The week gone by:
Indian Markets particularly Nifty closed@4650 almost down by 8% from 7th Dec 2011 when I last posted. The clear caution based on our fundamental analysis had already cautioned against this downfall. During the same period we found that Rupee trading at its historical lows against Dollar at 54+. The trend seems to be continuing for a while. We find that Rupee has to touch56+ on a worse case basis and Rs 60 on best case basis. This I think will be reached either by April-October 2012.Most of my colleagues argue about why the Indian Currency is falling against Dollar. Avery simple layman answer to this is “Flight of capital” & “Lack of confidence”. As we have been knowing India has been an Investors Paradise for so many reasons & One of them was India was recognized as a Demographic Dividend, i.e if nothing else will work, the population has capacity to consume so much that all foreigner will be able to sell their products. But how many of us, especially the youth has ever thought that from where we have got this money to buy? Well, to let you recollect,30% of our exports come from Service Sector, meaning that if people in West don’t work we can reasonably presume that people in Service sector will get unemployed and will have a cascading affect on demand of goods and commodities & thus lesser consumption. We will certainly have to pray that these unwanted situations don’t happen.
On a best case basis I assume that 50% people in Service sector are on the verge of loosing their jobs (the best part of globalization) if the crisis deepens & some banks/Government in Europe collapse. I know it sounds awkward but this is alarming situation for us as well. If this happens our Demographic Dividend will become Demographic Menace and we will be forced to go back to 1980`s level. For your kind information, developed markets of Germany & France are currently trading at 1980 levels (inflation adjusted).
Well coming to the point of Flight of capital again, I would like to mention that India as a country attracted Foreign capital because we projected to the worlds that as an emerging economy we will be growing at 8+% and off course in past we have shown this but now since we are growing at 6+% we should be ready to cut that extra flesh from FII kitty. Also don’t forget FIIs are just investors and they also take relative valuations in different countries to invest their money. Currently India is trading at 14PE on FY13 earnings whereas other emerging economies are trading at Single digit PE`s (China@7PE). Historically the gap has never been so much.
Now with our Fiscal Deficits surpassing our budgetary target of 2.5% of GDP to over 7-8% of GDP for FY 2011-12, it is obvious for a FII to take out his capital as Cost of funding for Indian Government will remain high because of high Deficits
With our Fiscal Deficit almost touching 1991 levels in terms of Debt to GDP(Central & State Govt combined) we shouldn’t be surprised our markets should also be seen at those historic levels(inflation adjusted though). Although you might argue about that “This time is different”. It is rooted in the firmly belief that financial crisis are things that happen to other people in other countries at other times, crisis do not happen to us, here and now. We are doing things better, we are smarter, we have learned from our past mistakes. The old rules of valuations no longer apply. Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provoke a crisis of confidence that pushes it off.
The Million Dollar Question-How much the markets will fall?
While one can not define the momentum and intensity of fall or the period of fall, what we can define is How we can preserve our capital and build a portfolio not only in equity but also in Debt which will change according to the dynamics of time. However my studies show that Equity historically has to fall down to 70% of replacement value before any bottom picking happens.
For further advisory on our dynamic asset allocation model & how to preserve your capital, do mail me at manfinacorp@gmail.com.
Mayank Mundra
17/12/2011
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