Opportunity In Crisis

We are living today amidst events that are reshaping our world, perhaps permanently so. What started as an average American being unable to meet her mortgage repayment has slowly snow-balled into an unprecedented financial crisis. As the world heads into a slow-down, India and Indian equities are not untouched by these concerns.

The pace of correction in the equity markets has been unprecedented last year, and in many cases unjustifiably so. In this environment, risk aversion is at its highest and so is disbelief — in stocks, in our economy and its potential. The recent rally over the last few days has also taken many investors off guard with a feeling of being left out.

Where does India stand?
While the western world may see a period of varying degrees of economic slowdown, we remain positive in the relative strength of the Indian economy. India’s growth is likely to be better, with 5% plus GDP growth supported by increased domestic consumption, amongst the highest savings-to-GDP ratios and low reliance on exports. Thus, while growth will slow in 2009, as the difficult credit environment hurts both consumer demand and investment, the overall rate of expansion will be reasonable. The 3rd quarter of the current financial year FY09 saw the convergence effects of tight system liquidity, high interest rates and consequently weakened demand in certain sectors, high commodity prices and huge volatility in exchange rates. Our subsequent interactions with corporates as well as recent data points indicate some improvement at a ground level. [PAGE BREAK]

• Trade which was suffocating for credit (and hence demand) has started breathing – albeit slowly. Passenger vehicles monthly sales volumes have improved with the drop in the interest rates, government sector wage revision, excise duty cuts, improvement in financing, etc. Cement volumes have been healthy, even allowing manufacturers to go for some price hikes.

• Sanctions and disbursements from PSU banks have intensified with about 15-20% growth in the loan book. While there are some possible risks of rising non-performing assets (NPAs), they appear to be relatively better placed currently.

• With bulk of the high cost inventories having been utilised, Indian corporates may gear up to start benefitting from the huge correction in most commodities like steel, aluminium, copper etc. which have corrected by more than 40-50%. The key risks to the economy remain the outcome of the general elections and the likelihood of the emergence of a third front or a government reliant on Left parties for its survival.

Cash as a strategy: In the market meltdown, stocks have been battered regardless of their core fundamentals and longer term prospects. Regardless of what businesses they are into, value of real assets or market capitalisation have fallen alike. With market falls and rallies being so untimely, we feel it is better to remain invested. While holding cash as a strategy will always look better on relative performance during months of market declines, it will eventually mean missing a very large chunk of the market recovery as rallies like declines are mostly untimely and come without warning.

Sectoral outlook: We are positive on banking sector which has witnessed some correction in the recent past. Some other sectors include oil marketing companies, FMCG (liquor), gas distribution and cement plays. Also, we are positive on select engineering players, construction, sugar and select IT companies.

Where is the bottom?
So how much longer will the bear market last? While no one can forecast when a downturn will begin or end, it is likely that the moment of maximum panic and bad news is right at the bottom. There is lot of fear and distress in the market, probably giving a reasonable investment opportunity in disguise. We believe that this certainly is not the time to sell when the risk-reward is hugely in favour. The initial signs of disparate bottom-fishing in distressed counters are already visible. We are at a time when equity valuations are attractive. While it is difficult to say whether they might be even cheaper for a short while, one can be fairly certain in saying that they will not remain cheap forever.