Dark clouds will be followed by a shining sun..

“Gloom to deepen: India Inc” is the headline in a leading business daily. Global media has been much more critical about India and no wonder that not only foreign investors but even Indian corporates are on a “quit India’ movement like never before. Given the macro conditions and political situation, you can’t argue against them. 

Every economic data release points to a worsening macro situation (current account deficit, inflation, IIP), rupee is crumbling despite RBI using every possible arrow from its armory to support it. Inflation is rising at a time when growth is slackening making it difficult for RBI to loosen monetary policy. Liquidity is extremely tight and fiscal position is going out of control . Political situation couldn’t have been worse than this with a leadership showing no intent to rise to the occasion and take charge. Investor sentiments are at nadir with possibility of country facing an acute shortage of risk capital going forward. 

Exactly 5 years back, things were so different. India was the darling of global investors and domestic investors were queuing to buy equities. We could have been a great ‘oasis of growth and hope’ when rest of world is dealing with such deep structural problems but alas, we missed an opportunity. Future generations wouldn’t pardon us for what we have done in last 5 years. 

Amidst this gloom, should we just leave hope. NO. 

The structural India story for which everyone was bullish on India are almost intact. Favorable demographics, rising incomes and consumption levels, high savings, opportunities in infrastructure and outsourcing, robust market infrastructure, all these  are still true. Froth of boom years is getting cleared. Of course, policy makers have disappointed us big time but don’t forget, democracies have their self correcting mechanisms. Look at last decade, at federal level, leaders focusing on 2G (growth and governance) are voters favorite. First time in our history, powerful ministers and corporate executives have been put behind the bars. Don’t under-estimate the power of institutions like Supreme court, election commission and free media. We are going through a massive transformation in our political economy when rest of world is going backwards (follow political debates and government actions in Europe, US and Latin America to feel a little better about India!). 

10-year bond yields in developed world are much below 2%, one can be pretty sure those central banks would keep printing machines work overtime to ensure low interest rates and ample liquidity. Will it fuel a commodity boom. No. Structural demand destruction in China and other parts of the world will ensure softness in commodity prices. China will surprise on downside. Given the outgap gap, core inflation is unlikely to shoot up. Having said that, headline inflation in India may remain sticky due to primary articles prices but I hope RBI would focus on core inflation. Weak rupee has negated the gains from low commodity prices, but I have a contrarian view that rupee is very close to bottom and unlikely to depreciate much from current levels. I also think global investors will look at India more positively as on a relative basis, economy and corporate sector would deliver better than most of the other parts of the world. We have always been dancing to the tune of global risk appetite and liquidity but this time, we would gradually decouple. Indian investors are severely underweight equities and with gold losing its glitter of late and boom in real estate coming to an end, I expect domestic investors to put money in equities and long bonds. 

There is no denying that macro situation is scary and very close to crisis days of 1991. Global environment couldn’t have been worse. Political leadership is missing and condemnable to say the least. Don’t forget, reforms never happen out of conviction, politicians deliver them out of compulsion. We are reaching that point. S&P is surely helping. If history is any guide, these are precisely the time when you get great opportunities to accumulate risk assets. Periods like October 2008 to March 2009 where headlines scare you.  And not when everything looks so rosy, the way it was in 2007. 

Next few months will offer a great opportunity to invest in long bonds and equities. Maintain the discipline of asset allocation rather than getting swayed by the high volatility that we are likely to witness. Patient investors would be suitably rewarded for risks.

Regards,

Navneet Munot
CIO - SBI Funds Management Pvt. Ltd.

(Mutual Fund investments are subject to market risks, read all scheme related documents carefully.)