markets? and b) how long will it take for things to turn around? By all estimates, the answer to the first question is – maybe a little more (read 10%-15%). The EPS estimates for FY09 for the Sensex are around Rs 950. So, at current levels the Sensex is trading at around 10x PE(FY09). This versus a historical bottom of around 8x. I expect anywhere between 5-15% degrowth in EPS for FY10. That leaves the Sensex at a 11-12xPE(FY10). So, though we have lost a lot of ground, by FY10 levels, the market still doesn’t seem that cheap and indeed compared to some of the other emerging market peers, we trade at a premium. Therefore, there is some scope for further fall before markets bottom out.
Now, coming to the other important question of the expected time span for this bear market. In my opinion, this is where India is far better positioned to be first off the blocks on the path to recovery. If one considers the five major relevant economic blocks – US, EU, Japan, China and India, the former three are plagued by severe systemic issues (such as excessive leverage, low savings rate, inordinate consumption levels etc) that will take a long period of time to get resolved. Now, in comparison to China, India has some significant characteristics that will play in the latter’s favour. For starters, as is oft repeated, exports form a far smaller component of India’s GDP compared to China’s. Apart from this, India also has a lower operating leverage in comparison to China. China’s model has always been to build huge capacities, which worked very well in boom times, enabling it to attain economies of scale and enjoy great cost savings. However, in times like this, excess capacity can become a millstone around your neck and result in higher fixed costs. The fact that India is primarily a services led economy in contrast to China being a manufacturing economy also helps. The other areas where India scores over China are greater capital efficiency and also deeper management expertise in dealing with capital constrains of the kind we face today. (Merits to add here that the one area where China scores over India is its superior balance sheet (forex reserves and also budget surpluses), which afford it with the option of spending their way out of the crisis of the kind recently announced). Also, one of the key constraints, which has affected economic activity in the recent past, which is the shortage of credit should also get resolved in due course given the absence of any systemic problems. In fact, credit from domestic institutions has actually registered a 30% increase last quarter and it is the lack of availability of global credit, which has been the cause of paucity of capital. With the global credits slowly limping back to normal and also given the interest evinced by the debt FIIs in recently announced SEBI registrations, the availability of credit should improve with time. Finally, and this is the most important point – the falling commodity (esp. oil) prices are bound to have an immensely positive impact on our economy.
In sum, India doesn’t face systemic issues of the kind the developed economies face and in fact, the slowing consumption in the rest of the world and resulting demand destruction for commodities puts India in a good wicket for maintaining its relatively high rate of growth. Hence, there may be a case to make that if the demand for commodities and oil had continued to be what it was in the recent past, it could have imposed severe speed breaks on the Indian economy and therefore, the allusion to the remark earlier about God planning for India in lieu of the government.
In my next post, I plan to discuss some investing strategies in India for the next year or so. Stay tuned.

Like everyone else in the finance world (and actually elsewhere as well), I have been watching with obvious interest, the unfolding of events in the past few weeks. And needless to say, they have been quite discomforting. While I don’t have anything particularly positive or negative to say about the actions that the US Fed or other central bankers have been undertaking to mitigate the crisis (most of them were actually Hobson’s choices), I do however feel that this may be a case of postponing rather than solving the issues unless we are favored with some generous doses of luck.
Ever since the financial crisis began to unfurl, a few things have been happening. To begin with, there has been a flight of capital to safe assets, which has squeezed out all liquidity and credit in the system. This has led to a bizzare situation where from the threat of inflation a few weeks ago, the US is now staring at a sudden deflation in the economy. So, what has the fed done? – it has started pumping up money supply and inflating the economy to maintain the liquidity and keep the economic wheels turning. But there are a few things which will really work against this strategy in the long run.
First is the overhang of credit that the US carries from the past. The credit expansion in the recent past has been unprecedented and the total estimated debt in the US, which includes national and private debt is $53 trillion (thats nearly four times its GDP). With all the bad debts that the financial institutions are burdened with and with economic prospects looking dimmer and not brighter (which in turn will affect the repayment capacity of borrowers), banks and financial institutions are not going to start lending in a hurry. So, the credit unwinding process would be a long and gradual one and its not clear how the central banks can continue to shore up liquidity till then.
Second, the record capital account deficits that the US has been running already put the greenback on a weak turf and unleashing ever increasing amounts of dollars will most likely cause a precipitous drop in value of the dollar (both against other currencies and/or intrinsically) sooner or later. So, it is possible that we could see a sudden and steep rise in inflation at some point in time.
And finally, we have the worldwide commodity crunch and the ever increasing demand for resources that we are witnessing, which puts immense pressure on its prices. I realize that there have been various analyses floated on this topic, and I don’t claim to have researched this topic to any degree of rigour, but from all the reading I have done so far, its clear that the absolute demand for resources is growing at a far greater pace than the matching supply. This to me is really what could be the steepest hurdle in any path to recovery. If this were not the case the monetary measures that the central banks have been undertaking could have aided the healing process in which with increased liquidity and falling prices, demand would shore up and economy brought back on track. However, with the large nations/populations in the developing world (China, India, Middle East) consuming ever increasing amounts of resources, this process may not follow the same pattern that it has in the past, when the predominant consumers were only to be found in the developed world.
Therefore, I am not so convinced that the long term equities story still remains in tact (be it in India or elsewhere) and that, with every dip we should be buying equities. In fact, I’ll say that in the medium term, on account of the above mentioned factors, the underlying story for commodities is what looks extremely strong and if I were a hedge fund manager today, thats where I’d be putting my money especially in case there are dips in their prices. The only things that could impact that reasoning would be – technological advances like clean energy etc, which would ease the demand for resources or, massive discoveries of new sources of resources. Else, in the medium term (i.e. 5 year horizon) my recommendation would be – short equities & long commodities.