Sep 12, 2006|
Benefits of a 'flattened' world...
Since terrorist forces flattened the World Trade Centre at the heart of global capitalism in New York in September 2001, we have been witness to an ever increasing flattening of the global economic system. Hereby, world financial boundaries have been marginalised and asset markets, especially equities, have been aligned. The period has also seen the re-emergence of the 'emerging market' theme, which was sort of 'dead' after the Asian and South American economic crisis of the late 1990s. In the Indian context, the equity markets have risen like 'phoenix from the ashes' post the dotcom bubble burst and the stock market scam.
The period since September 11 2001 to September 11 2006 has actually seen Indian equities rising at a compounded rate of 30.2%. The US Dow Jones has, however, risen at a compounded rate of only 3.5% during this period (see chart above). The rise in Indian equities during this period has not only outperformed the US, but has also been one up on its counterparts in the emerging world, like Malaysia, Thailand and Indonesia. A more vibrant growth story and better return on equity of Indian companies has led this relative outperformance of Indian equities over the past five years. Also, there is no doubt that the current valuations of stocks in India factor in this difference in fundamentals. As a matter of fact, the Sensex is trading at 19.7 times trailing 12 months earnings, much higher than the 14 times to 16 times range for its emerging market peers.
The last five years has also seen the emergence of the Indian MNC, which is ready to capture a greater attention of the global corporate. In a flat world, the ability to execute better than the best and more so at much cheaper costs, has seen a number of Indian companies make their mark on the global stage. Infosys, L&T, Bharat Forge, Ranbaxy, Tata Steel are just a few examples. Most (not all) of these companies have been through stages of turmoil during the pre-2001 period, due mainly to confused business models and processes and lack of wherewithal to compete on the global stage.
However, the restructuring brought about by the competitive requirements of an open world and more so due to cheap money (domestic and global), these companies are now ready to take on the world on a more comprehensive platform, through better business models and processes and with a wherewithal to compete on the global stage.
As for investors in the Indian growth story, ironically, the journey through a 'flat' world might not be smooth. As things stand today, while Indian companies are less dependent on global consumers for demand and consequent growth (unlike their emerging market peers), the Indian stockmarkets are fully gelled with the global financial system due to higher levels of foreign investments in companies. This can, however, be taken as an opportunity in disguise to build a solid long-term portfolio.
This is because, while any turmoil in global demand will have a lesser impact on India Inc., disturbance in global equities will impact the Indian stocks in a bigger way. Further, the mismatch of 'disturbed valuations' with the 'not-so disturbed fundamentals' can help you, as an investor in selecting stocks of companies that are fundamentally strong. Do we need to say more?
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