With the global turmoil, what is the future of Indian stocks?
(Jun 30, 2015)
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In this issue:
» What is Mr. P telling you to do now?
» Corporate India's external debt is a big concern
» Are India's forex reserves at risk?
» ...and more!
A lot of funny stuff is going on in the world these days.
One such event that has hit a crescendo is obviously Greece. The bailout package that has been keeping its wheels in motion runs out on today. For now, it seems on course to default on a little under Euro 7 bn of dues to the IMF and other short term bills. Its banks are shut and its citizens are out on the streets. If the country indeed goes bankrupt and is forced to exit the Eurozone, who knows how far the tremors will be felt. We're pretty much in uncharted territory here.
And if this was not enough, China too has been keeping investors on the tenterhooks. Its stock market has crashed a whopping 25% in a little over 10 sessions! An interest rate cut by its central bank and other such measures have hardly been able to halt the slide. There's no easy medicine for the paranoia of an economic slowdown intensifying.
Red flags are being raised back home too. Just recently we wrote about RBI governor Raghuram Rajan's view that the global economy may be slipping into problems similar to those during the Great Depression.
If the developing and developed world alike is in such doldrums, what about the Indian stock market? What's going to happen to it? And is this a good time to be in stocks at all?
All very fair questions these. In fact, investors were asking very similar questions towards the end of 2008 too. At the time, companies were going bust, economies had come to screeching halt, and the sub-prime crisis was at its full intensity.
However, investors that were following a certain Mr. P were doing exactly the opposite of what most other investors were doing. And they managed to do this by keeping their emotions completely out of the picture and making decisions only and only as per the diktats of Mr. P.
What was Mr. P telling them at the time? Well, in short, he asked them to go big not on selling, but on buying stocks. And the results that his investors got over the next few years were phenomenal to say the least, with the S&P BSE Sensex doubling from about 10,000 at the end of 2008 to around 20,000 by the end of 2010.
In case you haven't guessed it already, Mr. P here stands for nothing but having a 'process' in place that helps you invest without letting emotions like fear play havoc with your decisions. Considering just how profitable it can be to do so, we went ahead and designed a service that helps investors do exactly that. It has a system in place that keeps sentiments at bay and portfolio returns intact. Ensuring that whether Indian stocks head higher or fall lower in the near term, investors remain well and truly in the game.
Do you think that investors should move out of stocks due to the risks that these global events pose? Or is there a smarter way out? Let us know your comments or share your views in the Equitymaster Club.
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The root of the crisis in China and Greece is debt. The governments, corporates and individuals in these two nations have borrowed too much. Now they are finding it tough to repay. This is something that seems to happen regularly. The lure of cheap credit is hard to ignore. The same is true in India as well. We know the government is struggling to bring down the fiscal deficit. Can corporate India be far behind?
It is surprising that corporate India is not deleveraging as much as it should. Many Indian firms have taken to External Commercial Borrowings (ECBs) over the years. With interest rates near zero in the western world, Indian firms are on a borrowing binge! From US$ 60.3 bn in 2008, the total ECBs outstanding has reached US$ 170.8 bn in 2014 as per a report in the Mint. But even worse is the fact that most of this exposure is unhedged. If US interest rates were to rise and the rupee was to come under pressure, we believe this could be a debt disaster in the making.
To take our discussion about debt a little further, it is interesting to look at how global debt levels have grown. As can be seen in today's chart, instead of deleveraging post the global financial crisis, the world took on more debt! Has this really helped to bring about an economic recovery? We don't think so. The developed nations are still struggling to grow even though the crisis ended over six years ago. The huge increase in debt fueled spending hasn't brought about a recovery.
No signs of deleveraging
What it has done however, is fuel asset bubbles across the world. Global investors have taken full advantage of this free money and have used it to bid up asset prices. Some of this money has certainly made its way to India as well. FII inflows in to Indian equity and debt markets reached record levels in 2014. Of course, the party will end in time. Only then will we know the full extent of the damage caused by the bursting of the asset bubbles.
Over the last few days, we have heard several comments from the government to economists to fund managers about how India will not be affected by the crisis in Greece. Such statements are very common at these times. After all, Greece accounted for only about 0.11% of India's exports in FY15 as per an article the Business Standard. However, it is clear the government is worried. Europe is a large trading partner. The Euro has depreciated recently against major currencies and the Greece crisis will only add to the woes of India's exporters. Sentiment is already weak as India's merchandise exports had fallen for the sixth consecutive month in May 2015. If Greece imposes capital controls, it would be an added blow.
The government has good reason to be worried we believe. The rise in US interest rates and the unfolding turmoil in Europe could result in capital outflows from India. This along with the weak export situation could impact India's forex reserves. However, we believe such an impact would be temporary. India is among the few countries in the world that offers good growth opportunities. As such we don't expect a huge reversal of FII flows from Indian markets.
The Indian stock markets opened flat for the day and have failed to trade conclusively above the dotted line. At the time of writing, the BSE-Sensex was trading lower by 16 points (down 0.08%). Barring FMCG and Pharma stocks, most sectoral indices were facing selling pressure with software stocks leading the losses.
"Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety". - Ben Graham
|| Today's investing mantra
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|This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).
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