It was an easy call. In this bull run, India was termed an asset class. We were starting to think of ourselves as very special. I started getting worried when such rubbish started going around. India is not any asset class; it is only one of the markets.
This kind of euphoric situation can last only for a while. In 2007, every Tom, Dick and Harry could think of making a billion-dollar personal fortune. Employees across industries were getting salaries which were not justified even at the peak of any cycle in the US. It was getting ridiculous—wage inflation, asset inflation. If one had stepped back and viewed it dispassionately, it was quiet easy to figure out.
Look at China, the economy has been growing more than 10% every year but the market is still down some 65% since November last year.
So, is the India story over?
We think (the) emerging markets (stories) are over for a while. India is going to do what pretty much its peers will do. Sometimes it will do better; sometimes not so good. It’s unlikely that it will stand out of the pack. When the entire emerging markets turn up, India may turn higher than some other markets.
Do you see any change in the contour of the problems?
The problems started with the subprime crisis last year. However, now it is very much a local issue. India’s 9-10% (economic) growth was just an aberration. We do not understand that growth requires sustained investments and we don’t do enough of it. We got the benefit from a lot of slack capacity that got built in the second half of the ’90s which was not utilized till around 2003. There was huge pent-up capacity. Now we are through with it.
So, you saw it coming?
Historically, no equity market has given huge returns for six consecutive years. After five years of a bull run in emerging markets, a slump was due. The reasons could vary. The five-year rally, that has offered around 50% compounded return, was phenomenal by any standard. The last time we had this phenomenon was in 1987-92 when there was a 62% compounding growth of returns from investments.
Is the pain over?
The maximum downside one had seen in India was about 35% in a year in 2000. We have breached that already by the middle of the year. Now we are entering a situation where long-held theories can be thrown out of the window. We could be down another 30-40% from here.
I would not be surprised at all to find Sensex below 10,000. When we made an initial target (for the index) it was based on other factors and the run-away inflation was not in sight. If we factor it in that, the trouble gets compounded.
When do we see a revival?
Our basic belief is that liquidity does not matter. Markets create liquidity, and not the reverse. We need to wait another two or three years for a revival. It could be even shorter—just a year and half; but definitely not this year.