There is an environment of gloom and doom. Given the economic and political situation, not only foreign investors but even Indian corporates are on a ‘Quit India’ movement. Yet, five yearsearlier, India was the darling of global investors. Investors — domestic and global — were queuing to buy equities. We could have been a great ‘oasis of growth and hope’ when the rest of world was dealing with structural problems but, alas, we missed an opportunity. So, should we just lose hope? No.
The structural story for which everyone was bullish on India is almost intact. Favourable demographics, rising incomes and consumption, high savings, opportunities in infrastructure and outsourcing, robust market infrastructure, all these are still true. The froth of the boom years is getting cleared. Of course, policy makers have disappointed us big time but don’t forget, democracies have self-correcting mechanisms. At the federal level, leaders focusing on 2G (growth and governance) are voters’ favourites. For the first time in India’s history, ministers and corporate executives have been put behind bars. Don’t underestimate the power of institutions like the judiciary, Election Commission and free media. We are going through a transformation in our political economy when the rest of world is going backwards.
The 10-year bond yield in the developed world is below two per cent, and those central banks would keep printing machines working overtime to ensure low rates and ample liquidity. But this is unlikely to fuel a commodity boom. Structural demand destruction in China and the developed world will ensure softness in commodity prices. Headline inflation may remain sticky but RBI should focus on core inflation. A weak rupee is negating the gains from low commodity prices, but I think the rupee is very close to bottoming out. I also think global investors will look at India more positively as the economy and corporate sector would deliver better than the rest of the world. Indian investors are severely underweight on equities and with gold and real estate losing lustre, I expect investors to put money into equities and bonds.
The macro situation is scary and very close to the 1991 crisis. The global environment couldn’t have been worse. Political leadership is condemnable, to say the least. Don’t forget, reforms never happen out of conviction, politicians deliver these out of compulsion. We are reaching that point. S&P is helping. Going by history, these are the times when you should accumulate risk assets.
The next few months will offer great opportunities to invest in long bonds and equities. Maintain the discipline of asset allocation rather than getting swayed by the high volatility. Patient investors would be suitably rewarded for risks.
The author is CIO, SBI Mutual Fund