The Indian investor gets savvier

The market has an uncanny habit of beating expectations and surprising even the best of market cynics and optimists. The alarm witnessed during the early phase of the correction in August proves this point. The current volatility has brought forth many questions: what will be the extent of the crisis that has engulfed global bourses, duration of correction and sustainability of the three-year bull run in the Indian market?

In the past month, the average daily volatility witnessed in Nifty increased by nearly 86%, with the average daily point movement in Nifty being approximately ± 2.15%. This implies that the Nifty, on an average, moved 92 points both ways. This is in contrast to the regular market movement during the past one year when volatility was around ± 1.24%.

The spurt in the seismograph of Indian indices was not a one-off phenomenon, but was visible throughout the emerging and developed world. This short-term stampede was largely due to the sharp increase in risk aversion witnessed by investors, primarily FIIs and hedge funds. The rising defaults in the US subprime market — a fall-out of credit abuse — coupled with declining demand for new properties, hit financial companies which had securitised or invested in subprime loans and mortgages.

The consequent rise in losses in the US-based funds resulted in panic and increased redemption pressure on international funds. With the underlying assets (read subprime loans) having become illiquid, redemptions had to be funded via the sale of liquid assets. This led to a sell-off in emerging markets.

A more significant long-term impact of this could be the possibility of a slowdown in US consumption and the economy. The housing slowdown has already caused a dent in the home equity of US consumers. With higher oil prices looking a distinct possibility and declining real wages in the US, fears of a recession in the US economy have become real.

The latest US economic data hints at falling consumption of durable goods, residential investment in free fall, inventories on the increase and declining sales in the retail sector. The focus of the Fed is, therefore, shifting towards growth rather than inflation. So, there is a high likelihood of cut in interest rates in the US.

Against this backdrop, the India Growth Story acquires a much deeper meaning since India is one of the few nations whose growth is largely shielded form global upheavals, including that of the US. This is because almost two-thirds of our GDP comes from domestic consumption. The total Indo-US trade is around $26.8 billion and is growing at 29.5% YoY. Despite the US being our largest trading partner, the total contribution of the US trade in demand for Indian goods is around 1.7% of the GDP.

This implies that the high-paced growth seen in India since the past decade was sustained by internal demand. The government’s commitment to incur a capex of $300 billion in the next five years, coupled with a similar expansion programme in the private sector, has unleashed a capex cycle that is expected to sustain in the mid-term. The gross fixed capital formation in India is already at 30.2% of the GDP and is expected to rise to 35% in five years. This bodes well for India Inc, which can expect to see demand-driven growth in the future. In short, future GDP growth seems to be intact.

However, the domestic stock market will continue to be well-integrated with the global capital market. The eventual de-coupling of the Indian market from the crisis engulfing the rest of the world will begin gradually. The credit premiums offered for emerging markets have declined significantly on the back of huge currency chests of these economies. Against the backdrop of these uncertainties, the Indian investor has shown greater maturity by keeping faith in the market.

In fact, perhaps s/he has become far more confident in facing these bouts of volatility. But complacency should not set in. The investor should consider these bouts of volatility to buy fundamentally strong companies available at good valuations.

(The author is, CEO, Kotak Mutual Fund)