BackGreece takes a back seat, and Indian equities move to the front
Despite the volatile global environment, the spillover into India has been muted so far
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While the global environment remains volatile, its spillover into the India economy has been subdued so far. And this underscores India’s sanguine growth outlook.
However, the impact of the Greek crisis on the global economy cannot be ignored. And by putting together a last minute bailout package for Greece worth $93 billion (€86 billion) for the next three years, the euro zone has averted a crisis that could have damaged global growth. Now, its impact will be less severe as the global gross domestic product (GDP) is expected to slip to only around 2.7% for the financial year 2015 (according to a recent Citigroup report).
Investors who were sitting on the sidelines during the crisis are now heading back into the market as it has rebounded sharply after the crisis. Last month, foreign investors poured in more than $1 billion into Indian equities—much of it post the Greek crisis. Other than institutions, individual investors, both big and small, are also warming up to equities. Mutual fund folios have crossed the 40 million mark after a gap of more than two years.
If one is still wondering where the Indian economy stands vis-a-vis the global economy after the Greek bailout, the rout in China’s equity market, and the likely US Federal Reserve interest rate hike later this year, it is time to set aside such concerns.
The current Greek crisis is different from the one a couple of years ago. In 2012, private institutions and banks were the ones that held Greek debt. Therefore, a default could have resulted in a systemic risk to the euro zone economy and banking institutions. This time around, institutions such as the International Monetary Fund (IMF) and the European Central Bank hold most of the debt. So, a chaos in the banking channels could be ruled out. Besides, many euro zone countries have improved their macroeconomic balance sheets since the crisis first erupted.
The crisis, however, did play spoilsport in the Indian market, and for a limited time, stocks were on sale as markets turned choppy. But every time there is a crisis—be it global or domestic—it spells opportunity.
As a value-seeker—an investor who looks for prices to turn attractive—the red marks on stock tickers perk my interest. And the best time to buy is when most investors are selling.
Bouts of volatility are inevitable. Given that the world economy is more intertwined than ever before, whenever there is a crisis, the first reactions in the global markets are not always pleasant. After the numbers are crunched, and worst-case scenarios are analysed, the markets begin to stabilize again. Emerging markets, including India, are volatile, and sharp swings are in their DNA.
However, despite the volatile global environment, the spillover into India has been muted so far. The exchange rate has been stable, the equity market has rebounded, and the bond market has been steady. All this underscores India’s improving economic outlook. Structural reforms, easing of interest rates and lower commodity prices globally are factors that will drive economic growth in the coming years. And India’s favourable macroeconomics could lead to good investor experience.
Gone are the days of 2012-13 when external vulnerability threatened to derail India’s growth. Now, the current account deficit is less than 1.5% of GDP, fiscal deficit is well below targeted levels, and inflation is benign and much below the Reserve Bank of India’s (RBI) comfort levels.
The Wholesale Price Index for June came in at -2.4%, and has been negative for eight consecutive months now. India could see another rate cut this year if inflation continues to undershoot RBI’s target of 6% for January 2016. Commodity prices have eased considerably, especially crude oil which is below $60 a barrel, reducing inflationary pressures further.
Domestic challenges persist as the pace of recovery is still uneven. But there are positive factors, such as new project announcements that have increased at a healthy pace of 33% year-on-year in the first quarter. On the negative side, uncertainty over the monsoon continues to dampen spirits of the agriculture sector. From a 16% surplus in June, rainfall has now swung to a 4% deficit in July. But there are early days still and three quarters of the monsoon season remain.
Nevertheless, in my view, the Indian economy is in a position to recover since it is moving, in fits and starts, in the right direction. Further, other than commodity companies, businesses are getting the benefits of lower commodity prices and better export realizations. We are likely to see equity mutual funds deliver good returns in the next three-five years.
Some investors may have missed buying during the sell-off and may now be ruing the fact that they missed an opportunity to accumulate equity assets. One cannot time the Indian market any better than global markets, but there is no doubt that it is better to buy when there is a sell-off like the recent one. Hence, investors with a medium- to long-term view need not worry about the Greece crisis, the rout in China or a rate hike in the US. With a five-year outlook, it just makes Indian equity assets all the more attractive.
Nimesh Shah is managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd.
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