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Tuesday, 04/11/2006 5:54:50 AM

Tuesday, April 11, 2006 5:54:50 AM

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Tigers or bears in India

11.4.06 | 10:40 By Doron Tsur

There are a lot of advantages for investors who venture beyond their home turf. They can seek out markets offering fatter rewards for risk than are available in their home markets. And even if the risk/reward is not more attractive than available at home, diversification of their portfolio to mitigate risk is generally a good idea.

Technological advances and the growing range of financial instruments means that most investors can put their money almost anywhere in the world at a mouse click, or at least at a phone call. They can also be reasonably assured that the transaction will take place.

But there are disadvantages to straying afar, the main one being unfamiliarity with the target market and the companies trading there. The risks may not be obvious to the newcomer. The investor is an outsider - though that may be an advantage, in imperviousness to fleeting sentiment.

I encountered a case like that in 1993, when foreign investors started coming to Israel. A colleague of mine and I met with an investor running a fund that targeted emerging markets, who had dropped by Israel to learn the market. At the time, Israel's story was spectacular: peace around the corner (that was just after the Oslo agreements), a fast-growing economy thanks to the massive Russian immigration.

We were happy to relate

Said investor, a man with many years of activity under his belt, heard our review of the economic situation, the companies, and past performance of the indices (which were phenomenal after two boom years). And then he asked us how involved private investors were in the stock market, and whether they financed their investments through credit.

We happily told him that private investors were deeply involved in trade, especially in IPOs. We told him about the massive oversubscription at offerings. Sure, there was a lot of credit being used because the banks were lending money to people for investment in mutual funds.

And at that point he lost all interest in Israel. In an unexpected burst of frankness he told us that in his opinion, the market was caught up in a speculative madness and it was just a matter of time until the whole thing collapsed. And then he left.

He was right.

A year and a half later, in the summer of 1995, at the height of the bear market, suddenly a fax arrived out of nowhere, with buy orders for shares in a few TA-25 index stocks.

The view from home

I learned a lesson from all this: sometimes the view from afar can be clearer than the view closer to home. An outsider can be far more objective than players at home.

A lack of information about a foreign market can be overcome by research, if one is willing to devote the time to it. Psychological bias due to close involvement is harder to overcome.

This week I noticed an article by Andy Mukherjee, a columnist for Bloomberg News. Mukherjee works out of Singapore covering the Indian market. I know nothing about Mr Mukherjee, though his picture indicates that he's young.

The piece discussed the love affair among Indian investors for futures on specific shares.
It turns out that the volume of trade in such futures is breaking records. India's trade in single-stock futures is six times higher than parallel trade in Euronext.liffe, Europe's futures and derivatives exchange.

He quotes a leading light in the Indian investment world, R.H. Patil, who warned about the possibility of stock manipulation through futures and the leverage being used by the unwary.

Mukherjee does not agree with Patil, evidently: "Single-stock futures have allowed retail Indian investors, who had no credit rating and no familiarity with modern derivatives, to become speculators." That is a wonderful thing, he concludes.

That sentence would bother me, if I were an investor in Indian stocks. I don't think there is anything wonderful about naïve investors using financial leverage - meaning, borrowing money to invest in stocks or futures. They don't understand the risks.

Mukherjee's is only one opinion but he may well represent a shift in sentiment. Widespread use of credit for investment by people who don't really understand the market may be exacerbating a speculative bubble. It is nothing new: that has been the pattern of many a bubble.

That's what happened in America back in the 1920s, in Israel in 1993 and to tech stocks in America in 1999. Whether credit is used to buy stocks or futures doesn't matter: it increases the demand for securities without an increase in equity.

I do not have pretensions of having any idea what will happen to the Indian market in the months or years to come. There are ample positive processes in that great country that could well continue to support the stock market.

The fact that there is evidently intense speculation going on doesn't mean a crash is coming. My intention is simply to shed light on a phenomenon of which investors should be aware, in order to make more informed decisions.

Doron Tsur is CEO of Compass Mutual Funds. The writer and his company may hold securities, including ones mentioned in this article. In no case should this article be perceived as a recommendation to buy or sell securities. Any such action is the responsibility of the reader alone.

http://www.haaretz.com/hasen/pages/ArticleContent.jhtml?itemNo=705056

Dubi



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