Global Market Crash! what opportunity does the current situation bring forth to India?
Financial markets are in mayhem, the currency has taken a beating, and crude oil is at six year low. Sounds familiar? Except, this time it’s different.
Most of us have been around since the last time the Indian stock markets took such a beating. The difference lies in the fact that this time though, the reasons are more Global, and less local. The Indian economy is well balanced to counter this bloodbath, and if played well by the Government, could also see the beginning of the shift of power from our ‘Super-Economy’ neighbouring country – China.
Here are some of the factors that play in the favor of India:
1. The great fall of China
China has so far managed to play its way around, avoiding one bubble after another. However, this time around, it looks like the party has finally come to house. A calculated depreciation of the Yuan, rate cuts by the government, injection of short term liquidity into the markets, and a host of other measures have failed to calm the nerves in China. In a closely knit Global economy, such an impact is expected to have a ripple effect in all other major economies, and even more in the emerging markets, with the financial bigwigs pulling out money from the ‘risky’ emerging countries and moving it to the relatively ‘safer’ US economy. Such massive selloff has led to the recent downslide of the Indian stock market and the subsequent depreciation of our currency.
2. A falling Rupee
The last time the Rupee slipped to such alarming levels, the country struggled with a record high current account deficit (of c.4.7%), increasing fiscal pressures, high inflation rates (CPI touching 9%), policy paralysis and an economy growing at the slowest rate in a decade (of below 5% p.a.). This led to foreign investors dumping domestic stocks, and moving to the safer Greenback, putting downward pressure to the INR.
This time though, the reasons are more Global – Increasing threat of a currency war due to the devaluation of the Yuan, the Dollar getting stronger across all currencies, increasing possibility of the US Federal Reserve resorting to a hike in interest rates. While investment cycles have not met expectations, most Analysts feel that the current domestic situation does not warrant for such massive depreciation of the Rupee. Despite strong fundamentals, falling crude price and sufficient forex reserves of c.USD 355 billion, the rupee has taken a hammering, thanks to our Global friends.
3. Investment opportunity?
All this brings to our next question – what opportunity does the current situation bring forth to India?
At an individual level, the general rule of thumb in such volatile situations is to invest in fundamentally strong ‘value’ companies that take a beating due to external reasons. There are plenty of Companies out there that have been collateral damage to the ongoing bloodbath. Some deep dive into the financials and the business strength of the Companies would give an investor enough insight into whether the Company merits investment or not.
From a Government perspective, the current downturn in the Chinese economy presents a favorable opportunity for the Modi government to transition towards growth and project India as the next global growth opportunity. There has been little evidence in the past of undemocratic, authoritarian Governments like China registering successful economic growth for a consistent period of time. With the Indian economy relatively independent from the Chinese economy, focused efforts on policy revival would push forward the ‘Make in India’ cause of the Government.
The current situations provides the Government a lot of opportunities to take advantage of. It’s upto them to make the best out of the worst, or to stay put.
Hardhik Sheth is an Investment Banker with KPMG. The views expressed are personal.