This is not the first time that the world is facing a
financial crisis. Crises have come and gone and so will the sovereign one. With
valuations near a trough, it may be time for investors with a two-to-three year
horizon to buy stocks, says HDFC Mutual Fund's chief investment officer Prashant
Jain, who manages more than Rs 90,000 crore, in an interview with ET. Edited
excerpts:
What is the difference between the 2008 crisis and now?
In 2008, no one was expecting the markets to fall or the crisis to happen. It just happened overnight. So there was an element of shock. This time, we've known for several years that Iceland, Ireland, Spain, Portugal, Italy etc are under stress. So, this time the shock value is missing.
What could be done to avert a crisis?
I have limited understanding of Europe, but in my experience typically a solution is found for problems that are anticipated for some time. As far as India is concerned, the impact on the economy should be very limited. This is because we do not have any material investments in these geographies. Even the exports to the troubled countries are very small.
What happens when French and German banks are hit by these sovereign losses?
The impact of it should be very local. Indian companies and citizens do not have any worthwhile investments in these countries, or banks. The impact on exports should also be minimal as our exports to the troubled economies are not significant.
What should investors do when there's so much happening in the financial world?
Panic does not last in perpetuity. It lasts for short periods of time. One way or the other, the Greece issue should be largely over in the next few weeks or months, and markets will price it in. There'll be minimal impact on the Indian economy.
Investors should adopt a staggered approach while investing in the current markets. This is so because while there is good value from a medium-to-long term perspective, there is uncertainty in the short term and unlike the economy, the equity markets can get impacted due to sentiment in the short run.
What to do with Indian equities during these times?
The long-term range of P/E multiple of Indian market has been between 10 and 22 times. Even during crisis, the P/E s did not go below 10-11 times. This is so because at 10-11 P/Es, earnings yields become higher than G-sec yields. At present, P/E is 13 times one year-forward earnings... Over a one year period, there's very limited downside from current levels in my opinion.
Though it is a difficult time and sentiment is negative, P/E multiples are quite reasonable. I expect one year down the line interest rates to be lower. And lower interest rates are supportive of higher P/E multiples. I am reasonably optimistic, over onetwo years, markets should trend higher.
But the turbulence in currency markets due to these factors is hurting the Indian rupee. What could be the impact of depreciating rupee?
Indian exports should do well in the years to come. China has been our major competitor in manufactured exports and rupee has depreciated 15-20% against the yuan and it should continue to appreciate as a result of balance of payments surplus. India's competitiveness is improving in manufactured exports.
Our quality and technology are also improving. Sectors like textiles, where China has been the main competitor, are doing better now. What has happened in IT in past 10 years should happen to the manufacturing sector over the next 10 years.
But the capital flows?
Capital flows can get disrupted, but it'll not have a large impact on our economy as our savings rate is pretty high and we're able to fund almost 90% of our needs internally. It is possible for one year, till the time capital flows remain disrupted, GDP may grow slower by 1-1.5 percentage points, but it'll continue to grow.
RBI is well-placed and has a lot of room to maneouvre - interest rates are at high levels. The moment you start lowering rates, it'll be an effective counter balance.
India's macro fundamentals also seem to be weakening, especially fiscal deficit.
The key problem is fiscal deficit - we'd have done much better otherwise. When the global crisis took place last time, if we had had smaller stimulus, I don't think it would have hurt us badly.
Yes, we'd have grown at 6%... but the fiscal position would have been much better. The impact of borrowings lasts for several years . Lower growth for some time is better than higher fiscal deficits.
What about inflation?
A global slowdown is actually supportive of a lower fiscal deficit by way of lower oil prices and commodity prices. Subsidies have been the main reason for fiscal stress. If we had increased diesel price two years ago, we'd have significantly lower fiscal deficit and lower inflation today.
Economy would also have slowed down a bit because people would have slightly lesser amount of money as a result of higher expenditure on fuel. Higher interest rates are leading to a slowdown in interest-sensitive sectors and global commodity prices are also moderating, so inflation should be lower next year.
But the RBI governor seems to be seeing little chance of commodity prices easing due to easy monetary policy in the West.
If the demand for commodities comes off, prices should soften. Low interest rates globally are driving money into commodities. Commodities prices are much harder to forecast. Slowdown in China should also adversely impact commodity prices... Another positive factor is that there is an increase in supply of iron ore, coal, oil and natural gas in 2012 and beyond.
What is the difference between the 2008 crisis and now?
In 2008, no one was expecting the markets to fall or the crisis to happen. It just happened overnight. So there was an element of shock. This time, we've known for several years that Iceland, Ireland, Spain, Portugal, Italy etc are under stress. So, this time the shock value is missing.
What could be done to avert a crisis?
I have limited understanding of Europe, but in my experience typically a solution is found for problems that are anticipated for some time. As far as India is concerned, the impact on the economy should be very limited. This is because we do not have any material investments in these geographies. Even the exports to the troubled countries are very small.
What happens when French and German banks are hit by these sovereign losses?
The impact of it should be very local. Indian companies and citizens do not have any worthwhile investments in these countries, or banks. The impact on exports should also be minimal as our exports to the troubled economies are not significant.
What should investors do when there's so much happening in the financial world?
Panic does not last in perpetuity. It lasts for short periods of time. One way or the other, the Greece issue should be largely over in the next few weeks or months, and markets will price it in. There'll be minimal impact on the Indian economy.
Investors should adopt a staggered approach while investing in the current markets. This is so because while there is good value from a medium-to-long term perspective, there is uncertainty in the short term and unlike the economy, the equity markets can get impacted due to sentiment in the short run.
What to do with Indian equities during these times?
The long-term range of P/E multiple of Indian market has been between 10 and 22 times. Even during crisis, the P/E s did not go below 10-11 times. This is so because at 10-11 P/Es, earnings yields become higher than G-sec yields. At present, P/E is 13 times one year-forward earnings... Over a one year period, there's very limited downside from current levels in my opinion.
Though it is a difficult time and sentiment is negative, P/E multiples are quite reasonable. I expect one year down the line interest rates to be lower. And lower interest rates are supportive of higher P/E multiples. I am reasonably optimistic, over onetwo years, markets should trend higher.
But the turbulence in currency markets due to these factors is hurting the Indian rupee. What could be the impact of depreciating rupee?
Indian exports should do well in the years to come. China has been our major competitor in manufactured exports and rupee has depreciated 15-20% against the yuan and it should continue to appreciate as a result of balance of payments surplus. India's competitiveness is improving in manufactured exports.
Our quality and technology are also improving. Sectors like textiles, where China has been the main competitor, are doing better now. What has happened in IT in past 10 years should happen to the manufacturing sector over the next 10 years.
But the capital flows?
Capital flows can get disrupted, but it'll not have a large impact on our economy as our savings rate is pretty high and we're able to fund almost 90% of our needs internally. It is possible for one year, till the time capital flows remain disrupted, GDP may grow slower by 1-1.5 percentage points, but it'll continue to grow.
RBI is well-placed and has a lot of room to maneouvre - interest rates are at high levels. The moment you start lowering rates, it'll be an effective counter balance.
India's macro fundamentals also seem to be weakening, especially fiscal deficit.
The key problem is fiscal deficit - we'd have done much better otherwise. When the global crisis took place last time, if we had had smaller stimulus, I don't think it would have hurt us badly.
Yes, we'd have grown at 6%... but the fiscal position would have been much better. The impact of borrowings lasts for several years . Lower growth for some time is better than higher fiscal deficits.
What about inflation?
A global slowdown is actually supportive of a lower fiscal deficit by way of lower oil prices and commodity prices. Subsidies have been the main reason for fiscal stress. If we had increased diesel price two years ago, we'd have significantly lower fiscal deficit and lower inflation today.
Economy would also have slowed down a bit because people would have slightly lesser amount of money as a result of higher expenditure on fuel. Higher interest rates are leading to a slowdown in interest-sensitive sectors and global commodity prices are also moderating, so inflation should be lower next year.
But the RBI governor seems to be seeing little chance of commodity prices easing due to easy monetary policy in the West.
If the demand for commodities comes off, prices should soften. Low interest rates globally are driving money into commodities. Commodities prices are much harder to forecast. Slowdown in China should also adversely impact commodity prices... Another positive factor is that there is an increase in supply of iron ore, coal, oil and natural gas in 2012 and beyond.
Source: http://economictimes.indiatimes.com/opinion/interviews/global-crisis-will-not-hit-india-in-a-big-way-prashant-jain-hdfc-mutual-fund/articleshow/10164594.cms
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