First of all I would like to thank you all who liked my earlier post on real estate trends (Real estate prices in India face slowdown ) It’s true that most of the things captured in that blog post five months back has either happened or is happening.

Also check my July 2007 blog post Market meltdown on US concerns and the cautions mentioned to all the investors about the upcoming market mayhem.

Hope you would like the below blog post too.

After long now thought of writing a blog as I felt this is the time when we should understand what’s happening with the markets & what should be our investment strategy at this time.

The actual market mayhem started with the collapse of one of the US banks in Aug-Sep 2008. This collapse brought in fear in lending between institutions and bank. The low lending (at a higher rate) or say no lending at all brought in the credit crisis. The credit crisis coupled with Sub-Prime losses triggered closures of various institutions and corporate losses the world over.

Today we have reached a stage where we have lost the trust in the US belief of the free market economy. The belief that once the market moves away from the mean comes back to its original form if left alone has to be rethought. There is now a consensus that financial markets should not be left alone instead regulated to some extent. It’s the right thing to do as over regulation might kill growth and under regulation will bring in unregulated financial engineered products which might have a bad impact on the market. (The present crisis is the latest example)

I truly agree with George Soros who in one of the interviews said, every bubble has two parts one is real trends and the other is a misconception about the trend. Real trend is credit expansion with use of leverage and the misconception has been market fundamentalism. Misconception is that the market correct back to the mean always. This misconception occasionally brings in financial crisis.

The one thing we should always remember when we are in equity markets is that the market goes to extremes and creates bubbles. It means when the market is trading at very higher valuations or at very lower valuations is when bubbles are created.

But does that mean that the bottom in the market too is a bubble?? Probably yes, probably it should be called over contraction as once the trust factor comes back to the market it will start zooming from here.

Today Indian index SENSEX is trading close to  9 times of the next year forward earnings which few months back was at around 21 times. Aren’t the valuations today too cheap, too contracted??

The only thing that is stopping investors today from investing at this kind of cheap valuations is the global factors. The day we see bit stabilization in the global markets is when our markets will start their ascent journey, and it will take some time probably say a year more from here.

Advantage India:

The Nov 08 Bloomberg data of BRIC economies index performance for the calendar year 08 shows the following

MICEX of Russia down 67.64%, Shanghai Composite of China down 62.25%, Sensex of India down 53.74% & Bovespa of Brazil down 46.03%.

India is one of those few economies of the world which didn’t had substantial losses (till now)  in the subprime crisis, but still our markets came down like a pack of cards.

Indian market is mainly affected by sentiments also called the misconceptions which drive the sentiments. I spoke to some of the analyst and their blunt reaction as usual was we are affected due to the recession affecting the world economy as when there is recession the world over there will be less consumption of various products and services which indirectly will affect India’s trade and markets crash.

I personally don’t think the above analysis make that much sense because trade as % of India’s GDP is around 33% which also include oil (close to 7%). So if I remove oil from our trade then we will be left with around 26% of GDP as trade. Now let’s say that around 40% (on the higher side) of this 26% of trade is affected due to recession still our GDP should be above 5.5% which definitely is not a bad GDP as no other economy other than say China will even be closer to it.

Today lot of Indian companies are shifting their focus from US & European markets to markets like  China and also local Indian markets so that their profitability is not majorly affected.  But yeah with global slowdown we in India might see some job/salary/incentive cuts which might lead to less consumption, though this might not be on the higher side unlike economies in the west.

Second point is the inflow and outflow of money. Our markets had moved up all the way to 21K level on Sensex with lot of money which flowed into our economy either by FII, PE or as FDI.  In 2008 the total foreign flow into the country stood close to $ 110 B which will be around 8.5% of GDP. Due to the global meltdown India has witnessed lot of outflows which too was one of the main factors for the market turbulence. The money which went out was mainly due to the unwinding of the leveraged positions and to meet the capital requirements in each of the fII’s home business. Today we don’t have that much of unwinding left and governments world over are funding companies in trouble. There are also the long term players in our market like the pension funds who are still invested in India. Going forward we should also remember that when global market sentiments stabilize a bit, India will be one of the few economies which will attract a big chunk of the global investor’s money. India at that time, compared to the best economies in the world will have one of the highest GDP growths.

Third factor could be the Indian inflation as it is likely to come down to close to 6% by next year mid this will make sure that interest rates too will come down quickly which will provide the much needed liquidity to our markets and it might also act as the fuel for market upturn.

Disadvantage India: Some points

The global slowdown might lead to a series of job cuts across sectors, though the numbers might not be substantial. India need to look into ways to reduce job cuts.

Unlike China India is running a deficit close to 6.6% of its GDP so ideally the decisions to feed the economy with extraordinary stimulus package might not happen.

India’s political outlook doesn’t look too great. How beneficial a coalition govt. can be and how fast decisions can be taken by such a govt is anybody’s guess.

India is too much depended on foreign money especially by companies who borrow abroad.

Apart from this the long term India story still remains.

My views for investment remains the same as June that this is the time when we need to review our portfolios and weed out those scrip’s and funds which might not participate in the upcoming market upturn like infrastructure, real estate etc. This is also the time to rethink income funds as an investment vehicle apart from equity investments which should be invested via a proper staggered route or as STPs on mutual funds.

 Before ending, I would also like to add that the above stated points are just my point of view and any review/rebalancing /investing should be done with proper care.

You can send me your views on my email id sureshkaimal@gmail.com . 

Check out my personal blog, http://kaimalsway.blogspot.com/