Have we entered a multi-year bear market? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Have we entered a multi-year bear market? 

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In this issue:
» Is the Euro crisis flaring up again?
» India still the one of the best destinations, feels a leading venture capitalist
» Can India's GDP growth fall to 1%-2%?
» Why are FIIs exiting quality stocks?
» ...and more!

The BSE-Sensex has been in a cheerful mood the past couple of days. And we've had a new man - Raghuram Rajan - taking control of our central bank. A man who the ex-governor feels is one of the most capable for the job. However, let these small doses of optimism not distract us. The fact remains that our economy is in trouble with most of the macro indicators flashing red. What more, there seems to be little respite in sight.

Although there seems to be no shortage of economic experts at home, we believe it helps to give more weight to what outsiders feel about the Indian economy. Simply because their views are likely to be more unbiased than people within the country. Sadly, things don't look too good on this front. Market watchers are of the view that sell off in India and other Asian countries is far from over. In fact, as per moneycontrol.com, an analyst has even gone to the extent of predicting that we could be at the beginning of a multi-year bear market in the region!

His argument is simple. Sooner or later, the US Fed will certainly wind down its monetary stimulus and will also keep interest rates lower for a long period. The winding down of stimulus will mean that investors pull capital out of emerging markets which are already struggling and deploy it in developed markets where low interest rates will help the economy and eventually the companies grow.

The emerging markets on the other hand will have to keep their interest rates high so that their currencies are not weakened more. The high interest rates in turn will weaken growth further, thus adding to concerns over the wide current account deficit and giving investors more reasons to sell.

For good or for bad, exactly the same scenario is being played out in India as our high current account deficit is leaving no room for RBI to lower rates which in turn is hurting our economy. Thus the experts opine that this is a toxic mix and could make the turmoil last for 3 to 5 years.

It should be noted that no matter how plausible, this is a prediction at best. And like all predictions, it should not be treated as a gospel truth. However, it cannot be totally ignored either. Whether it turns out to be true or not, the fact remains that fundamentally, our economy is certainly on a weak footing. And now is the time to initiate some long term reforms so that we are not at the mercy of foreign capital.

The aim should be to unleash productivity gains in a variety of sectors by making investments and taking bold steps such as privatisation. Ignoring the same for too long will certainly lead to a multiyear bear market as is being predicted.

Investors meanwhile would do well to invest in stocks that are fundamentally strong enough to ride out the medium term headwinds. And are able to still grow their revenues at a decent pace in the current environment.

Do you think the Government will save us from entering a multi year bear market? Please share your comments or post them on our Facebook page / Google+ page

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01:28  Chart of the day
What comes to mind when you hear of declines like 87% and 86% in a span of three months. Small caps isn't it? For large caps have too resilient a business model to witness such kind of corrections. However, as today's chart of the day highlights, when a crisis strikes an economy, such corrections are not uncommon amongst large caps also. The top 5 losers in the BSE-200 index over the last three months have all seen their stock prices go down by a minimum of 50% with the biggest loss in the region of 90%. You know how long it will take for someone to recoup these losses. Well, just to break even on the -90% stock, an investor will have to find a 10-bagger and that too in the current times. Did anyone say 'don't lose money' is the biggest rule every investor should keep in mind?

Source: Ace Equity

Foreign Institutional Investors (FIIs) have a major influence on Indian share markets. Their buying and selling activity tends to set the direction of the market. And of late, FIIs have been selling. As per an article in Business Standard, they seem to be dumping quality stocks too. Stocks such as ITC and HDFC Group companies often play the role of safe havens during tough times. But this time around, the FIIs don't seem to care. Why so, you may wonder.

The reason is that the sharp depreciation of the Indian rupee against the US dollar has eroded their dollar returns. So an FII investor who has been holding both HDFC and ITC for 5 years would have earned compounded annual average return of 4% and 20% respectively. On the other hand, a domestic investor would have earned 13% and 30% respectively in rupee terms. In fact, over the last 3 years, the compounded annual returns of Nifty 50 companies are -10.4%. It is worth noting that FIIs have invested about US$ 100 bn into Indian stocks since 2009. A mass exodus by the FIIs could cause Indian markets to plunge even further. On the positive side, significant decline in stock prices could provide great investing opportunities for value investors.

Just a few days back his predecessor made some very honest and scathing remarks about the relationship of the RBI with the government. Dr Subbarao's parting speech as the governor of Reserve Bank of India (RBI) was in many ways a summary of India's key problems. But his successor, Raghuram Rajan, seems determined to take the mantle in a very confident and optimistic manner.

Dr Rajan's maiden speech as RBI governor was in fact very transparent. It laid out exactly where the central bank's focus will lie. From expediting new bank licenses to sops for foreign trade to policy frame work for financial inclusion, each of these found a mention. But most importantly, Rajan made it very clear that all his policies may not find favour with the government and markets in the near term. Also that he was not looking to becoming popular with his policies and would rather take some painful steps. Only that would help him steer the economy out of the mess. While we certainly find Dr Rajan's words encouraging, we believe it is too early for financial markets to take any cues from it.

The government and the Reserve Bank of India (RBI) have been working out solutions to bring the CAD under control. But brokerage house Jeffries is of the opinion that reducing the CAD would hurt India's GDP growth. The brokerage has stated that India's GDP growth could slip below 1-2% if CAD were to be halved from the current position. Their reason for this is that India has a high level of imports. These imports drive demand and employment to some extent. If CAD were to be halved, it would mean that imports would be cut down which in turn could hurt that demand and employment. As imports account for nearly 16% of the country's economy, this would hurt India's GDP growth as well.

The idea presented by Jeffries is perhaps as ridiculous as the earlier idea given by Mr Moily on austerity. The point is that India has over the years managed to increase its CAD and this has put it under an economic stress. This stress has not just hurt our currency but has also hurt growth and investor confidence. The only way to get that back is by reducing the deficit. For this, India needs to take concrete steps that include rationalizing populist expenditures, boosting exports, implementing policy reforms, etc. Taking a myopic view that reducing imports is the only way to control the CAD is simply that - a myopic view. True that like any other restructuring exercise there are short term pains that the country will inadvertently suffer. But without the exercise, the pain would just intensify over the long term. Because for long term growth and economic stability, controlling the CAD is extremely important.

India has nothing going for it at the moment. So right now, one could probably come with ten reasons for not investing in India. But Silicon Valley venture capitalist Vinod Khosla has a different view. He opines that if one looks at investing in India from a 10 year perspective, then the prospects are quite good.

He is betting that sectors such as education, healthcare and infrastructure will see a lot of entrepreneurial activity attracting good funding. He believes that governance issues have been the bane of most of the emerging market economies. Thus, in a longer time frame, these will not really matter. What will solve the problem as per him is taking the human interface out of the system. This would be through initiatives such as Aadhar and e-governance. It is true that India is facing too many headwinds currently as a result of which the outlook for the economy remains highly uncertain. But we do not want to write off the country entirely and agree that from a 10 year perspective, the prospects do seem better.

Credit Default Swaps (CDS) are derivative products used widely as insurance against failure to repay. Right now, the CDS spread on sovereign bonds of Portugal is increasing. In fact, on a relative basis compared to other nations, the spreads are quite high. When sovereign spreads widen it means that the probability of default by the country increases. In such an instance, Portugal may look for outside support from IMF or European Union, as has happened in the past. However, even these bail outs come with certain conditions. And the fact is that public finance in Portugal has not improved. Government is submerged in debt. Unless austerity measures are implemented tightly in Portugal there is a fear of write down in future. And this may worsen the situation in Europe. In other words, Euro crisis could well flare up yet again.

Meanwhile, indices in the Indian stock market have opened on a strong note with the Sensex higher by 390 points at the time of writing. Banking stocks have found the maximum favour, leaving other sector stocks far behind. Other Asian indices have closed mostly higher with Europe too trading in the positive zone.

04:56  Today's investing mantra
"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."- Benjamin Graham
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4 Responses to "Have we entered a multi-year bear market?"


Sep 5, 2013

Since 2008 the Capital market in India has been moving sideways with occasional ups and simultaneous downward pull. It is believed that the Capital market's response to revival economy will be faster. The recent crisis due to CAD and rupee are eye opener to all. No body can think of leaving our economy in this state for long. I am hopeful that any government at the helm of affairs will have to act boldly at this present crisis situation to revive our economy to growth trajectory. let us be optimistic. Predictions by expert above the bear run are a single mans opinion. let us not give to much importance to such rhetoric.


Abhay Dixit

Sep 5, 2013

Forget the markets. Govt needs to act to make sure that poor do not revolt. Food Bill and land bill will not produce wealth-- only inflation. Govt. is not the solution but the problem itself (Thanks to Regan). So far Indians were looking for jobs overseas, now companies too will migrate.

Like (1)


Sep 5, 2013

which government? This government. If any one thinks that it will they are living in fools paradise

Like (1)


Sep 5, 2013

We in India are like the wise men of Hindustan who went to see an elephant. The major reason for our problems is our profligate use of imported oil as fuel. 70% of this is used the transport sector. That we will come to this pass was predicted in the 1970s and 1980s, by committees on fuel policy and transport policy.They foresaw then itself that Crude price would reach $100/- per barrel and prescribed remedies WHICHWERE IGNORED BECAUSE OF THE IMPORT LOBBY.
REMEMBER A RECENT STATEMENT BY A CABINET MINISTER THAT EVEN WHEN WE ARE IN DEEP TROUBLE DUE TO IMPORTS THE IMPORT LOBBY IS STRONGER THAN THE CABINET MINISTER.the prescription given 40 years back and not implemented with the vigour needed is still the only solution to the crisis.
i. Depend on indigenous fuel and not imported fuel (give preference to coal - electricity from coal- and not to petroleum
ii. invest heavily in Railways, which are SIX times more energy efficient than roadways - We have done exactly the opposite. Sunk much more money on Roads.
iii. Have roads and rails playing complementary roles and not competitive roles - roads and rails should be perpendicular to each other = they are now parallel
iv. Go for MASS TRANSPORT and not CLASS transport. We have built millions of cars. - one volvo a/c bus in Bangalore today replaces 50 cars - yet roads are choked- there are more cars standing on the roads than running on them.
v. Have trains like the TGV of France or Shinkansen of Japan for fast travel. Even today we are not implementing them but arguing about them.
Prevention of this situation should have been the priority of successive governments; which have totally failed to act speedily.
Why should we have gas guzzling cars take a single passenger. Why should we produce so many LUXURY cars GAS GUZZLERS. Let us go strong on these steps envisaged 40 years back at least now.

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