In hindsight, we all got off cheap in the past 12 months. The markets are down about a percent in rupee terms and about 5% in dollar terms. Looking at the carnage in most emerging markets (Russia, Brazil, Indonesia, China), India has still held up ok. Which is precisely what I had written in my piece last year in this magazine, that we would be fine, relatively. But weren’t we supposed to be doing better than just a 1%-down year? Weren’t we supposed to be at the cusp of a new dawn, with a brand new leadership?
The trouble was that in 2014, we witnessed a collective shot of serotonin and adrenaline, simultaneously, to all market analysts, fund managers and corporate managements. It was assumed that the new government had some miraculous secret that only it knew, and that in May 2014, they would let us in on that secret. Large investments would get conjured up, non-performing assets would vanish, GDP growth would head back to the 10% mark, etc, etc.
In the vein of Atal Bihari Vajpayee, who, when presented with a plan by his inner circle as to how India’s economy would get magically transformed, if anybody dared to ask, “Par yeh sab hoga kaise?” (But how is all this going to happen?), would have been shot down, trolled, vilified and digitally spat upon. So, we all stopped asking.
But we must ask now. The government has been blessed by a single, overriding factor: low oil prices. This has, single-handedly, transformed the external and the internal accounts, inflation and every other thing. Put oil back at $100 a barrel and the picture that emerges is scary. We have an incredibly complex set of domestic factors to deal with. We are faced with anaemic growth, very poor corporate earnings, and a general sense of dismay among companies. On the other hand, tax revenues are showing gob-smacking buoyancy. Frankly, this has me confused and I wish I had some really smart answer to this.
If we had to err on one side, we would rather be asking the companies about their growth outlook. However, what they say makes for depressing consumption. For example, AM Naik of Larsen & Toubro has been reported saying that he sees extremely challenging times ahead for his business. Deepak Parekh has said something similar, speaking for overall corporate India. Privately, most companies say pretty much the same thing.
As if this wasn’t enough, we now have added a new element of massive uncertainty: political. The market had factored in a smooth, five-year ride for the present government. In reality, even before the Bihar elections, the government had its hands full trying to get its way in Parliament. With the Bihar results, suddenly, the Parliament has started looking like the battlefields of Syria, at least, from the seat of the present government.
The other thing to dwell on also is that it is almost certain that the BJP won’t get anywhere close to the 280-300 seats that it managed in 2014. The math appears compelling: in 2014, the BJP managed to split the minority vote and consolidate the Hindu vote (to some extent, anyway). In 2019, it could well be the exact opposite: the minority vote will consolidate against it for sure, and the middle-of-the-path Hindu vote is likely to sway away from the BJP, given its satellite organisations’ current strategy of majoritarianism. So, if the BJP’s 32% vote share of 2014 gets eroded by, say, a further 5-7%, given the above two factors, then its tally can’t remain at 282. Add to this some measures of opposition unity. If all three factors happen, even to some degree, we are looking at a very sharp cut in the BJP’s 2019 tally. This, then, throws up several political combinations, few of which the market will like (even though some options may well be good for the country).
Topping all of the foregoing is the global macro situation. The US will raise rates for sure, inflation is super benign and growth is patchy. This will result in a further strengthening of an already roaring US dollar. This will create great pressure for all the emerging market currencies, India included. It will also further crush commodities, resulting in further capital flight from weak currency markets. It is instructive to see that despite $40-a-barrel oil, India is still running a current account deficit of 1.3-1.5%.
All in all, the next 12 months look terrible for equities and I don’t see India escaping a major global equities fall. That being said, I do believe small- and mid-cap companies in India are a great place to be in. Many companies in this space don’t require big a economic tailwind to deliver 30-50% growth. Many also have unique business models; many have sizes that can benefit even from the smallest-size business growth. Of course, this segment is also a landmine of shady promoters and shadier accounting. So, the best way to approach them would be through any of the good small-cap funds.
Debt remains a great option in India, and I would give it a reasonable allocation. I see rates trending down in 2016 as well, so it’s a good time to lock in these rates. As for gold and real estate, they remain on my negative list. Overall, 2016 will be a year to be conservative and risk-averse. The time for bravery will come and to take the advantage of that, for now, we have to remain solvent.