The severe liquidity crunch in the global financial markets has led to a flight of capital from the Indian equity markets. This has resulted in the markets plunging to record lows with little hope for recovery in sight in the near term. What has caused this, why have the Indian markets reacted in such a manner and what to do in such a situation are questions that are topmost in the minds of equity investors.Ramesh Damani, member BSE and a well know name in the Indian equity markets analyses the past, present and future trends in an interview to Vishal Chhabria and Jitendra Kumar Gupta.
What’s your perception of the troubled financial markets and its impact on India?
It’s pretty serious and one in a hundred year event. I think you can trace this back to 1980, when global markets took off led by the Dow and was followed by emerging markets and other asset classes. Two things stand out–deregulation and American style democracy. I think we probably have swung the pendulum too far in both those areas. As Lenin, was fond of saying, “A capitalist will sell you the rope with which you are going to hang him.” That is what Western financial institutions have done. They have hung themselves with their own bill of goods.
Will the crisis engulf Asian economies?
It is doing that already and Asian markets are also falling. This is because America is the largest consumer of products made in Taiwan, Hong Kong or China. India’s economy is off course driven by domestic factors and some what insulated, but you know when there is collateral damage you can see panic across the street. So some part of it is collateral damage and some is due to excesses in our own market.
Is the worst over, what are the early signs that indicate this?
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The bear market has two dimensions; one is price the other time. And clearly on the price front we will stop falling at some point, we are not at the bottom yet, but will probably get to the bottom soon. But the time dimension can sometime be quite long in a bear market. To give an example, the second largest economy in the world (Japan) had the twenty five year bull run, which ended in the 1989.
The index went to 40,000 and from there, even as I speak to you, it is below 10,000 and we are getting into the twentieth year. So once a bubble breaks, often the time dimension can take the entire generation to forget the excesses that took place in the previous bull market. So we have been too used to very sharp ‘V’ shape recoveries occurring in the global economy. My sense is that the recovery is going to happen over a long time or ‘U’ shape rather then a ‘V’ shape recovery. Overall, it is classic symptom of a bear market where the headline stocks fall and at some time we will have capitulation.
From the Indian point of view, where are we in the cycle?
Let’s take any country that goes through a period of economic phases. We might now be entering a phase where the economy will continue to do well, we might see 6-6.5 per cent growth this year may be 5 per cent one year down the road. So the economy will continue to grow at 5 per cent is not bad in a world that is growing at 2 per cent. But stock markets might go nowhere.
So there are two different things investors have to look at, one the economy will continue to do well, but that is already priced into the market. For example, in 1992, the Hindustan Lever was Rs 330 per share, even today 20 years later the price is Rs 240. So a number of good stocks get priced and then continue to move sideways for years to come. There is no relationship, that if the economy does well, the markets have to do well.
Would you opt for stocks, bonds or altogether different asset class like gold?
Every year there is particular asset class which has done well like during the seventies, Japanese stocks did well, in the eighties America had a bull run, in the nineties technology stocks did well and of late, the emerging market stocks have been the stars. So every decade is marked by fondness for a particular asset class. The one asset class that has not really worked is cash and given the liquidity crunch in the market and given the fact that the money has dried up, my sense is that the cash might command a premium in the market.
Cash will be king. So those who have cash might be able to buy assets at throw away prices. My suggestion to investors is that you should have at least 20-30 per cent of your portfolio in cash, also as an alternate I will also suggest about 2-5 per cent of portfolio in gold. However one must understand that gold is a non-productive asset, which does not pay any dividend and there is a holding cost to gold. However, central bankers and institutions have debased currencies and financial instruments so much that people will not trust those currencies and financial instruments anymore.
They will tend to move towards gold. So, that can change and a huge demand will show itself for gold from developing markets as people want to diversify. And gold is now breaking out of the technical trading range of almost thirty years between $300 to $900 an ounce. So if it breaks out of the $1,000 an ounce barrier, there could be a sharp up movement in gold. I am not very fond of gold, but as a temporary measure it might help stabilise a portfolio and provide insurance.
Would the earnings growth remain at these levels or will there be a downgrade?
I think it is up in the air. Considering the IIP numbers are down, confidence of the consumer has shaken, confidence of global business has shaken, whether it is technology, steel, or refineries earnings will be muted. I do not have the exact numbers, but I would expect that the pace would the poorest in the last five years. I think the growth premium is over. Companies that require capital to grow and instead of growing through internal accruals, those that have borrowed money from all corners–will find the going hard. So growth will have to come down and if investors want protection the only safe haven are places like FMCG and companies that are deleveraged.
What is your view on the commodities stocks now?
Commodity stocks are not necessarily good long-term investments. I think the global growth will slowdown so the demand for commodities be it oil, zinc or copper will tend to slowdown. Globally, the demand destruction is going on. Till some time we were worried about the inflation, but now we are worried more on deflation. And during deflationary times, commodities do tend to underperform.
How much money have FIIs pulled out and your view on FII investments coming to India?
FII selling is inevitable, they sold about $10 billion in India or about 13 per cent of the total investments they have made in India. Since there is no liquidity they might not be able to sell aggressively. It will take time for the FIIs to invest once gain into the Indian markets. In a period of contracting liquidity, money that chased emerging markets, commodities, art, and real estate will slow down. We will all go back to limited liquidity, you will have to prove that you are worth the money. So, if you hold cash you might be able to pick up some unbelievable bargains.