The markets have taken a serious beating around the world and also in India. They have lurched from one crisis to another. Real sector developments have been roiled with heightened inflation and a slowdown in growth. There is increasing tension on global trade standoffs. Lastly, there is increasing social unrest caused by growing income disparities and diminishing access to essential commodities for the poor. Monetary tightening and tougher policy measures to counter some of these developments are causing business confidence levels to plummet. So how long is this likely to last and how will the world recover from it? In this pall of gloom, are there any bright spots?
The S&P CNX Nifty lost 37 per cent from its peak. The rupee has lost 10 per cent versus the dollar from its peak value this year. Inflation globally has perked up. Why did the mood become so negative when the markets were going so well, especially in India? Given strong multi-year growth, the markets put a steep premium on continued hyper-growth in future. However, the unanticipated hike in fuel prices has now led to an apprehension that global growth will remain slow for a prolonged period, profit margins will be under pressure and macro-economic pressures will get reflected in tougher monetary and fiscal policies, making capital more difficult to access and more expensive. The continued turmoil in the global financial market has also affected the Indian markets, both in terms of sentiment and through a net withdrawal of funds by foreign institutional investors of $6 billion in 2008 to date.
But in this gloom and doom, there are many bright points that have the potential to keep the market's chin up. Corporate treasuries continue to be rich. Even though the financials for the year ending March 2008 are not yet out, CRISIL estimates that the cash accruals of the top 50 non-bank companies increased by 16 per cent in 2007-2008, as compared to 2006-2007. In addition, global liquidity remains healthy, although it is now in the hands of new owners that include private equity funds, oil producers and the Asian neo-rich. These funds are all looking for investment opportunities. With the steep fall in valuations across board, the market is pregnant with opportunities for mergers and acquisitions. Given the dramatic shift in pricing power upstream towards those that control resources, a number of companies will look to secure upstream value chains to insulate themselves from pricing shocks. The firms at the consumer end will also look at buying weaker competitors to consolidate their base. These activities will reactivate global merger and acquisition trends, putting a number of stocks in play.
The very cause of the global anxieties can also perhaps be the source of interesting investment opportunities. Rising commodity prices could be attributed to decades of under-investment in the core real sector, such as agriculture, mining, heavy engineering and manufacturing. Given the entrenched shortages in almost all these sectors, there is a good possibility that investments will flow back into them. During the 1990s and in the present decade, the advent of new technologies like the Internet, telecommunications and biotech, certainly overshadowed these traditional industries in attracting fresh investments. The under-invested sectors are now showing declining productivity caused by both obsolete technology and inefficiencies, and sheer shortcomings in output. Thus, these will now be looked at with renewed vigour as good investment opportunities. Electricity, renewable energy, nuclear energy and the agriculture sector all need considerable investments, and will attract the same going forward. For instance, the retail sector, which has of late become fashionable, will certainly morph into an agriculture play in the next few years, as investors in this sector realise that the fight will be fought in the farm lands and not on the fashion street.
This is not to say that investments in frontier technologies will fall off. Investment opportunities continue to be rich in areas such as advanced materials, computing, communications and medicine. These will continue to drive global economic growth. Indeed, areas such as advanced materials will hold even greater sway given the advances in technology, and accelerated need for such materials. For example, given global warming concerns, the new materials that will be used will seek to lower energy consumption in both manufacture and use. Considerable innovation has already taken place in applications as diverse as building materials, textiles and automobile parts. Research and manufacturing facilities for these new areas will drive investment-led growth. The dramatic fall in investment in fundamental research in the pharmaceutical industry is showing up in a complete lack of new molecules for more than two decades now. This will certainly be an area that will attract far more attention going ahead.
This paradigm calls for a wild reversal in the way investments have been driving over the past two decades, emphasis has been on fast and furious returns, quarterly progress and hyper-growth. The investment world will now need to become a lot more patient and invest and earn fortunes from longer-term fundamental investments. The boom--and-bust cycle will perhaps give way to more balanced investment behaviour with adequate attention to all relevant sectors, as against the past algorithm of resource allocation only to the most efficient sectors, that tended to create unacceptable bubbles and which denied capital to many other deserving sectors. This does not mean that inefficiencies will be tolerated. But capital will become a lot more strident in demanding efficiencies even from the