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Market Watch: Reverse Chindia syndrome

When everyone tells you that the Chindia story was exaggerated and it is over for good--when the bulls throw in the towel, go out and buy, writes Udayan Mukherjee.
By Udayan Mukherjee
UPDATED ON APR 06, 2008 10:44 PM IST

It is not India or China, it is India and China; the words ring loud in my ears. These two were hailed as the economic superpowers that would lead the world together. Over the last two years, the coupling was indeed glorious. They emerged as the fastest growing economies and, in turn, the best performing stock markets in the world. In the last few months, the situation is slightly different, to put it mildly.

Take last week. The Dow Jones, amid all the problems in the US was up 3.3 per cent, the Hang Seng was up 5 per cent, and Brazil 6.6 per cent. China was down 11 per cent and India 6 per cent. Last week's move simply highlights a growing trend of stark underperformance for these two markets. From their recent peaks, China has now collapsed 40 per cent and India 30 per cent, making us the worst performing among major global markets this year. We were the fastest growing, the best performing, the most loved and the most expensive, but now the tables have turned! It is quite ironical as we will still be the fastest growing economies in the world in the foreseeable future. Despite slowing down, China should grow at 9.5 per cent and India just under 8 per cent this year. Sadly, stock market performance is not about absolute growth rates but about the rate of change of growth. The similarities in several aspects for our two economies and markets are startling. Inflation is a big monster for both. While inflation touched 7 per cent here, in China the CPI has soared to 8.7 per cent. The same level of panic is visible in the actions of policy-makers in both countries to quell this problem. And growth is slowing. There is denial on that score among various sections but the market knows the reality. Given this fundamental backdrop, the same attendant problems will plague both markets: earnings growth will slow down, interest rates will remain at high levels, policy moves will create distortions and valuation multiples will contract to reflect these problems.

The good news is that all this will not last forever. The Chindia bull story is not over for good. No, I am not about to sing you the favourite tune of all trapped bulls which goes "the long-term India growth is still...".

That sounds like a defensive whimper to me. I will not be surprised if there is more pain ahead for China and India. The key question is how long it takes to flush the problems out of the system and from what base we resume our economic and market uptrend. The answers are not easy. The stubbornness of global commodity prices, the extent of the US housing collapse etc are all too difficult to map. At some point, maybe a bit later than people expect, things will start improving again. Cycles always turn. It will probably get worse before it gets better but in the throes of that despair would perhaps lie the seeds of the best buying opportunity of the decade. When everyone tells you that the Chindia story was exaggerated and it is over for good--when the bulls throw in the towel, go out and buy . As King Khan would have said, "Picture abhi baki hain, mere dost."

The writer is Executive Editor, CNBC-TV18

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