Money on the markets

from Expert Zone:

Sensex: Key takeaways from 2011

(Nipun Mehta is an award-winning private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

About a year back in November, we were at the highest ever level of the Sensex with hopes of moving higher. A year hence, as we inch closer to the end of 2011, the Sensex has fallen more than 26 pct from its peak, and then recovered a bit.

In the interim, there have been bouts of volatility, long periods of dull range-bound movements, and a lot of events and learnings from the domestic and international markets.

The biggest learning in the last year has been for the present generation of investors who would not have seen such a long period of stock market underperformance and for whom the definition of long-term has changed. For those who started investing after 2003, the last three years have been an excruciating period yielding seriously negative returns. Most of these portfolios are still a few years away from returning to green. The key lesson is, short-term is out and long-term is in, with long-term to be defined as more than three years.

The other key learning during 2011 has been for the Indian corporate sector, where some hardly ever hedged their forex exposure. It was largely perceived by these companies that the rupee would remain stable and the Reserve Bank of India (RBI) would intervene whenever there were sudden bouts of currency inflows or outflows.

This prevented several mid-sized companies from taking a forex cover with the objective of saving costs. After losing significant sums during 2011 on account of foreign currency fluctuations, risk management for forex has all of a sudden become the buzzword for companies that have foreign currency exposure. The corporate sector is unlikely to take the currency fluctuations for granted any longer.

It is gradually becoming apparent that after a few years of excellent domestic economic growth, even when the global economy was struggling, the growth momentum for an 8 pct (or thereabouts) GDP growth for the country cannot be taken for granted any more. Estimates for closer to 7 pct GDP growth for 2011-12 have already been announced by rating agencies. The decision paralysis and governance deficit within the government is at an unanticipated new low and threatens to pull down GDP for 2011-12 to 6.5 pct levels. The greater threat, however, is for the Indian corporate sector -- starting to look overseas for expansion rather than investing in India, a far cry from the 'India shining' story that used to pull large investments from other countries into India.