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Striking a positive
note Navneet Munot says India’s growth story is intact and investors should ignore
doomsday predictions.
 “Gloom to
deepen: India Inc.”, screams the headline in a leading business daily. The global
media has been even more critical about India and no wonder, 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 macroeconomic situation (current account
deficit, inflation, IIP) and the rupee is crumbling despite RBI using every
possible weapon 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. The political situation couldn’t have been worse than this with a
leadership showing no intention to rise to the occasion and take charge.
Investor sentiments are at a nadir with the possibility of the 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 up to buy equities. We could have been a great
oasis of growth and hope when the rest of the 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 the last 5 years.
Amidst this
gloom, should we just give up hope? No, we should not.
The structural
India story because of which everyone was bullish on this country is almost intact.
Favorable demographics, rising incomes and consumption levels, high savings,
opportunities in infrastructure and outsourcing, robust market infrastructure—all
these are still positive factors. The dust is settling from the boom years. Of
course, policymakers have disappointed us in a big way, but don’t forget,
democracies have their self-correcting mechanisms. Look at the last decade, at the
state level, leaders focusing on 2G (growth and governance) are the voters’
favourite. For the first time in our history, powerful ministers and corporate
executives have been put behind bars. Don’t underestimate the power of
institutions like the Supreme Court, Election Commission and the Fourth Estate.
We are going through a massive transformation in our political economy when the
rest of the world is going backwards (just follow the political debates and
government actions in Europe, US and Latin America to feel a little better
about India).
10-year bond
yields in the developed world are much below 2%, one can be pretty sure those
central banks would keep their money-printing machines working overtime to
ensure low interest rates and ample liquidity. Will it fuel a commodity boom? It
won’t. Structural demand destruction in China and other parts of the world will
ensure softness in commodity prices. China will surprise on the downside. 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 will
focus on core inflation. The weak rupee has negated the gains from low
commodity prices, but I have a contrarian view that the rupee is very close to the
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 and the
economy and corporate sector would deliver better than its peers from 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 will gradually decouple. Indian
investors are severely underweight on equities and with gold losing its glitter
of late and the 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 the macroeconomic situation is scary and very close to the crisis
days of 1991. The 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.
If history is
any guide, these are precisely the times 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.
The 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.
(Navneet Munot,
CFA, is Chief Investment Officer with SBI Funds Management Private Limited)
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