One year back, if somebody had said that crude would correct by around 50%, inflation would halve, the current account deficit would be benign, and RBI would cut rates by 125 basis points, one would have been very bullish on market performance. Unfortunately, we are left disappointed, with the NSE 50 Nifty producing negative returns in 2015 even in rupee terms. It is then easy to pan the government for not delivering and relate that to the market weakness; however, in my view, such a scenario needs closer inspection.
In 2012-2013, India received extremely robust inflows of $24bn and $20bn, despite the government’s policy paralysis, persistently high inflation, large twin deficits and a significant deceleration in the economic cycle. However, the contrast is true for 2015, where FII flows slowed to barely $3bn despite India having the best macro fundamentals in last five years. The reason was simply this: In 2012-2013, western countries were struggling and their QE policies were quite supportive of investments in Emerging Markets (EMs) in general. So emerging economies, regardless of fundamentals, saw large capital inflows. But this began to change with the improving economic prospects in US and Europe; and EMs in general were caught on the wrong side of the plunge in commodity prices leading to volatility in EM markets and resulting capital outflows . This market correction which started from August 2015 has unnerved investors.
While global investors are not discriminating at present, in the long run there will definitely be winners and losers of low commodity prices. India will be one of the main beneficiaries as was the case with the current fall in oil prices, resulting in oil savings of 2-2.5% of GDP over the last two years. Apart from this, lower oil prices will also reduce inflation and the fiscal burden providing more elbow room for the RBI Governor and government to stimulate the economy. However, in the short run there could be some negatives as a lower oil price results in petrodollar-stocked state governments liquidating reserves (accumulated when oil prices were high). This in turn impacts flows into India. It also slows global trade and can translate into currency fluctuations. For example, a slowdown in China causes its currency to weaken and because China is India’s largest trading partner the Indian Rupee will have to commensurately fall for India to remain competitive.
From an investment point of view, all these developments will augur well for India from a longer-term perspective. India is a very resilient emerging market economy due to our investment and consumption being locally driven, and the current markets offer an excellent opportunity for long term investors. India’s GDP is expected to double every seven to eight years and given this, we will go from $2 trillion to $4 trillion by 2023 and $5 trillion by 2025 – a big jump. Also, current valuations at 15 times price to earnings ratio is quite reasonable. Historically, we have seen that it is always been a good investment time whenever the market trades below 15 times price to earnings. In my view, buying when FIIs are selling heavily (as is the case currently) has always been rewarding for investors in the long term. In the last 20 years, if investors invested in the stock markets after 6-9 months of heavy FII selling, the returns over the next 18-36 month have been more than 20% per annum. Further, there have been numerous reforms enacted which are not catching headlines at present, but are likely to have long term benefits. For example, there is a clear infrastructure push with focus on roads and railways. A lot of states have signed up for UDAY, which should resolve the long-pending power distribution problem in the country. India’s coal production has surged and imports have decreased, as Coal India has increased production. Also, the coal auctions have been a success. The government’s Jan Dhan Yojana has added 200 million bank accounts and should result in increase in the overall financial pool going forward.
Despite the bullish medium term view for India, it’s hard to think of about investing in tumultuous times. The volatility and the noise today, make most of us lose focus and eventually we don’t see the long term trend. I expect volatility to continue in 2016. Investors should use the volatility to build equity positions smartly with a long term view. Just to borrow a phrase from Warren Buffet – “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.
Having said that, it is extremely important that we do not get complacent and instead capitalise on the favorable macro environment. I think, cleaning up of bank balance sheet should be the highest priority for the RBI and the government as it lays the foundation for strong and sustainable growth. While this could be painful in the short term, benefits are high in the long run. Cleansing balance sheets was one of the reasons for a V-shaped recovery in US, post Lehman crisis. Apart from this, the reform process must continue and some of the key reforms such as GST, bankruptcy code, etc. need to be passed to increase investor confidence. Luckily for India, we have some of the best men at the centre. Apart from a reformist government, India also has one of the best central bankers in the world leading the Reserve Bank of India. This should hopefully result in meaningful policy measures being continued.
Overall, given the low inflation, declining interest rates and stable currency along with favorable demographics and strong political setup, the Indian economy is in a sweet spot. As, the dust over global uncertainty settles, India should attract a lot of International investment - both FDI and FII. From a long term perspective, I remain highly positive on the Indian growth story.
Rashesh Shah is Chairman and CEO, Edelweiss Group