“We were wronged.” This remark comes from a senior official of Central Bank of China after the surprise devaluation of the yuan ended up wiping off $5 trillion off global stock markets in August. In defence of the central bank action, Yao Yudong, head of the bank's Research Institute of Finance and Banking, was quoted by Reuters as saying:"China's exchange rate reform had nothing to do with the global stock market volatility, it was mainly due to the upcoming US Federal Reserve monetary policy move.”
While the Chinese clearly don’t want to be blamed for the market crisis, there is no denying that problems emanating from China could keep global markets, including India, under pressure.
Besides external factors, conditions closer home are far from encouraging. Fresh government data on August 31 revealed that domestic growth had slowed down to 7% in the June quarter from 7.5% in the previous quarter. Not surprising that the Sensex is already down 800 points in the first two trading sessions of September. This is after the benchmark gauge plunged 6.5% in August, the most since November 2011, as foreign institutional investors dumped equities worth $2.5 billion.
More pain in store…
Interestingly, amid the gloom and doom mood on the street, there is a diverse opinion creeping in on how bad things could get on from here.
Shankar Sharma, vice-chairman and joint managing director, First Global, feels that though the Chinese government has taken several measures, none of them are enough to curb the huge leverage and the risk that it poses to the system. “There is no immediate respite from the Chinese crisis and there is going to be more trouble for sure. And if things are only getting worse, India will also feel the pain,” says Sharma, who had in a report in FY13 highlighted the risk that China posed to the markets.
Concurring with Sharma is Nilesh Shah, MD and CEO of Envision Capital. "The current scenario is very different in comparison to 2008. Developed economies, then, had room to provide liquidity-support to global financial markets while China provided the growth-support to the global economy. Today, with the US mulling over a rate-hike even as China’s growth is slowing down has created a lot of uncertainty, which will continue to keep markets volatile."
…but not as bad
While the gloom talk appears all-pervasive, some experts believe extreme pessimism is unwarranted although volatility will persist.
Manish Bhandari of Vallum Capital Advisors rules out a deep correction, "While there may be bouts of volatility because of global events, India, to a large extent, will not be susceptible because of its relatively stronger economic fundamentals and enough leeway on the monetary front.”
Despite the 75 basis point reduction in the repo rate since January this year, India's benchmark lending rate at 7.25% is still 300 basis points above its low of 4.25% seen during the crisis period of 2008-2009. That apart, thanks to lower commodity prices both fiscal deficit and inflationary pressures have eased with the WPI falling by 4.1% in July 2015. That apart, despite the forex volatility, India's currency reserves at $355 billion is at an all-time high, covering over nine months of import. Further, low oil prices are also a boon for India.
Against such a backdrop, UR Bhat, director at Dalton Capital Advisors, feels India is the only market that offers hopes to foreign investors. “India is the only market which is in the midst of cylical recovery. In light of the weakness in other emerging market economies, India stands out and can still attract reasonable amount of money.”
Some analysts though question the recovery itself, and have already cut FY16 earnings by 6% to ₹1,640.
To jump in or stay put
While investors are divided in on the interplay of macro factors and how much downside it could cause, everyone is looking at the markets with caution. Valuations are not too expensive at a price-earnings multiple of 15 times FY16 earnings but not too cheap either to compel investors to pile on to stocks here and now. "Investors should continue to hold on to around 30-50% of their incremental allocation in cash," feels Shah. While Shah advocates sitting on cash for a while till things start stabilising a bit, Bhandari says, “At every lower level, smart money will enter. Utilise every dip to buy in.”