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WF: World markets are experiencing a bout of nervous sell-offs as they struggle to digest slowdowns in China, in commodities, in Europe and also the potential impact of US rate hikes. What is your view on global markets and how much should we worry about these events from an Indian market perspective?
Anand Shah: There are two aspects we must keep in mind - impact on the economy and impact on the market - and the two don't always go hand in hand, at least in the short run. In the long run, we know that markets are driven by the strength of the underlying economy, but in the short term, material distortions can and do take place in markets.
From a market perspective, my view may sound a bit controversial, but the way I look at it is two down, one to go. Greece was the first issue that took down the market, then came China and we are seeing its impact. That's two down. There's still one to go - which is when US actually starts raising its interest rates. Don't be surprised if you see another round of global market volatility on that event.
Under Dr. Rajan, RBI has taken a number of pre-emptive steps to contain currency volatility and any collateral damage from the global market volatility. That has put us in a much better situation to face these global events. The Indian currency and Indian markets have fallen much less compared to most other emerging markets.
Talking about the impact on the economy, we must appreciate that our economy is much more influenced by domestic factors than global factors. Yes, slower global growth will have an impact on our exports, but the positive impact of lower commodity prices including oil, is far higher than the negative impact of lower exports. India is not an export led economy, and as such, the impact on our economy from global events is not negative in the long run, in fact it is positive.
Having said that, it is only fair to say that some part of this correction was due in any case, notwithstanding global events. Our belief at BNP Paribas has always been that this economic recovery cycle will be akin to playing out a marathon, but the market went into a sprint, on hopes of strong Government action leading to a sharp recovery. Domestic over-enthusiasm created leveraged positions, which had to be unwound when global volatility started impacting our markets.
WF: Some international experts are warning that this global deflation can spiral down into a depression. If the global economy worsens as some fear it will, will the structural bull case for our economy and market remain intact anyway?
Anand Shah: Clearly deflation is a worry and all Central Banks are concerned about it and are looking at ways to combat it. One thing we have to however realize is that there is only a point upto which prices can go down. Whether it is oil, coal or metals, they can't keep going down, because producers will stop production below a point and prices will normalize then.
The key issue with many developed markets is that they have a demand issue. They are unable to spur demand beyond a point. Our case is opposite - we don't have a demand issue, we are still trying to deal with our supply issues.
Deflation in the world is unlikely to result in deflation in India - rather we will see lower inflation, which can actually boost demand. Lower fuel prices in India mean more disposable income, which can be spent. The 7th Pay Commission will add to disposable income in the hands of Government employees, and in a benign inflation environment, can spur demand in a healthy manner.
The Government's finances are getting healthier due to lower oil prices, giving it room to spend on infrastructure without stoking inflation. So, while the world may see deflation, what we in India are seeing is dis-inflation, which is healthy for us as it can spur demand and help sustain growth.
Look at the markets - they are telling a clear story. Highly leveraged companies and commodity companies are the ones that have collapsed very significantly. Companies that cater to domestic consumption are holding up much better.
WF: In this "two down, one to go" scenario, would buying now into this correction be akin to catching of falling night or is it best to stay on the sidelines for a few more months. Let the dust settle and then decide on incremental investments?
Anand Shah: The concept of falling knife does not apply to Indian market, in my view. Sure there are some markets around the world that might fit that definition - where falling markets can even take the economies down with them - but India is not in that bracket. Our fundamentals are improving and we are not critically dependent on foreign capital to sustain domestic growth.
Our view on the Indian market has been different from most for quite a while now. We never said we are in a big bull market in 2014, when markets were getting euphoric about a multi-year mega bull market. Our stance was at that time, and continues even today, that Indian economy is recovering out of a painful situation, and that this recovery is going to be gradual. We never jumped headlong into deep cyclicals in the hope of a V shaped recovery, and therefore our portfolios are not really witnessing this "falling knife" phenomenon.
If you look at our portfolios, they have companies that are delivering significant growth in earnings. Our portfolios were never geared for a play on cyclicals which were expected to demonstrate a V shaped recovery. We maintained our focus on businesses that are growing at a healthy pace, and these businesses have held up relatively better in this correction.
So, from the perspective of our portfolios, we are really not that much worried about this correction. Some parts of our market may be falling like a knife, but we have stayed away from those parts.
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