Healing Should Start Soon

-By VED PRAKASH CHATURVEDI
During 2009 the Indian capital markets will be driven by four major influences. The first influence will relate to funds flow and news flow from overseas. Secondly, markets will closely track earnings growth performance of individual companies. Next, there would be the focus on how inflation and interest rates are likely to behave and last but not the least, the political climate in the country will significantly have a bearing on how our markets react. 

Retrospectively, we feel that one of the major developments in the global economy that has happened in the past couple of years has been the injection of liquidity and the easing of interest rates in key global economies including India. This will further bring down interest rates and it will also ultimately drive fund flows to assets where performance is anticipated. 

Gradually, as consumer and business confidence returns and as the earnings’ slowdown bottoms out, markets will look to the future and start to focus on potential growth, particularly of emerging market economies. The significant liquidity in the global system will start flowing to these economies with potential for growth and towards the latter half of the year we could see markets in a relatively more positive frame in the context of what is mentioned above. 

However, this upturn is not just around the corner and we will have to go through a few more months of concern and pain. If we compare 2008 to 2009, the large part of the fall is over and my personal guess is that the lows are behind us. The one big event that has happened in 2008 is this enormous pumping up of liquidity which is right now dammed in because of lack of trust and confidence. However, it is now flowing into bond markets and we have seen bond rallies of unprec-edented nature taking place in India. 

At some point of time this liquidity will find its way to equity. I can already see a trickle of that happening and over a period of time this could turn into a bigger flow. And as we will move into the second half of 2009, confidence will certainly bounce back, especially after September because of low interest rates and low commodity prices begin-ning to swing the economy once again. The equity market will then show positive results. While there could be surprises of the nature that we saw in the IT sector because of what Satyam did, I will not rule out the possibility that some of the larger companies may actually decide to come clean before their frauds are found out.

The other surprise would obviously be in terms of either volume growth disappointments or more importantly disappointments in what companies talk about as their outlook for the fiscal year 2009-10. The large com-panies that we have been speaking to have maintained that the fiscal year 2008-09 is more or less behind us and somehow we have escaped through the heavy shelling but it’s time now to start worrying about what will happen in 2009-10. 

CFOs have shared with us in private that they expect 2009-10 to be a very difficult year. This perception affects the outlook and in turn the market so that one cannot rule out negative sur-prises even if other things proceed well. As per our expectations, the Q3 num-bers were not that good. Hopefully though, the markets will not reach the October lows once again.  

Tata Mutual Fund is a broad spec-trum broad market fund house. And the central philosophy is buying growth at a reasonable price. The investment philosophy entails buying businesses with sustainable competitive advantage run by high quality managements so as to create value for our investors over a longer period of time.