Well let us look at the Indian market from a foreign investor’s point of view:

Indian markets (as also China) is down by 18% over the past one year. If you are a foreign investor add another 14% of currency depreciation. It is not a pretty picture, correct?

It must have been quite a shocker for people who thought India was a domestic consumption driven market – and actually runs a small trade deficit. The Indian markets peaked in Nov last year and then has been on a ride down. From 21000 to 16000 now.

What caused this UNEXPECTED slump? It is not clear. Indian politicians have always been corrupt – however some new social changes – of wanting to punish the corrupt suddenly found ground support and has been shaking the governments. This movement has had an impact even on a few local elections. No major polls have been announced after this movement gained momentum. Also there was a Telecom scam where the Minister in charge of the licensing process was even jailed. Jailing corrupt businessmen, their executives and even a Minister that too for 180 days is unprecedented in India.

The FII cash flow into India in the year 2009 was US $ 17 billion and they invested US $ 29 Billion in the year 2010. In the year 2011 there has been a withdrawal – of about US $ 325 Million. In a country with very poor retail participation (there are no accurate figures for this – it varies from 1,000,000 to 10 Million!) exit of foreigners’ money was bound to have an impact.

India has many problems – the rate of inflation is in double digits. The RBI would love it if the economic growth rate and the inflation rates were to trade places, but there are no indications of that happening! The Indian growth rate of 6-6.5% is not bad, but when the expectations were in double digits, such a low figure of 6-6.5% (with a downward bias) does not look good at all.

If US $ 30 billion were to come in – and that too quickly what would happen? If retail FDI was really allowed what could happen?

These are difficult to handle. However a 7% growing economy with a beaten down market and a beaten down currency is very difficult to ignore. So money will come in. Will the markets scream its way to the top? No. Frankly there are no great triggers for the market to RUSH up all the way to 21000.

However we all know that triggers for a bull market or a bear market are not visible TILL THEY HAPPEN! So suddenly you might see cash flow coming in, quarterly results being good, interest rates coming down, a feel good factor – and the index could be at 21k in no time at all !

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  1. Hi Subra Sir, I agree to you on the point that some new things are happening in India like corrupt going behind bars. But Imagine a situation, which may be true in near future, when a strong Jan Lokpal bill is passed and action is taken against many corrupt politicians (I am not sure of the % of corrupt in the System). What will be reaction of the Market? Will it be
    1. Positive: As India will start moving in right direction
    2. Negative: As many powerful people will be behind bars

  2. Subra,

    The only scenario in which the market will collapse badly(and will create even better opportunities to buy) is if someone in Europe defaults and some of this FII money flows back to safety in panic. As you rightly pointed out in a previous post, most of the quality stocks are still at a premium(think Nestle, Asian Paints, HDFC Bank etc). So one should surely keep a decent money in cash in case such an opportunity arises(the probability is not small enough to ignore).

    —- Nir

  3. Subra, I stopped taking macro analysis like this too seriously after learning about long-term investing from you.
    1. There are so many macro variables and people can selectively interpret in which ever way they want. Recency Bias.
    2. As you said in another post,this is what WE are seeing NOW. Market has seen all these quakes, scams, world wars, cold wars, epidemics, civil movements, over pessimism, over optimism, corruption, oil shocks, currency fluctuation, country defaults, runaway growth …(a long list). In long term chart these will look like bumps or blips. As you say keep up the monthly SIP, sleep peacefully for most *layman investors with at least a 5-7 year view* (professional fund manager/trader can act differently based on these variables).

  4. Cash combined with courage in times of crisis can be highly profitable. If someone is ready to take a 3-5 year call on India’s growth story, it makes sense to start investing. Our blue chips have been battered. Investors should start taking selective exposures to some of these fallen giant with earning visibilities and ability to survive the crisis. We all know that mid caps and small caps also offer above average returns when the going is smooth. So doesn’t it make sense to also start buying into mid-small cap oriented mutual funds? We think it does.
    So it is evident that CRISIS is here. If you have the CASH, please show some COURAGE, to make super normal profits in the long run.

  5. If our government sends the signal that it is Pro reform instead of waiting for some crisis to happen to make a move (avaiation is the recent example), launch massive infrastructure projects with huge budgets at the same time committed to reduce the budget deficiet, keep the prices in control inspite of currency devaluation and ensure that FCCBs are honoured by Indian corporates would certainly make investors flock to our country. Easier said than done.

  6. In last paragraph you mentioned:
    >>>> “However we all know that triggers for a bull market or a bear market are not visible TILL THEY HAPPEN!”

    But whenever that turn takes place we will surely know it if we know where to look for, Isn’t it!!!

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