Equity markets will suffer as the cycle against corruption accelerates
I was in Thailand on a short holiday recently and, boy, what a wonderful country! Slick and funky at the same time, as I told a friend, who immediately retorted, “Just like you.” Quite a compliment, I thought.
And, of course, holiday or not, there’s always a lot to learn. For instance, I saw a headline in the Bangkok Post which said that Thai exports fell for the 13th month in a row, not that different from in India (14 months in a row). Clearly, even having substantially slicker infrastructure (= better competitiveness) has been unable to protect Thailand’s exports from global economic weakness. It would seem then that, in this environment, even a weaker currency would have limited impact on exports, vindicating, to some extent, RBI’s efforts to prevent the rupee from falling too precipitously.
Indeed, the rupee has firmed up quite sharply over the past few days—a definitive case of short covering—but with so many factors keeping uncertainty high, we could see these gains return quite quickly. Nonetheless, I believe the standard multinational bank forecasts (70 to 72) will take some more—and, possibly, much more—time.
Another hugely valuable learning from my holiday was a new perspective I got on China. Thais see many more Chinese than we do—there are 9 million Chinese tourists in Thailand every year. The manager of our hotel in Phuket—the elegant Dusit Thani—told us that they were near full occupancy, with 70% of the guests being Chinese, and it was the same story at all the hotels in Phuket. He said that in most cases the Chinese simply stay overnight, with tour operators rousting them from their one night stay to sightseeing, shopping, dinner and more shopping. And the next night, the rooms were filled with another Chinese tour group. And so on—the hotel was booked solid for months. In other words, these are early days for Chinese tourism, and with the huge number of people who have become richer over the past few years, the Thai government is looking for 16% compounded growth in Chinese tourism over the next five years. (India needs to recognise the huge potential business from Chinese tourism and go after it.)
More interestingly, a Thai friend, who has spent decades in and about diplomatic circles in Asia, told me that the Chinese government is sharply focused on eliminating corruption, and that, despite the recent wobbles in their equity and currency markets, they are completely in control of the situation. He said that they have arrested and/or executed nearly 300,000 people for corruption over the past few years—the belief is that this will clear the way for more sustained growth and, who knows, perhaps more democratic rights sometime in the future. He pointed out that even countries which run the most liberal democracies today started out authoritarian till they became rich enough to combat the intrinsic corruption that such regimes breed; only after that did they turn democratic.
In India, of course, we have things ass backwards. While we are nominally a democracy, the vast majority of our people live in circumstances that are little short of the worst kind of authoritarianism. Narendra Modi came to power because people believed that his autocratic style would enable him to clean up the government. Unfortunately, this promise was belied at birth since his position is dependent on several hundred corrupt MPs and bureaucrats, who sustain the abhorrent conditions on the ground in most places in India and, tragically, Modi seems to be in no hurry to address this.
Turning elsewhere, America is also sending out authoritarian signals—witness the ongoing Presidential election circus, which is harder to look away from than ever. While Donald Trump’s histrionics (and hair) make it hard to take him seriously, he has hit the bullseye with his loud plan to prevent US companies from avoiding taxes by shifting their tax addresses overseas. While much of this tax “avoidance” has been legal, the way the laws are written, intermediated, of course, by armies of lobbyists for the corporate sector, has corrupted the compact between the American government and its people. Together with Bernie Sanders, Trump has flagged corporate America’s excesses—corruption, if you want to call a spade a spade—and it is clear that from here on out unfettered globalisation will no longer be blindly accepted as good for America.
Whether or not Trump makes it to the White House, equity (and other asset) markets will suffer as the cycle against corruption—whether from authoritarian or capitalist excess—accelerates.
The author is CEO,Mecklai Financial