Expert Zone

Straight from the Specialists

With markets falling, it’s a good time to invest

August 22, 2011

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

The Sensex tested the 16,000 mark last week after 15 months.

I believe the following three quotes which made headlines on different days, tell us a lot when we put them together.

World Bank chief Robert Zoellick said “what we have seen is that confidence is a fragile element of how the market economy works. The convergence of events in the U.S. & Europe had rattled investors in countries already struggling to cap sovereign debt issues and unemployment”.

Sir Martin Sorrell, head of WPP (global leader in advertising) said “Brand India is far stronger than Brand UK and Brand US”.

Lastly, the Indian finance minister said “FII flows will eventually lead into Indian markets which look comparatively better”.

It is therefore, surprising that India’s Sensex lost 16 pct since Jan 2011 and about 7 pct since S&P’s U.S. downgrade, less than Germany’s DAX ( fall of 22 pct and 12 pct respectively) which is into the thick of the danger zone.

Attributing the fall even in part to the current political situation is merely a canard because the Hazare movement is more an indication of how strongly rooted India’s democracy is. After all, not many emerging countries can take credit for such movements conducted in a peaceful manner with the government attempting to resolve it within the framework of our Constitution.

Surely this cannot be worse than the riot-torn streets of the UK and political brinkmanship indulged in the U.S. with complete disregard for national reputation and credit standing.

While the Indian economy cannot remain unaffected, it is certainly not as exposed.

Firstly, exports are only about 20 pct of GDP. FDI in the first half of 2011 at $18 bln was robustly up about 60 pct year on year. The RBI has been very proactive with policy rates which should cool the economy and help in achieving a more stable growth rate thereby giving time for infrastructure to catch up and provide the structural changes required to tackle the supply side inflationary aggravations.

The Indian government is well seized of the need to promote investment to take it back to the 35 pct plus of GDP levels by thawing the policy freeze. This could be supported by the expectation that the RBI may well be near the end of its interest hiking cycle, especially considering the sobering impact of declining oil prices on inflation.

The global scenario may take a while to stabilise while U.S. politicians reach a consensus which I fear may get increasingly difficult as they inch closer to elections. On the other hand, it may be very difficult for the Germans and French to accept paying the bill for the fiscal profligacy of their poorer Euro partners.

Will Germany exit the Euro or will the PIGS opt out? How will the recent electricity crises in Cyprus play out for its over exposure to Greek banks? Is Italy with a $250 bln debt coming up for rollover soon, the first G8 disaster waiting to happen?

It’s not as though concerns around the euro debt crisis and U.S. economy have newly surfaced to push the global markets off a cliff which is why one would reasonably expect global markets to have by now discounted for the worst, due to the evident cracks in their economies. But a momentary shock on the finale may not be unavoidable.

While India does have its own share of challenges, this time around I strongly believe that the cause for so large a Sensex slide is therefore more the deteriorating economic environment outside India and particularly in the euro zone and the U.S.

Therefore, more than the S&P downgrade, it was the political squabbling in the U.S. and the inability of Germany and France to conclude a concrete action plan to resolve the euro debt issues which led to this lack of confidence making the world’s investing community scamper for cover.

Ironically, money which left the emerging markets in hordes went into U.S. Treasuries which once again were looked upon as a safe haven. It is this sense of helplessness which seems to have resulted in the prevailing gloom and confusion leading to market volatility.

In the meanwhile, the meetings of U.S. senators and euro zone premiers will continue to be closely watched with market expectations raised and dashed many times resulting in continuing volatility over the next 3 to 6 months.

India’s markets which have of late been driven by FIIs have obviously suffered the most and have ended up mirroring the worst between U.S. and euro indices.

The situation is very different from 2008 simply because the global economy has enough liquidity. The U.S. may well come up with a QE3. Having learned from the last crisis, the RBI is prepared to keep both liquidity and credit flowing to keep the wheels of trade from any abrupt seizure.

Finally, investment flows will depend on the comparative strength of the alternatives presented before those making allocations and investment decisions.

I believe India even with a 7 pct GDP real growth will continue to remain one of the better macroeconomic stories in the global investment scenario and irrespective of what happens in the short-term, FII inflows can be reasonably expected to revive sooner than later leading the Sensex to a recovery in Q4 2011.

What happens in the immediate term is for anyone to guess.

However, at 16,142 the Sensex is about PE13 a year forward and if the past was to serve as any indication, it seems a very good time to invest. Retail investors in mutual funds should remain invested and diligently continue their SIPs.

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