The sharp correction of 854.8 points or 3.1 per cent in the benchmark Sensex at the Bombay Stock Exchange on Tuesday, in line with the global market fall and softening crude, came as a warning for investors looking to ride the market for short term gains. The following relief rally in the next three trading sessions, however, came as an assurance to long-term investors in domestic equities. It also came as a lesson to investors that in a long-term bull run, such corrections ensuing from global developments, should be taken as an opportunity to invest rather than getting perturbed and worried about existing investments.
Indian equities will not only benefit from expected relative underperformance of other emerging economies but will also benefit from the underperformance of other competing asset classes — real estate and gold – and softening of all major commodities.
Why the fall?
Though it is an established fact that a fall in crude oil prices only benefits India, one cannot ignore the fact that a big part of the Indian equity investment belongs to foreign institutional investors. While the real economy is not too dependent on global markets on account of the low percentage of export contribution to the country’s GDP, equity markets do get shaken up when there is a turmoil in the global markets because of the resultant response of the global money managers who pull out funds from emerging markets to move into safer debt instruments.
Something similar happened on Tuesday when a sharp fall in crude prices by around 5 per cent on Monday, made the markets nervous and strengthened the fear that deficient demand on account of slowdown in the pace of global growth may be pulling the oil prices down.
“Oil is a significant part of the global economy and when oil falls, the entire energy basket goes down and a part of the global economy goes down with it leading to a correction in the markets,” said Raamdeo Agrawal, joint MD, Motilal Oswal Financial Services.
Others too agree. “In the short term, fall in oil price may put some pressure on Indian equities and debt on account of possible risk of default by some country or their banks, leading to flow of fund into US treasuries,” said Sankaran Naren, CIO, ICICI Prudential AMC.
The development on oil along with concerns over Greece’s ability to remain a part of the euro zone post the forthcoming elections, made the markets nervous and the foreign institutional investors moved their money out of equities from across the world into US treasury bills.
Can it impact India in the long term?
Unlike China, which is also a beneficiary of falling crude oil prices and where exports contribute significantly to their growth, India’s economy is more dependent on domestic investment and domestic consumption and therefore a slowdown in the growth of euro zone or some other parts of the world will not have a tangible impact on India’s growth. Therefore, while a fall in global crude prices will help in keeping the current account deficit under check and in reducing input costs and improving margins for companies across various sectors, a slowdown on global growth may only have a partial impact in the form of a dip in export-linked income and growth.
“Exports can witness a moderate slump in the short term and rupee may come under some pressure but the positive impact of falling crude on the economy is much more than a dip in exports growth on account of slowdown in parts of the world,” said Agrawal adding that if the oil prices continue to trade low for a year then it can result into savings of between $75 and 100 billion for the country.
Another expert pointed out that a slowdown in global growth will take away the tail-winds of growth and in that case India will have to derive more from domestic reforms and push for growth.
What favours India and what should you do?
The RBI’s decision to keep interest rates tight in its efforts to tame inflation now comes as a blessing in disguise. While the euro zone, China, Russia, Brazil will get affected on account of either slowdown in growth or fall in commodity prices, Indian economy that is set to embark on a low interest rate regime will emerge as a preferred investment destination for both equity and debt investors across the world.
“RBI, by virtue of keeping the rates high till now, has the cushion to loosen the policy, which may provide boost to economic growth,” said Naren adding that India will be a preferred investment destination for institutional investors going forward.
Decline in major commodities and underformance of real estate and gold also augur well for equity investments.
“The two competing classes—real estate and gold—have not been doing well unlike in the period between 2004 and 2008 when they were competing with equities. This shows brighter prospect for Indian equities as an asset class which does not have a challenge and will attract investors towards itself,” said Pankaj Pandey, head of research at ICICIdirect.com.
Experts feel that unless something structurally goes wrong for India, the equities are in a long-term bull run and therefore a day’s, week’s or month’s weakness in the markets on account of global factors should not deter the investors from investing or deviating from their investment plan.
“Investors should take advantage of the short terms concerns and decline in markets by investing for the long term,” said Naren.
Even for domestic investors, the unknown is now known Indian investors should not miss out on the expected growth in equities this time around. A lot of retail investors stayed out or entered late in the markets between 2004 and 2008 when the GDP growth rate and Sensex were moving into unknown territory (something the economy and investors had not witnessed or experienced in the past).
But now that they have seen that India can climb to growth rates of around 9 per cent and it is no longer an unknown, investors should look to benefit from its impact on equity markets. The net inflow of record Rs 50,000 crore by Indian investors into equity mutual funds in the nine- month period between April and December 2014, only strengthens the argument.