Fallen, not broken

The US subprime crisis won8217;t go away, but here8217;s why Indian investors don8217;t need to panic.

Seven trading days ago, on January 10, I got an SMS from a colleague who has an equity exposure that would have the Left parties deliver benign smiles of approval. 8220;Should,8221; she asked, 8220;I buy this stock a global pharmaceutical major?8221; My answer: No. Not because this person, in her twenties, doesn8217;t need the equity exposure 8212; she does 8212; but because I didn8217;t want to be the shoulder over which she would fire her first speculative shot. As I walked into office later in the day, I told our resident stocks expert that the market will fall.

And fallen it has 8212; indeed, what a fall. A full 2,062 points, intra-day. To put this number in some sort of historic perspective in a market that looks at history with scorn, this fall in the value of the popular market benchmark Sensex on January 21 approximately equals the value of the Sensex 16 years ago, when it closed at 2,020 on January 15, 1992. Though I was fairly sure the Sensex would fall, the extent surprised me, as it has most market players.

There is a diarrhoea of 8216;analysis8217;, presented with a bravado that weakly attempts to couch the experts8217; real sentiment: fear. These lame-duck experts are using two crutches to make their holy pronouncements. The left crutch of reason says Indian markets have fallen because of global factors in general and the looming US recession its declaration, really in particular. Despite its fantastic growth, India has not decoupled from the US economy yet and so, if the Dow does an 8216;aaaaah8217;, the Sensex would end it with a 8216;choooo8217;.

By all indications, the US recession is all but an announcement away. The 150 billion tax cuts that the Bush administration announced late last week are among the many signals to soothe a market that is still reeling under the unknown impact of the sub-prime crisis there. Unknown, because of the staggered manner in which banks are disclosing their bad assets 8212; money lent to households that didn8217;t have the capacity to pay, at rates that were higher than better quality borrowers8217;, at a time when property prices are turning, with the pain accentuated by financial 8216;innovators8217; who securitised bad debts and sold them to investors 8212; leaves much in closed books behind closed doors.

Not for a moment am I saying financial innovation should be banned. It is transparency and accountability of rating agencies in this case, riding on whose Triple A products that were really not even investment grade that I8217;m advocating. At stake is not merely the interest of investors who transacted in these collateralised debt offerings, but balance sheets of banks, through them, the poor who bought homes to live in.

When money in the US economy shrinks, US investments in non-US economies are called back 8212; yesterday, Hong Kong was down 5.5 per cent, Japan fell 3.9 per cent, UK 3.6 per cent 8212; by investors who suddenly feel more at ease with US assets, all other markets being 8216;riskier8217;. The reverse flow of money is also directed by bankers, who, despite falling interest rates, are unwilling or unable to lend simply because their books need to be beefed up with capital.

The billion-dollar financial marriages of countries through their sovereign wealth funds SWF with these banks need to be seen in this context. Last week, on January 15, SWFs of Singapore, Kuwait and South Korea put in 21 billion into Citibank and Merrill Lynch. According to The Economist, 8220;Since the subprime mortgage fiasco unfolded last year, such funds have gambled almost 69 billion on recapitalising the rich world8217;s biggest investment banks far more than usually goes the other way in an emerging market crisis.8221;

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While the crisis is here to stay awhile, the right crutch that8217;s helping Indian asset managers limp ahead is of sentiment. In the futures and options segment, the falling market passed through all 8216;bottoms8217; like a hot knife through butter, creating a meltdown that streamed into the cash market. Usually, traders are tense about squaring off their leveraged long positions a day before settlement. This time, however, that wait seems to have expanded to accommodate global worries.

As far as Indian companies go 8212; for those who have forgotten, the underlying assets over which trading in securities and through it the Sensex happens 8212; even though results are tamer than the 35 per cent plus over the past eight quarters, at over 30 per cent they remain high. To me, even a 25 per cent growth, modest in the short term but attractive by any standards, is large enough to attract capital, global or domestic.

What8217;s difficult is to create a financial policy environment that maintains this growth and enables its acceleration, keeping the 8-10 per cent per annum GDP growth target as an aspiration. In order to do that, Indian business is fighting two battles 8212; currency appreciation it has risen by 14 per cent over the past year, and high interest rates 7.75 per cent against 4.25 per cent in the US, 5.5 per cent in the UK, 4 per cent in Europe. Balancing these growth aspirations on one side with inflation on the other is not going to be easy for RBI governor Y.V. Reddy when he releases his credit policy on January 29 8212; to make Indian business more competitive, he should not cut but hack interest rates.

Meanwhile, an expectations forecast. Do not imagine that markets will rise or fall in a steady 200-250 point trot. In the information age of today, reactions to events are instantaneous and the velocity of these reactions has hyperjumped, showing just how efficiently markets absorb information. Finally, most money is made when there8217;s blood on the street. We saw some today. We8217;re likely to see some more over this week, perhaps the next as well. And lest we forget, this seven session fall of almost 3,000 points or 14 per cent still leaves the Sensex 24 per cent higher than a year ago, 85 per cent higher than 2006 and 4.2 times what it was five years ago. In a market that has only seen 8216;returns8217; for the past five years, it8217;s time to meet 8216;risk8217;.

gautam.chikermaneexpressindia.com