Currency war

Many countries seem to be involved in a race to devalue the currency. By doing so, they want to remain com­petitive in the global space. China’s devaluation did come as a surprise – and no one knows how many more devaluations there would be in the next few months. Other emerging markets have also allowed their currencies to fall, to spur export growth.

India has seen its currency quite stable in relation to other emerging markets, but the pressure of deval­uation may continue to remain high.

Devaluation of cur­rencies by other coun­tries poses two challenges for India – one, on the export front, we may not remain competitive; and, secondly, cheap imports could affect the local man­ufacturing segments. Modi wants to increase the share of manufacturing in the GDP but the present global
dynamics makes it harder. The gov­ernment must think out of the box to minimise the impact of global slowdown, instead of taking pride in claiming that we are amongst the fastest growing economies in the world. In July, IMF pared down the global growth rate to 3.3 per cent but, with the present crisis looming, there is a probability that this could get trimmed.

It would not be wise to conclude that the global issues would resolve smoothly. Also, it would be naive on our part to assume that India would be insulated from global upheavals. “Global markets can see more down­side in the next 6-12 months,” says

Shankar Sharma, vice-chairman and joint MD, First Global. “All attempts at lifting real economies have failed worldwide. And markets will finally wake up to this realisation. India, while being relatively better off, will still get hurt in these times of tur­moil, albeit less”. While Finance Min­ister did make an attempt to sooth nerves by giving TV interviews after the crash, investors now want action. It’s time words turn into acts at the ground level.


Keeping in mind the recent volatil­ity, one would definitely need a clear- cut strategy to play out successfully. The equity market is not going to recover in a hurry and, hence, invest­ments should be channeled into smaller lots, rather than at one go. The market henceforth will become a little choosy in terms of stock selec­tions and sectors too. The first pos­itive movement would come in the ‘A’ group companies, with the intro­duction of a risk-off strategy in the market. That means investors would be choosy in terms of selection of stocks, where capital safety would assume preference over returns. This also means that some of the mid­cap and small cap stocks may not see their market caps expanding sig­nificantly. Even though post-crash mid-cap and small-cap indices have crashed significantly.

Moreover, investors should choose sectors that get benefits from the fall in the value of the rupee – like pharma and IT, as their mar­gins would expand. Also many of the IT and pharma companies’ businesses are in developed economies like the US and Europe, which are not in trouble. Hence business prospects for their, continue to remain strong Of course, they are not avail­able at cheap valuations bu: they may continue to com­mand premium, in the absence of a wider choice o: sector selections.

The one sector tha: would be affected least by
the global turmoil is domestic con­sumption. Companies catering to this sector would get benefits from the fall in the price of international commodities, which should help them to expand their margins. Also the public may see more money in their hands, as prices of die­sel and petrol have been reduced, and so has the inflation rate. These savings would increase their pur­chasing power.

In the last Monetary Policy, RBI had indicated that there is revival in the urban consumption story and, hence, one can expect volume growth for consumer-facing businesses, which almost alone are sitting on a sweet spot in the midst of the emerg­ing markets’ turmoil. Also, India’s population is young and dominated by the working class and, hence, the domestic consumption is likely to remain strong, despite the global tur­moil. There is bigger investor interest for consumer-facing businesses like FMCG, paints, consumer durables and automobiles.

Even falling interest rates augur well for these sec­tors. With the VHth Pay Commission likely to be tabled in a month’s time, these sectors would be fur­ther benefitted.

In the last one month, many of the PSU banks have surged on the bourses, as the government announced Indradhanush.

While this is a step in the
right direction, benefits would be felt in the long term rather than short term. Global commodity prices con­tinue to remain soft, which means that the companies operating in these segments such as steel, metals and mining – would continue to see their loan servicing ability coming under stress. Also, the manufactur­ing sector’s outlook may not be rosy due to cheap imports and the chal­lenging scenario on exports. These sectors may continue to pose prob­lem for the banks. Many of the pub­lic sector banks may continue to see elevated level of NPAs. Hence, a sustained rally in the public sector banks is unlikely.

The private sector banks may also underperform for the same reasons. With competition likely to come in from two new banks and several payment banks, private sector banks could see challenges on retail loans
too. With their existing valuations being not cheap, private sector banks may remain underperformers, at least for the next 6-9 months.

FII flows

In the current calendar year, Fils have not gone aggressive on invest­ments. In 2015, till August, they have pumped in only ?33,000 crore into the Indian market, as against ?97,736 crore during the full year of 2014. What is worse is that in the recent past, Fils have been net sellers. During the last four month period, they were net sellers on the Indian equity market for three months, sug­gesting that their pull towards the Indian equity market is on the wane. Of course, being part of the emerg­ing market also hurts us somewhat. “Given the outflows from emerg­ing market funds, India may also see some FII outflows,” says SBI MF’s Munot. “While there is cau­tion as far as emerging mar­kets are concerned, global fund managers are rela­tively positive on India”. Tata’s Jain also believes that the capital flows are stall­ing only till global markets see signs of stability. “We believe there is still a lot of uncertainty regarding the FED lift off,” he adds.

But it’s unlikely that the Fils would pour in much more money into Indian

equity market during the rest of 2015. This is where domestic institu­tions have to come in. If the Fed does increase its rates, then the Fils could continue to be net sellers on the Indian bourses. But Sharma is opti­mistic. “Fils are finding India safer than many other emerging mar­kets. Hence, barring short-term blips, they continue to be relatively pos­itive on India, though they are dis­appointed by the lack of any revival whatsoever in the economy”. A sim­ilar optimism is shared by Edelweiss’ Khemani. “There is an interesting trend occurring with EM-dedicated funds seeing outflows and pull­ing money out of India; while the India-dedicated funds continue to see good flows and are heavily invested”. On the other hand Nigam of Axis MF does not want to hazard a guess on the short-term flow but he believes that longer term FII flows will remain positive for India on the back of our

strong growth prospects and attrac­tive equity and debt markets.

What to expect

While we believe that Indian equity indices may not give great returns in the next three months or so, an Indian equity market is poised for an excellent long-term growth story. Munot believes that the market can offer 15 per cent returns in the next 12-18 months. A similar view is echoed by Khemani too. “Over the next 12 months or so, we expect markets to remain volatile, but still yield 15-20 per cent return. This is attractive, compared to other asset classes such as gold, real estate, etc, where there are doubts of even a pos­itive return”. Jain believes that vola­tility will continue in the short term and could start abating by Decem­ber. “The recent episode has exposed the cracks in the market,” he adds. “And we can expect markets to remain extremely volatile in the next three months. After that, we believe the market would have priced most of the negatives and see levels rising thereon.”

If the government acts fast on the reforms, the market may even start ignoring the international cues. Even Fils would start putting India in separate bucket among emerging markets. The Indian market could well be at an all-time high in the next 12 months! Now, it all depends upon the Modi government. This is the first market test of the Modi government. And its response to the crisis would decide whether the Indian market belongs to the best- or worst-performing bracket. While the short-term investment climate is turbulent, investors must remem­ber that the best returns are made only when investments are made during challenging times. If one has invested in stock market, one should continue to remain invested and let this volatility phase play out. Those on the fence, wondering whether they should invest or not, or if they should start investing in small lots There is decent money to be made in the next three years.

♦ SUNIL DAMANI 4 [email protected]:


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