The stock market has turned highly volatile as global worries far outweigh the strong

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fundamentals of the domestic economy. Is it a good time to buy or just lie low? FC posed the questions to Nilesh Shah, the man reputed for his razor-sharp analysis of the domestic market, and Sukumar Rajah, the investment manager who knows global markets like the back of his hand. Both converged on one conclusion: There is a huge opportunity for smart investors in this crisis.



“FUNDAMENTALS prevail over the long term and India certainly has stronger fundamentals compared with most economies”

The March quarter numbers, the GDP figures and the recent auto sales numbers all point to a strong undercurrent of consumption-driven growth. But the stock market continues to remain jittery. Where do the downside risks lie? Do global problems such as the worries from the euro zone or China have the potential to derail our recovery? Are there other factors, which you feel could present significant challenges for the domestic economy and equities market?

While India’s growth prospects remain strong from a medium- to long-term perspective, stock markets have weakened largely due to weak global sentiment and FII outflows. The recent volatility in the global financial markets is an indication that the global economy has not fully healed from the crisis of 2008 and investors are wary of systemic risks.

We continue to believe that fundamentally sound economies like India (especially those dependent on domestic drivers) are unlikely to be impacted by the sovereign debt crisis in Europe. The impact is felt more so in the financial markets due to FII flows. In the case of China, we feel the recent tightening measures by the authorities should help address the concerns around the property market and overheating (of the economy).

The government has exhibited its ability to steer the economy well in the past and is likely to continue to do so in the future. There are some short-term concerns, but domestic consumption has been increasing strongly helped by the rise in disposable incomes — as reflected in the fact that it has become the largest automotive market in the world. From a medium- to long-term perspective, we are positive on the China’s growth prospects.

One key concern is on liquidity front. As overseas debt gets costlier and domestic liquidity comes under stress, will it delay the much-awaited domestic capex cycle?

From the international market’s perspective, reduced global liquidity and risk appetite can have implications for corporate India’s overseas borrowings plans. However, given that domestic credit has remained relatively muted in the ongoing recovery cycle, we don’t expect any major systemic issues. Several large companies have managed to raise capital in the market over the past few quarters and credit offtake has begun to come off lows. While increased global uncertainty could have an impact on corporate India’s plans, until and unless the global growth situation worsens dramatically, we don’t see any major change of plans.

Risk aversion seems to be the new buzzword in equity markets worldwide. The volatility in equities and the surge in gold prices point to a flight of investors to safe havens. The fear factor is strong across markets. Your comments?



Market sentiment tends to move in extremes due to various factors, but over the medium to long term, equity markets reflect underlying fundamentals. Until a month back, global equity markets were ignoring rising fiscal deficits across the globe and the lacklustre uptick in employment growth. Some of the markets even appeared to be in an overbought situation.

A series of headline news focusing on fiscal problems faced by few countries in Europe and the regulatory oversight of the financial sector has now brought the focus on the magnitude of the issues and hence, broad markets are now factoring in these issues.

As mentioned above, fundamentals prevail over the medium to long term and India certainly has relatively stronger fundamentals compared with most economies. In that sense, any sharp decline should be viewed as buying opportunities.

In spite of the strong volatility in markets, India has managed to put up a brave front in the face of the European crisis. Can India hold its fort if the crisis deepens and global economies go into another slowdown? How real is the fear of a double-dip recession in the West?



The Indian economy is largely domestic driven and relatively lower credit growth and the large forex reserve should help India manage this phase comfortably and the drop in global commodity prices should provide some respite.

However, export growth has been lagging behind import growth in recent times and could be impa-cted by a slowdown in Europe, resulting in a wider trade deficit. Nonetheless, India’s resilience through the global slowdown over the past two years clearly underlines the fact that the economy is one of best structural stories across the globe.

The rupee has gone into a tailspin. Is there a risk of strong currency fluctuations hurting some key sectors of the economy?

Currency fluctuations are largely dependent on global sentiments and foreign inflows – a strengthening rupee tends to impact export-oriented sectors while benefiting importers as well as reducing the impact of energy imports. However, most companies typically use various instruments and contract negotiations to mitigate the impact of sharp fluctuations.

FIIs have been net sellers in May. The sentiment of foreign investors appears to be turning weak. What could be the trigger for this outflow? Is it their risk perception for the Indian market or their own domestic concerns?



The selling has been largely due to the change in risk appetite of global investors rather than any macro concerns about India. Global investors with a long-term view are likely to view any sharp correction (in India) as a buying opportunity. Despite the outflows in May ($2 billion), year-to-date FII flows stand at a healthy $4.6 billion.

One view is that emerging markets are already past their worst and the move ahead from here is upwards? Another view is that emerging markets were actually the biggest beneficiaries of the easy liquidity and as purse strings get tightened, these markets are going to take a bit of a hit. Your views?



The rally seen in 2009 and the early part of this year has been driven by high global liquidity levels and investors being in search of higher yields given the sharp drop in global interest rates. As central banks normalise monetary policies, some of this liquidity will be drained out and it will impact markets. However, instead of lumping all emerging market economies together, one needs to focus on those countries with large populations and strong domestic consumption stories. Such economies will be able to withstand any slowdown in the global recovery or liquidity. As per Institute of International Finance (IIF) estimates, emerging econ-omies will receive inflows of over $700 billion in 2010, 33.5 per cent more than 2009 level.

What are the five domestic factors you will be watching to remain confident on the economy and the stock market over the next two quarters?

Among an array of domestic economic and corporate indicators, IIP, inflation, earnings, capex and consumption trends will be some of the factors to watch out for over the next two quarters.

For India, we believe at this point in time, key macro challenges are inflation and fiscal deficit. On the latter, the government has outlined a roadmap to consolidate imbalances and reduce government borrowing, which is a positive. However, the progress will need to be monitored, especially on market-dependent items such as disinvestment and subsidy outgo in FY11. Any substantial increase in international crude oil/commo-dity prices will be key to the inflation outlook for India as well as the monsoon season. The progress on some of the infrastructure programmes and tax reforms is critical for long-term growth.

What’s your outlook on earnings upgrade for Indian companies over the next two quarters?

The recent earnings season has been a positive and earnings visibility for the coming quarters is on the brighter side, even as overall trends were divergent across sectors.

However, earnings revisions have slowed in the recent past, with changes being announced for select companies based on business developments. Most of the positive factors seem to be priced in and we will need to see progress in the first half of FY11. The composition of the Sensex is commodity-heavy and, hence, sustained decline/low commodity prices can impact earnings growth.