Markets can fall further but play for recovery down the line
Nothing can go right for India now. Equities are tanking, currency is tanking and the government is doing its best to make things worse for markets. Politics over reforms, seemingly uncontrollable inflation, lack of consensus on fuel subsidies, indifference to power sector woes, use of cash rich public sector companies to fund wasteful expenditure and daily dose of scams are all making investors throw up their hands on India. The Sensex, which closed at over two year lows of 15,350 on the 19th of December 2011 is now forecast to go down by another 25%. The Indian Rupee (INR), which dropped to all time lows of over Rs 54 against the US Dollar is forecast to fall by another 10%. Market pessimism in the face of deep reversals of fortunes is not uncalled for but investors have to stop and think whether such pessimism is warranted.
The current extreme pessimism on India is similar to the over optimism seen on India in the bull of 2007. The Sensex in 2007 hit record highs on a regular basis and touched record levels of 21000 and the INR strengthened rapidly against the USD to trade at highs of below Rs 40 to the USD. Forecast at that time for the Sensex was more records broken on the higher side and the forecast for the INR was more strength. India could do nothing wrong at that time and the whole world wanted a piece of it.
Investors who had invested in equity markets at the peak of the bull run are now wary of entering the markets at depressed levels. Extreme optimism has given way to extreme pessimism. It is difficult for anyone to tell investors that it is a good time to buy as they will turn around and say that “you said the same thing at 21,000 on the Sensex four years back”‼ Investors are right to feel hurt when the same person who told them to buy at 21,000 on the Sensex is telling them to buy at 15,400 on the Sensex after four years.
It is easy to get carried away by the market, when everything is going wrong for it. Domestic issues are compounded by global issues in the form of, sovereign debt issues in the Eurozone, China overinvestment and the subsequent stress on Chinese banks due to bad loans and budget cuts in the US and other highly indebted countries across the globe. If there is no bad news in India for a day, there will be bad news from the global front and vice versa. On days of bad news from India and the globe, markets reacting tend to be highly negative. It is a classical bear market where all news is bad news.
Equity markets are giving a good opportunity for investors who can get over their fears. Bear markets tend to depress prices more than warranted and that itself is a natural risk control mechanism. Downside risk at ever level becomes lower. Factors that drove down market also change for the better. For example, inflation, which was the biggest problem in emerging economies in the last couple of years, is now showing signs of easing. Central banks in Brazil, China, Indonesia, Russia and Australia have all cut rates in the last few months on signs of weakening inflation and weakening economic growth. India’s RBI has signalled rate cuts going forward on the back of inflation expectations coming off and growth expectations weakening. Low interest rate regimes in economies across the globe will act as a catalyst for growth down the line.
India has seen its share of ups and downs over the last twenty years. The country was virtually bankrupt in the early 1990’s and now India has over USD 300 billion of foreign exchange reserves. The country will come out of the current mess in the future.
Global issues too will resolve itself slowly. The world has seen many debt defaults in the past with South American nations in the 1980’s and Russia in the 1990’s standing out. The world came out of the sovereign debt default crisis well and these debt default countries are now doing well with the exception of Argentina.
It is going to be difficult to put a time frame for this bear market to play out but it may well be sooner than later. Investors should not wait for the end of the bear run to invest, it is better to invest closer to the end of the bear run and this may well be now.