India is an oyster…

If the yo-yoing of the share prices and clos­ing indices brought in a sense of gloom on 12 August 2015, then 24 August definitely brought in a sense of doom amongst the inves­tors. The Black Monday saw the indices crashing by 6 per cent – Sensex fell by 1625 points and Nifty fell by 491 points. The market capitalisa­tion eroded by ?7 lakh crore ($105 billion).

Not just India, prices crashed all over the world. The DOW shed 1000 points in intra-day trades and closed with a drop of 588 points, the highest since August 2011. Other major markets like London, France and Germany saw steep falls of 4.5-5.5 per cent, wiping out billions of dollars in market cap. The Asian story is far worse.

The dragon’s surprise devaluation of the yuan was the major trigger and confirmed the worst fears – that all is not well with the Chinese econ­omy, weighed under with a debt of nearly 3 times its huge GDP of $10 trillion+ and a slow­ing economy. The abysmal fall in Brent crude prices to $40 levels only added to the fears. The global village got singed and scalded with the dragon adding fire to the crude. The yuan devaluation saw the rupee value also nosediving and breaching ?66 to a dollar.

A silo view of the markets will be one of doom and gloom. But are not the markets known to over-react on bad news and over celebrate on good news? It has always been a mix of irrational exuberance and illogical panic the world over.

Coming to India, if one were to analyse the macros of its economy and the potential, the road ahead is certainly rosy. Digest these. RBI has foreign exchange reserve of $350 billion. The country has a population of 1.25 billion and the demographic dividend. Falling oil prices, falling import bills, falling fiscal deficits, removal of pet­rol and diesel price subsidy, ability to reallocate funds for public welfare like universal insurance and banking, thrust on infrastructure, transpar­ent auction of natural resource allocations like spectrum and coal, direct transfer of benefits and so many other on-the-anvil systemic changes all make for a heady cocktail. Besides, India’s share of the world GDP is just about 2.5 per cent now and has a huge potential for gaining world share down the line. Its export is a meagre 15 per cent of its produce, where China has over 30 per cent
being exported. If China is waning, India could be waxing.

Having said this, timing of decisions and exhibiting confidence in times of distress is crucial. The RBI and the government should be waltzing and go for the jugular with rate reduc­tion and enable liquidity. Unfortunately, the RBI is going to the other extreme of caution by holding rates and not indicating anything to the contrary. Our inflation is down to sub 4 per cent. But our real rate of interest even today is in the region of 4 per cent. How is it affordable or sustainable by business or the gentry? Should it not be more like 2 per cent? I am no econ­omist, but aren’t there two ways to look at an elephant in the room – either get scared or get emboldened.


The economy badly needs a positive signal and more liquidity at lesser cost – to invest, to grow, to offer jobs, to shore up demand and fuel the Indian economy. Some of the recent steps like permissions for new universal banks, payment banks, induction of new leadership into struggling PSU banks, potential dilution of government holding in banks, setting up of a holding company for all PSU banks to better oversight and management, are positive steps and should augur well for our economy. The govern­ment’s recent announcement of ?1.25 lakh crore for developing Bihar (the cynics may see it as an election gimmick), exploring ways and means of improv­ing the economies of the NE states, better con­nectivity amongst states, festinating steps to implement GST et al will be invaluable impetus to the economy.

With a strong government (hopefully learn­ing to carry the opposition in its agenda to bet­ter India), one can hope that the above crucial issues will be addressed soon and the country set on a growth path. For a starter, the government should ensure an effective floor management in the parliament and see through crucial bills.

India remains an opportunity. Investors should see this opportunity and stay invested in shares. We should see an average return of 15 per cent +/- over the next six months, from the cur­rent levels. Be brave when others are fearful. The meek can never conquer!      ♦


Markets can remain irra­tional lon­ger than you can remain solvent,” John Maynard Keynes had once said. As if to reflect this sen­timent, on 24 August, all across the world, stock indices crashed, the trigger being the China factor. The Indian market, which was sup­posed to be on the ascendant, felt this jolt too, as this time, it was a severe one. Since 2009, Indian stock

x indices have not fallen more than 5 3 per cent on any single day. But, on ” 24 August, the BSE index fell by 5.90 z per cent. This was the first major 5 shock for the Indian stock market in § the last six years. No one can afford a to brush aside this kind of a massive fall, as it takes time for the market to recover from this kind of mas­sive jolt, as history shows. Hence, it’s critical for investors to remain sol­vent, as the market may remain irra­tional for a longer period of time than one imagines.

One question that bothers every­one is: how long would the Indian stock markets take to recover? And another question that nags is: where is the bottom? Risk appetite has vir­tually disappeared from the mar­ket, with the massive fall shaking investors’ confidence. Safety of money has now become more important than returns.

Business India does not believe that the Indian market would slide more than 10 per cent from the present level of 25700. A massive upswing in the immediate future is also ruled out. Things are not as favourable on the global front, which could have helped the Indian stock market report smarter gains in the next three months or so. Hence, it would not be wise to assume immediate recov­ery. Even if the market does recover somewhat in the immediate future, the probability of it sustaining higher levels is low. We also believe that the investors have to expand their time horizon for the equity investments. What returns investors were expect­ing in the next 12 months may mate­rialise only a little later – maybe, in 18-24 months. Several analysts and fund managers have forecast Sensex and Nifty achieving targets at higher levels by December 2015 and March 2016 before this mega crash happened. But we believe the same has to be scaled down in the coming weeks.

The key to success in the present market is patience. The only way you can remain sane with your invest­ment decisions is to have the abil­ity to wait patiently. Those who are confused with the present volatil­ity are advised to take a break and

switch off from the market, as a con­fused mind usually ends up making more mistakes than taking the right decisions.

Biggest fall

Even though the fall of 24 August was the biggest ever in terms of abso­lute value, it was the 27th largest fall in terms of percentage in the history of Indian stock market since 1990. Going by past trends, after every big fall, the Indian stock market has bounced back in the next cou­ple of years; we see no reason why it would not be so this time too. The

Sensex forward PE




2 Jan 2007-24 Aug 2015 Source: BOA Merrill Lynch


only problem is, one does not know how long it will take the Sensex to cross the 30000 level – which it had touched on 4 March 2015. While India’s long-term story remains intact, the challenge is basically on the short term. “Global averseness to emerging markets remains elevated and we believe that volatility will remain high during the next three months,” says Ritesh Jain, CIO, Tata Mutual Fund. “We saw there was a calming effect in the recent stimulus measures offered by China, which were followed up with cash injec­tions. But it is clear that it will take more than that to restore normalcy”. But Chandresh Nigam, MD and CEO, Axis MF believes that China effects on Indian market should be minimal beyond the short term.

An analysis conducted by Bank of America-Merrill Lynch illustrates how the stock market behaves in
the short term, after a massive fall. Going back too far sometimes leads to wrong conclusions. Since 2008, the Sensex had fallen by more than 5 per cent on 11 occasions. The high­est fall in percentage terms was on 24 October 2008, when the Sensex crashed by 11 per cent. We looked at how the market performed in one month and three months, after the fall. At least on half of such occa­sions, the market had either moved up or down during the immediately following one-month period.

Hence, we do not get any mean­ingful trend, which could help us understand which way it would go this time. But, in a three-month time frame, the historical data suggests that the market normally goes up — a trend that was observed 8 times in 11. The probability of this pattern recurring is high. Indeed, the mar­ket could, in the next three months, be at a level higher than where it is at present. On some of the occa­sions, the gains have been dramatic with the market going up as much as 49.50 per cent. This was after the crash of 15 October 2008. Inciden­tally, at that time also, the market had fallen by 5.90 per cent, just as it happened on 24 August! We feel the rally this time may not be as sharp as the one that happened on 15 October 2008.

A repeat performance?

‘Are we going to have a repeat of 2008?’ is the most common ques­tion that is recurring in the minds of most of the investors. The fall in the stock indices in 2008 were dras­tic and painful. Do we expect a sim­ilar scenario now? The answer is: ‘NO’. There are various reasons to reach this conclusion. First, in 2008, the Indian stock market had had a very good run-up before it crashed. From January 2007 to January 2008, the Sensex had surged from 14000 levels to 21000 levels – a gain of 50 per cent in 12 months. But, this time around, before the 24 August crash, the strong rally was conspic­uous by its absence. Last August, the Sensex was at 26000 while, before this crash, it was at 28000. The index had moved in a narrow range during


Munot: push reform button


the last 12 months, with a 52-week high of 30024 and a low of 25232. Our estimate is that, in a worst case scenario, the Sensex may go down to 22500 levels, but not beyond that. Vikas Khemani, president & CEO, Edelweiss Securities, even feels the


According to Ritesh Jain, CIO, Tata Asset Management Capex plays: cement, construction and capital goods and engineering Urban consumption and input price reduction beneficiaries: auto and auto ancillaries, paints and home improvement companies Pharmaceuticals: strong base demand unaffected by global growth and rupee beneficiary

Choice of Navneet Munot,


Industrials; consumer discretionaries; financials

Picks from Vikas Khemani, president & CEO, Edelweiss Securities Capital goods; banks; IT; pharma

Chandresh Nigam, MD and CEO – Axis MF

Financials; autos; logistics; consumer industrials

downside will not be too much from the present level. “I would be sur­prised if the Nifty breaches the 7500 mark,” he says.

But, we do fear that the market may remain in a narrow range, frus­trating many investors. In the 2008 bull rally, the Indian stock market was commanding handsome val­uations. But this time around, the Indian stock market valuations are already quite reasonable. In 2008, the 12-month forward the Sensex PE was 25 times, as against 15.3 times today. The Sensex has a long term average of 14.5 times PE. Hence, there is not much surplus that can slide off. Last time, the retail inves­tors were fully invested in the equity market. Hence, when Fils started sell­ing in the domestic market, there was no one to Counter them. But, this time, even though Fils are sell­ing, the domestic institutions are giving support by buying. What is good is that, since many of the retail investors are either not fully invested or still have to take exposure to equi­ties, they could come in at lower val­uations and lap up the companies. This would ensure that the fall in the value of the companies may not be that high as what we saw during the bust in 2008, when the Sensex went down from 21000 to 7700 in just nine months. “With positive real interest rates and stress on real estate, we could be at the cusp of a turnaround in the household sav­ings’ behaviour and the equity mar­kets will be a big beneficiary of it,” says Tata AMC’s Jain.

Last year the mid-caps index saw smarter gains as there was great fancy among investors. This is despite pop­ular indices going nowhere. But recent corrections in the market will make mid-caps underperform at least in the near future as risk off strategy will again be the order of the day. We expect that mid-caps and small caps fancy would take some beating at least till December.

Another factor that is favouring India is that, now the country has a good amount of forex reserves, which would ensure that we have enough cushion to absorb the shock of the falling rupee. This should comfort

the Fils and convince them not to feel jittery about any fall in the value of the rupee. Indranil Sen Gupta, chief economist, Bank of America-Merrill Lynch, believes that rbi may use up to $20 billion of the forex reserves to defend the rupee.

But, handling the current global volatility would be a challenge for the central banks in the emerging markets (EMs). If they cut interest rates to stimulate their economies, they may see a flight of capital which, in turn, could put pressure on their local currencies. On the other hand, if they don’t cut interest rates, they may face the risk of recession. Looked at in this light, in retrospect governor Raghuram Rajan has done a good job in terms of balancing the growth and interest rate. Consider­ing the global volatility, Rajan may continue to hold interest rates steady when he announces the monetary policy on 29 September, as a fall in interest rates may see a flight of cap­ital from India, putting further pres­sure on the rupee.

Reforms are the key

In the current global scenario, it’s hard to expect good news from inter­national markets to perk up senti­ment. We believe the China story will keep bothering market senti­ment time and again. Against this backdrop, it’s the domestic news flow that has to lift market sentiment. To lift sagging sentiment, we need not one but a series of good news.

A Damocles sword that hangs over the Indian as well as international markets is the likely hike of inter­est rates by the Fed in September. While we believe that it would not be a wise move by Fed to increase the rate in September, the market will be on tenterhooks till the Fed actually makes the issue clear.

It is now that the Modi govern­ment should act fast and lift sen­timent by announcing a series of reforms to show both the coun­try and the world at large that India means business. For the first time in 30 years, we have a government that enjoys absolute majority in the Lok Sabha. Modi has to make use of this strength to push his reforms agenda
through. The government has to find a way out to clear the bills pending in the Rajya Sabha, where Modi gov­ernment does not enjoy a majority. The government must learn the art of taking the Opposition into con­fidence and remove the logjam. But there are many areas which do not require legislation, and require solely executive decision. The Central gov­ernment’s strong actions would send strong signals to the domestic as well as international investors that India means business.

The GST Bill is the first issue that the government must try to imple­ment – if not from 1 April 2016, then at least by 1 October 2016. There is little doubt that India is losing its

Fils investment every year

Equity net investment (? crore)



economic charm. Recently, Moody’s had trimmed down India’s GDP growth rate from 7.5 per cent to 7 per cent for 2015-16, thereby warn­ing of a slower industrial recovery. While reducing the GDP growth tar­get, Moody’s stated, “One main risk in our forecast is that it affects the pace of reforms, slowing it signifi­cantly, as the consensus behind the need for reform weakens once the least controversial aspects of the gov­ernment’s plan have been imple­mented.” Even RBI, in its 4 August monetary policy, had mentioned that “India recovery is still a work- in-progress.”

In the same policy statement, it also mentioned that “Investments as measured by new projects are still weak”. The recent FICCI Business Confidence Survey did not project a rosy picture either, as the Confi­dence Index was at a six quarters low. In that sense, the current set of eco­nomic data is far from encouraging. If the monsoon continues to remain poor, it can easily shave 100 basis points off the GDP growth numbers.

Against this backdrop, the govern­ment must act swiftly to boost the local consumption as well as invest­ment cycle, as the global scenario is unlikely to improve in a hurry. “The government must tackle the pending legislative reforms (GST and the Land Bill), while executive action should also be stepped up,” says Navneet Munot, CIO, SBI Mutual Fund. “A big infra spending by the govern­ment is the need of the hour to kick- start the investment cycle and revive sentiments”. Let’s hope the gov­ernment understands the urgency involved in this.


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