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If Wishes Were Horses

There's no realistic basis for the short-term optimism floating around in the equity markets

Whether it's politics, or the economy, or just the equity markets, a lot of us seem to be increasingly under the notion that big changes can happen quickly. Or at least, at this point of time, India is in a situation where big changes can happen quickly. This huge sense of urgency appears to have two drivers. The first is TV news and the second is people's need for change, each of which reinforces the other and looks to have set up a positive feedback loop.

While it's not my brief or my area of expertise to comment on the purely political aspects of this phenomena, or whether a positive can actually create its own reality. However, in investments this can be dangerous and misguided. There's seems to be a large expectation effect in the equity markets currently. The idea seems to be that the general elections in 2014 will be followed by a rapid, practically overnight improvement in the business prospects of a broad set of companies.

Maybe this is true and I certainly wish as much as the next person that it were. But let's not bet upon it, at least not just now. It took a lot of mismanagement, both on the part of businesses and the government, to get us into the hole that we are in. India is littered with zombie businesses--huge walking dead companies--that are stumbling around waiting to be knocked over. Their unsustainable debt and unworkable business models are not going to get a kiss of life from anyone, no matter what happens in the elections. The middle India of business--the small and medium sized (largely unlisted) manufacturing companies--is getting deindustrialised at a rapid pace, and one that is mostly invisible in the media.

At best, a 'good for business' election result will mean that things won't get much worse for a while. So if the equity markets are going rah-rah with a rally sustained by the usual flow of money, don't get fooled by it.