The Indian markets have corrected more than 11 per cent over the last four weeks. While the Indian market correlation with Hong Kong’s markets has been more than 80 per cent historically, over the last month we have seen a totally inverse correlation with the Hang Seng, up over 4 per cent. Most key European and US markets have rallied sharply as investors have been focusing on inflation in the short run. Countries with upgrades in outlook have done better than the fancied countries of last year.
The factors bothering the markets have shifted from global factors to domestic concerns. This has resulted in countries like India, China and Brazil underperforming in the near term. The biggest concern seems to be how inflation will lead to higher interest rates and thus slow down the economy and corporate earnings growth. The second concern is about higher commodity prices eating into corporate profitability. The other specific concern in India has been related to the complete standstill in governance, as a result of which policy decisions have been postponed and no new projects are being awarded by the government or PSUs. Environment-related concerns are holding up a lot of mining, metal and infrastructure projects. There seem to be no policy announcements forthcoming from the government on boosting the supply side, which has been the biggest culprit of the current inflation cycle.
Investors should evaluate how things will be a year from now and also whether the relevant concerns have already been factored into the markets as they have performed over the last few months. The problem normally is that most investors extrapolate today into the future, however the best returns are made in adversity and as such I believe the next few days and weeks are the best ones for investing in India. The recent events in Egypt could cause a panic bottom to form in the markets. I believe that 12 months hence when we sit and analyse the markets, headline inflation could be 4-5 per cent, the government would be more stable as the scams and governance issues will be behind us, the growth outlook would be looking much better and the situation will be sanguine for investment. At that time, the markets will in all probability be 25-30 per cent higher than the current levels and one will not be able to see the reasons why markets should not be doing well. At this stage, when most analysts have a bearish or dire view, the only thing I would like to say is: “It’s important to grab the entry points in bull markets as they come with gaps and are normally shortlived.”
The author is CEO-Portfolio Management Services, Prabhudas Lilladher
