this time, growth and outperformance are in the hungry, emerging East; not in the well-fed West.
So is the risk. After September 15, 2008, when Lehman Brothers fell down the financial precipice and the global economy came to a standstill, we have seen risk move from emerging economies to developed ones. From Iceland, Ireland and Portugal to Greece, Spain and now the big daddy, US, the macro risk that fund managers play with — government debt and the ability of a nation to pay it back — has turned turtle.
“This has been the mentality over the past 50 years,” Axis Bank president Nilesh Shah told me over a discussion on the 702 point intra-day fall in the Sensex. “They have grown up on the idea that emerging markets are risky. But smart money is beginning to walk away from this mentality.” As a result, after the initial knee-jerk of the 702-point crash, the Sensex closed at 17,306, down 387 points or just 2.2%, the same as China.
Compare this fall with Australia’s, Taiwan’s or Indonesia’s, all down more than 4%, and you know that some of the smart money is here. The reason has been visible to all since 2009, when global recovery began — China and India are going to be the world’s engines of global growth. The two are no longer small. “India is not emerging,” US President Barack Obama said in his address to the Indian Parliament in November 2010. “(It) has already emerged.”
He probably meant India’s size. It will possibly touch the $2 trillion GDP mark by 2012, $3 trillion (global rank: 9) by 2016 and, at more than $30 trillion, become the world’s third-largest economy by 2050. If future growth is what fund managers look at while allocating capital, India is a pretty place to park money. (So is Indonesia and Brazil.)
But to understand why the Indian market fell today, you need to get under the mind of global fund manager. Too busy protecting his backside and bonus, his perception of risk lies in the year the 1960s. It is ok to lose money in say the US or Germany. But it is completely unacceptable to do so in India or South Africa. In the former case, the fund manager can say that he is bound by the country allocation that the MSCI indices decide, so there’s very little he can do — if global markets fall, he has to sell emerging markets to stick to the same ratio. But if he goes wrong on emerging markets, god save him.
It will take a courageous fund manager to look beyond what’s known and explore growth. So, if due to a small 1-day or even 3-month dip in markets, the share of emerging markets allocation rises to 25% from 20%, he would not “rebalance”. In fact, he might go for a reverse rebalance — sell more of UK, US, Japan and buy more of India, China and Indonesia. But that would be like trying to catch a falling knife. Until we get a mass of courageous global fund managers, Indian investors should continue with their systematic investment plans — high returns are destined.