 "Prasun Gajri")
The financial markets have been in turmoil and it seems to get worse every passing day. The currency is in a free fall, the liquidity is tight, bond yields have risen (though back from peaks) and the Foreign institutional investment (FII) selling in equity markets is rising. The equity markets are responding to the rupee movements and any consideration for valuations and earnings is clearly not there. It does not help that we have had a disappointing set of results in the June quarter. So, it is natural to be despondent on the economic and the market outlook. Also, even if one tries to look beyond the depreciating rupee and a deteriorating economy it is quite challenging to form a firm view on how things are likely to pan out in 12-18 months. However, it is important to look beyond the current hazy environment. First, the monsoon has been very good and this would provide support in a deteriorating growth environment and help bring down inflation. There is also a likelihood of exports reviving in the next few months given a much more competitive currency and an improving demand environment in the western world. This would also help in reducing the current account deficit and the same is likely to come off meaningfully in the coming months. The last two months trade deficit data and good growth in service exports in the June quarter are early indicators for this belief. While there is a threat of capital outflows, especially on account of tapering by the Fed of its earlier explanation, I do believe that this is priced in and the actual event would not lead to more turmoil. Thus, we could see some stability in the rupee over the next few months though it is difficult to ascertain at what level. A stable rupee would remove the big overhang and the equity markets can then move back to what they should focussing on earnings growth and valuation multiples. While growth is a challenge, a large part of the market is already building in meagre to negative growth and this is reflected in the current valuations of a large number of stocks. This should provide support to the market. Also, given the slowing GDP growth and inflation which is expected to be benign, interest rates are quite likely to fall sharply in the next six months. This could lend further support to the market. A stable rupee and falling interest rates should help in bringing back the FII inflows. Thus, it is quite possible that in three to six months, we could have a very different outlook on the market than what we are currently witnessing.
There is no denying that these are difficult times for the markets. The earning downgrade cycle is not yet over and we could be looking at three years of no earnings growth for the market. Moreover, till the rupee stabilises, it is difficult to ascertain the levels at which the market would find support.
However, as pointed out above, it is within this uncertainty that one would look for opportunities. The environment is probably not as bad as the current perception and there are silver linings on the horizon. This market is providing good, medium to long term investment opportunities if we are willing to look beyond the current situation.
The author is Chief Investment Officer, HDFC Life
