Wednesday, August 26, 2015

BEGAANI SHAADI ME ABDULLA DIWANA by Mr. Nilesh Shah (Kotak Mutual Fund)

Many years ago I was working in a Foreign Company. At that time U.S. was dropping bombs in Afghanistan. There were reports that many a time bombs were being dropped waywardly and were hitting unintended targets. One day I get a call from an overseas colleague of mine checking if we were all safe in Mumbai as the US bombing was hitting unintended targets. To my well-meaning friend distance of more than 2500 KM was not good enough to stop a wayward bomb being dropped in Kabul from hitting us in Mumbai. May be he was influenced by the map proximity.
This kind of incidence shows the reaction to events in faraway places.
When 9/11 happened, Indian interest rates jumped up significantly as a risk of sell off. It took strong intervention by RBI to bring sanity in rates market. Irrationality can prevail in short term.

The world is worried that China is slowing down. China is devaluing their currency to get an edge for their exports. They can do a replay of 1997 Asian crisis on a much larger scale.
The reality is that most of the other EM currency has dropped more than Renminbi. Today's China cannot do a devaluation of the scale with which it got away in Mid 90s.
From an India point of view depreciation of Rupee is critical to maintain export edge as our interest rates are high and our productivity is low compared to our peers. Rupee depreciation is a tactical necessity rather than a sign of weakness like in Russia or Brazil.
China slowdown is a big positive for India as it pushes more investor's to look at an alternate model of balanced growth rather than credit led growth. China's credit to GDP Ratio is more than two times that of India.
US dollar is appreciating against most EM currencies and is putting pressure on US growth and exports. US Fed will be compelled to keep dollar strength in mind while looking to raise Fed rates. If not the start at least the quantum of Fed rate hike will be lower than that expected by the market. US 10 year yield is indicating the same at below 2% after a long gap. Slower rise in US Fed rates will help India to cut interest rates and attract capital flows.
There is a worry that with oil prices dropping below USD 40 world is moving in to recession or slower growth. Actually India is a large importer of commodity. We import 1.4 billion barrel of oil on a gross basis. Every USD 1 drop in oil price helps us save about USD 800 plus million in import bill. Today with oil dropping below USD 40 our incremental saving will be close to USD 16 billion plus since June 2015 high of oil prices. India is a beneficiary of dropping oil and commodity prices.
The government, unlike in the past has used oil price dividend of more than USD 60 billion to clear fiscal mess.
Currently, India is having good macro fundamentals. Even with increased government spending, the fiscal deficit is under check at below 4%. CAD is under control. Inflation is under control with WPI at negative level for last nine months and CPI at 3.8% is below RBIs target level. Indian interest rates are at a level where they can be cut to support growth. IIP growth is recovering. Benefit of improved government spending is yet to fully percolate to economy. With recent depreciation of Rupee vis-à-vis USD, Euro and Yen our exports will get support. It is not that we are a perfect nation, but we are better than most of our peers. Most nation would like to have our problems rather than battle with their current issues.
FIIs have been a seller in Indian equity markets in recent times. Some of this outflows is from ETF redemptions and EM fund redemptions. Globally equity funds have seen massive outflows. Some of this has to reflect in India selling despite our fundamentals. Some of this selling is led by sovereign funds of oil nations, which need to put money in domestic economy. It is likely that for next few weeks this selling may continue. Good part is that domestic participation is on rise with Provident Funds making a beginning and mutual funds receiving good flows. Many of the day traders have lost lot of money. They are spreading views as if the world is coming to an end. Pictures above are showing their mind set. It is their frustration which is reflected into fear mongering and gossip spreading. The reality is not as bad as is being portrayed. There may not be a v shape turn around but certainly there is a U shape recovery ahead.
We may not make a bottom in markets till globally things settle down. We will be volatile in line with global peers. However the governments and central banks around the world are not going to sit around looking their market collapsing. They will take corrective actions by way of coordinated actions. More money will be thrown at their economy – QEs and TARPs will come back in some other acronym. The coordinated actions will calm the market and reduce volatility creating a foundation of recovery for Indian markets.
If our domestic participation is stronger than we will have lesser pain and quicker recovery. If our naysayers will have upper hand our pain will be higher and recovery will be longer. There is no doubt in my mind that FY17 will see strong growth in corporate earning to support markets.
Indian market capital is down by about USD 200 billion from TOP. At 10% direct retail ownership, it is a loss of USD 20 billion. It is a fraction of losses suffered by them on their gold holding. If domestic investor remains opportunistic, then they will benefit from the volatility.
Correction in most global markets is driven by local factors. For e.g. Chinese markets are down as they have run up significantly in last 18 months. Russia and Brazil are down due to commodity based nature of their markets. NASDAQ is down as valuation of some of their Tech Cos are showing excesses like 2000 technology boom and bust.
In summary we believe
  • Global volatility is here to stay for some time.
  • Drop in commodity price is negative for few EMs like Russia and Brazil but hugely beneficial to a country like India.
  • FII selling is led by oil nation's sovereign funds, GEM funds and ETFs. It is likely to continue for a while.
  • Domestic participation will determine the extent of drop and speed of recovery in Indian markets.
  • We are more likely to see a U-shape recovery than a V-shape recovery as FY17 corporate earnings recovery will support markets.
  • Provident Fund participation can also provide additional support.
  • In the short term it will be futile to predict bottom of the market.
  • Central Banks around the world will swing into action to support markets sooner than later.
  • Their coordinated action will soothe global volatility.
It is better to divide your investment in two parts. One part invest through SIPs in large-cap funds and blend of large and mid-cap funds. The other part invest gradually on current corrections in market till March 2016.
We have all seen the pain of 2008 and subsequent gains. Today's global volatility is giving similar opportunity. Don't let notional gain or loss deter you from the real goal. No one can enter at bottom or get out at Top. No one can predict how markets will behave tomorrow. All we can say is that every correction like today is making Indian markets more attractive to invest. A disciplined and contrarian investment will pay back after the volatility subsides.
Happy Investing and Regards,
Nilesh Shah
Managing Director
Kotak Mutual Fund
Mutual Fund Investment are subject to Market Risk. Please read offer documents before taking any investment decision.

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