The Indian markets are now clearly in disfavour, with investor disinterest moving towards apathy. Trading volumes in India are at five-year lows and still declining. With daily cash volumes now below $2 billion, small changes in buying or selling can have an outsized impact. From our own experience, my guess is that prospective investor flow to the country is also at an all-time low, with most investors simply not interested. There are numerous tales of sell-side analysts not getting meetings when they go abroad to sell the India story to fund managers, and even Indian companies are finding access difficult.
In numerous hedge fund conferences, India is singled out as a consensus underweight or short, given the weak macro and deteriorating perceptions. India is no longer considered in the same breath as China by either global investors or the media. The country is also seen at risk from the coming de-leveraging of European banks. Many analysts expect the European banks to shed over a trillion euros in assets, the bulk of it being outside the European Union zone itself, and all in the coming 12 to 18 months. Given the reliance of Indian companies on short-term trade credit and external commercial borrowings, many large Indian companies are going to face refinancing issues.
Consensus is also very concerned about macro signs, with the fisc, current account and rupee all threatening to spiral out of control. Earnings growth expectations are also now getting muted, with many companies guiding to a very tough second half to this financial year. The bears are talking of negative earnings growth in the coming 12 months. Unsurprisingly, most India fund managers are a tired and depressed lot, with no inflows and no energy or motivation left to try and stem the negativity towards the country.
India has clearly lost the public relations battle, with even the global press now turning hostile. The positive buzz around India that took years to build has now dissipated. No one even dares to talk about nine per cent growth today, with most market observers praying we can at least maintain 6.5 to seven per cent in 2012-13. Market players have also given up on substantive reform, and feel we have deep-seated structural issues in governance and our attitude towards business.
The disappointment among old India hands is palpable. This was supposed to be India’s moment in the sun. A strong domestic-oriented economy, eight per cent GDP growth irrespective of the European Union crisis, a chance to overtake China in the growth sweepstakes — all seemed within reach. There was also a feeling that India would attract disproportionate flows, as money would not move into Korea/Taiwan due to their export dependence, China’s economic model was under scrutiny, and a slowing China and falling commodity prices would hurt Russia and Brazil. India had a real chance to stand out. But, as is becoming the norm, it has blown its chance once again.
It is very easy to become hyper-bearish on India right now. We can construct scenarios of growth falling below six per cent, negative corporate earnings growth, the rupee getting pummelled further and interest rates spiking. One could even argue that the markets should fall back to levels last seen in the first quarter of 2009.
Though tempting, to my mind it would be a mistake to write off the country and give up now. Most of the negatives are now well known and are in the process of getting priced in. A further correction is likely, in terms of time and maybe 10 per cent in price. The news on earnings, growth and politics will get worse before it gets better. As more and more players give up, apathy will set in, and set us up for potentially a very interesting entry point.
Here are some positives that the market is ignoring. First of all, the 16 per cent depreciation of the rupee – nearly 20 per cent against the Chinese yuan – is almost like a devaluation. It will fundamentally improve the competitiveness of Indian industry. Most of the upfront hit on revaluing foreign current obligations will be taken by the December quarter. As the rupee stabilises at these levels, operating profitability improvement will start kicking in as the average realised rupee levels converge with the current spot rates. Thus, in many companies and sectors, you will see earnings upgrades linked to this.
Secondly, I have never seen MNCs put more money on the ground than they are doing today. Whether it be Siemens, Nestle, ABB, Ford, Cummins or others, they have clearly not given up on the long-term India story, and are putting billions of dollars on the ground into new factories or by hiking their stakes. They clearly believe that India will deliver growth and profitability.
Third, the Reserve Bank of India forecast of seven per cent inflation by March seems to be on track. Thus, we could see rate cuts by mid-2012, which would be a significant boost to sentiment and markets. Markets normally bottom out with the last rate hike and pre-empt rate cuts.
Fourth, the current political impasse is not sustainable. The sense of helplessness one sees in Delhi cannot be the norm going forward; something has to give. The base case cannot be that nothing gets done in Delhi for the coming two years. If that is true then all bets are off in any case: just sell India and go home. Already, there are signs that some of the political and regulatory obstacles to investment are starting to get cleared.
It is easy, very easy, to be bearish on India today. One can construct scary, plausible bear scenarios, which would involve further draw-downs of 20 to 25 per cent. But instead of getting carried away by the prophets of doom and gloom, keep your head down, do the fundamental work on companies and be prepared to commit capital. A good entry point is likely to emerge in the coming six months.
The author is fund manager and CEO of Amansa Capital
