Dubai in October 2009 and Greece now confirms that we are in for more frequent bear markets and the tenure of bull markets is shortening, though we may not actually witness the double dip recession feared by some die-hard pessimists. This very fact may cause the death of the “buy and hold” strategy that most small and retail investors follow. They should therefore enjoy the cyclical rebounds but should not expect the boom to last the way it did during 2004-2008. Emerging markets like India may have witnessed higher growth recently due to the fact that their debts have not been unsustainable, but they need to understand that their markets are not decoupled from the jerks abroad.
After the sub-prime crisis, the world economy is headed for years of much slower growth. This will have a decisive impact on India. A Greece-like problem is quite likely to engulf the US, UK, Europe and Japan. The US is heading for a debt-GDP ratio of 500 percent, Europe of 434 percent and Japan of around 200 percent. If these fiscal imbalances are not addressed through massive austerity measures and spending cuts as also by increasing revenues, they may lead to two options: one, high inflation (for countries borrowing in their own currency) and two, defaults (for countries borrowing from abroad). The austerity measures, of course, will see prolonged periods of slow growth though most governments lack the political will to implement them and thus crisis economics is here to stay. The only solace is that countries like China and India have shown that their domestic demand can sustain respectable growth even in a deep recession.
Though the risk of contagion from the Greek crisis is minimal for India due to insignificant trade links, the larger risk to the Indian market comes from the potential fall in risk appetite and possible reversal of risk capital.
Though the risk of contagion from the Greek crisis is minimal for India due to insignificant trade links, the larger risk to the Indian market comes from the potential fall in risk appetite and possible reversal of risk capital that has been partly funding growth in India. The FIIs’ inflows have been the mainstay of the Indian market in the recent past. This is proved by the fact that the rise of markets in 2009 was mainly led by the $17 billion inflow by FIIs. Also, an outflow of $13 billion in 2008 caused havoc in our market. During the past eight months, it is FII money that has kept our market buoyant with domestic institutions being net sellers and retail investors almost non-existent. If risk aversion increases, it would make it much harder for private companies to raise money from the markets or for the government to meet its huge disinvestment target.
However, the crisis can have a sobering impact on inflation in India due to falling commodity prices – crude, metals, and the like – coupled with the prospect of a good monsoon. This may prevent further tightening of interest rates reinforced by buoyancy in tax and non-tax revenues such as auction of the 3G spectrum. Valuations too can add to comfort with another quarter of good performance by the corporate sector. India, therefore, continues to be a good long-term growth story but global turbulence may impact the pace of its growth. Though it may be too much to expect the country to return to the 9 per cent plus growth rate, India will still remain one of the best and most attractive investment destinations.
Investors are therefore advised to be stock-specific in their investment approach and focus on stocks of companies that have substantial earnings from the domestic markets, as long as the crisis persists. Infrastructure may be another good sector to bet on.
Chambal Fertilizers & Chemicals
(CMP – Rs 53)
Belonging to the KK Birla group, the company is one of the largest private sector fertilizer producers in the country and operates in five segments: own manufactured fertilizers, trading, textile, shipping and others. The others segment includes the yarn and food processing business activities of the company. Its subsidiaries include Chambal Infrastructure Ventures Limited, CFCL Overseas Limited and India Steamship Pvt Ltd.
The consolidated performance of the company during the fiscal ended March 2010 was disappointing. The top-line fell 26 per cent to Rs 4,148.69 crore, while the consolidated bottom-line fell 4 per cent to Rs 217.22 crore but looking to the embedded value of subsidiaries and the expectation of a good monsoon to boost its future prospects, the stock is in for re-rating. A dividend of 19 per cent declared for the FY10 gives a decent yield of 3.5 per cent on the current market price. Investors are advised to accumulate the stock for decent returns over a period of one to two years.
