China is sneezing and the world seems to have caught its cold. The rapid and continuing depreciation in the yuan heralded by the People’s Bank of China (the Chinese central bank) has raised the spectre of a global currency war.
At the same time, crude prices have fallen below the $33 mark for the first time in nearly a decade. This has led to the World Bank lowering its global economic growth forecast for the first time below 3%.
India insulated
Why are FIIs selling in India when the problem lies elsewhere? One reason could be of course that emerging markets are considered risky and during times of uncertainty money is moved to what are perceived to be safer assets. However, the other and the key reason is these investors are booking profits in India to cover up for their losses elsewhere.
Always always look at the big picture. Amongst all emerging economies, our export to GDP ratio is the lowest. Consequently, even a full blown global recession will shave only around 40 to 60 basis points off our GDP growth rate.
In fact, India is a direct beneficiary from a drop in crude prices. Cheaper oil or energy, a key input cost in almost all manufacturing / transportation would have a domino effect on the price of products and services thereby tempering inflation. In fact, big bull Rakesh Jhunjhunwala has termed the biggest collapse in crude prices since the 2008 global recession as ‘God’s gift’ to India.
Yes, there will be certain collateral damage in terms of possible deflation in developed economies which in turn may affect our export growth. However for India, net-net, the impact of slowing Western economies would be more than off-set by the cost advantage of lower commodity prices
Earnings growth is expected to pick up pace in the second half of the year, and if reforms measures like the goods and services tax and land acquisition bills go through what we have is nothing but a safe haven for investors spooked by risk.
Past being repeated
Renowned international investor George Soros has equated the current turmoil to the sub prime crisis that had hit the global financial markets in 2008.
And there itself lies the lesson. In January 2008, the sub-prime crisis had hit the world. And we had come down from over 60% of the then peak. That time too, we had written that this is a problem of the international financial community, by the international financial community for the international financial community. India is not affected. And look what followed. From 8,000 levels, we have seen the Sensex rise to almost 30,000 in seven years. But looks like that lesson is being swept under the wave of gloom and doom that is manifesting currently.
We are not saying that India is isolated from world events. However, the decoupling theory or that we are a global village etc. is also being completely oversold.
For example, almost 65% of Chinese exports are to the developed Western economies. So who do you think will be more affected by the current situation? India or the West?
To Conclude
As a community, we Indians are long-term investors only so far as the market is rising. At the first sign of trouble, we tend to panic and exit. Only to chase the index again upon its turnaround. This time, let’s not make the same mistake. And in order to help you in the process, we are going to paraphrase Warren Buffet. He has said words to the effect that – five years from now, ten years from now, we’ll look back on this period and we’ll see that you could have made some extraordinary (stock market) buys.
That doesn’t mean it won’t get more extraordinary a week or a month from now. Just don’t borrow money to buy your piece. Of course, he has said this about the US – but it can be literally copy-pasted with respect to the Indian context. So to this we’ll add our two bits. Don’t borrow to invest. Ever.
Do not listen to tips that your neighbour, train friend or office colleague is so gung ho about. Instead keep it in mind and be sure to check after a year or so what actually did happen to the hot stock that everyone was so excited about. That is, if it is still traded. Invest with mutual funds with an established track record of at least five years. Choose plain vanilla diversified funds. Then hold fast, hold tight and hold out. And yes, sleep well.
(The authors may be contacted at wonderlandconsultants@yahoo.com)
