Jamal Mecklai: Send me some champagne

MARKET MANIAC

FII inflow into Indian markets has returned to high gear, with October's $1.88 bn being the highest monthly inflow since February 2005 and the third-highest ever. And, looking at the way November is shaping up, this number may well be eclipsed soon. This is despite the sudden dip in the probability of the Fed cutting rates next year, which should actually augur against increasing flows to higher-risk emerging markets.

My sense, though, is that we ain't seen nothing yet. While some of this has to do with my""perhaps, excessive""certainty that the Indian growth story is going to be far bigger than any of us expects, I also believe that the flow of money into India""and, indeed, other "risky" assets""is being driven by other, more fundamental, considerations.

To set the stage, it is clear that globalisation has pushed inflation structurally lower. Everyone knows by now that bringing a couple of billion hungry""in every sense""people into the world economy keeps wages down, which, in this age of services, keeps prices down. Equally important is the technology-driven collaboration-instead-of-competition business model that is rapidly seeping into business consciousness. This compels companies to innovate to retain margins, while King Consumer walks around with a smile on his/her face. Thus, despite the crazy spiral in commodity prices (driven in great part by the same force propelling money into India), global inflation is down and will remain so for some time to come.

This low inflation, while excellent for consumers and businesses, is casting a pall over investors, particularly in the developed economies, which, because they are so mature, can grow, at best, at 3 or 4 per cent a year. With inflation restrained at around 2 per cent, this means that over the medium to long term, developed country assets can grow, at best, at 5 to 6 per cent in nominal terms. That ain't gonna pay for the good life, and investors and investment managers have""slowly, at first, more hysterically, now""recognised this, which explains why there has been such a bull market in higher risk assets. The surge in commodity prices since 2002 has been driven by this, with the China story merely the visible trigger. Emerging market equities have benefited from this rush for yield investment flow, as have the huge flows into private equity and hedge funds.

Of course, this huge and increasing demand has pushed the price of these assets up, effectively reducing the risk premium for holding them. In other words, the compression of risk premia that everybody has been worrying about is really the result of lower structural inflation, which, in turn, is a result of accelerating globalisation, which, in turn, is a result of life.

This also explains why the trickle of money that started coming into India in the late 1990s and which turned into a flood around 2002, is beginning to look more like a tidal wave. Even the most chilled-out equity market-wallahs are walking around with a mask of delighted terror on their faces, as they buy art, buy property, buy disaster management clothes""and, oh yes, buy stocks.

The other day, I was logged on to an equity-trading site and they must have had the microphone on at their end. I heard what I thought was a religious chanting and this is what it sounded like: The money flow sounds like the bull market hasn't even begun, but valuations are so high and liquidity is so low, whatever can we doo-o-oo?

Kasrat, my friends, this tide isn't turning any time soon.

With the Fed and the European Central Bank (despite their differences) committed to keeping inflation low (say, around 2%), and technology spreading faster and deeper into Mr Friedman's flat world, this more fundamental price-modulating force will ensure that global inflation stays subdued.

Thus, the search for yield will continue. And India, of course, is the best-placed beneficiary. The commodity cycle appears to be abating, at least for now""copper fell below $7,000 last week; I think it will fall further. Hedge fund strategies, too, are being shown up as having a very short up cycle and/or susceptible to truly devastating risk. All of which leaves emerging market assets as the investment of choice.

Within this universe, India is""certainly today""the blue-eyed boy. With the government at least holding the line on the fiscal deficit and India Inc. doing a great PR job (as it buys up global assets), it is hard to see foreign inflow not multiplying substantially over the next few years. And if $10 bn of FII flows and $6-8 bn of direct investment have sent our markets into such a tizzy, can you imagine what will happen when those numbers double? Or treble?

Of course, there will be volatility, so buy anything you can (in India) and don't look at its price for three years. And send me a case of champagne after that.