Email
Print
ShareWow! What a week this is turning out to be. Lehman Brothers has filed for bankruptcy. Merrill Lynch is being bought over by Bank of America. And one of the biggest insurance companies in the world, AIG, is desperately seeking funds, prompting Alan Greenspan to call this a once-in-a-century crisis.
In short, there is pandemonium out there. Indeed, America is in turmoil.
But, India is not in turmoil. There will be collateral damage, of course. Some 2,500 employees working in the India offices of these organisations may lose their jobs. So should we go boo-hoo? I think not.
Our homegrown indigenous financial sector is strong and vibrant enough to more than absorb this additional employment. Okay, so these guys won't get the crore-plus bonuses they were looking forward to. Boo-hoo.
The other constituency that could be adversely affected is our capital intensive real estate sector. Sob! Now these guys would no longer be able to sell ludicrously over-priced property and you and me may just be able to look forward to affordable housing. So I am shedding tears, but these are tears of happiness.
Let me put this another way. Okay, it is sad that an institution with a legacy of over 150 years, such as Lehman, has fallen. This means this pillar of Wall Street could survive two World Wars but not the recklessness of Wall Street cowboys. But at the end of the day, how has this changed your life?
For me, today is no different from yesterday. In other words, the collateral damage of this western catastrophe on our real economy is minimal.
I have often said in my columns that this is essentially a problem of the international financial community, by the international financial community and for the international financial community. Entities in India, whether it is a bank or an institution, have limited exposure to the subprime crisis.
Yes, credit will become tighter and more expensive; the outsourcing industry may suffer as the end consumer is suffering and there may be significantly lower participation by FIIs in our stock market.
However, ask yourself one question. Why are FIIs selling in India when the problem lies elsewhere? One reason could, of course, be that emerging markets are considered risky and during times of uncertainty, money is moved to what are perceived as safer assets. However, the other and the key reason is these investors are booking profits in India to cover up for their losses elsewhere.
Always, always look at the big picture. Amongst all emerging economies, our export-to-GDP ratio is the lowest. Consequently, even a full blown US recession will shave only around 40 to 60 basis points off our GDP growth rate, which was a healthy 7.9% for the first quarter. The industrial production numbers for July also displayed a respectable 7.1% growth.
Oil is down to almost $93-a-barrel, thereby signalling lower inflation going ahead. The earning per share growth for Sensex stocks over the forthcoming year is expected to be around 19.2% Add to it an earnings growth rate of around 15-18% pa and a return on equity at the same level and what we have is nothing but a safe haven for investors spooked by risk.
I repeat --- the fundamentals of our economy make our market nothing short of a safe haven during such turmoil. So I don't care what happens to the market in the near term. Mark my words, once this storm blows over, it will be markets such as ours that will show the most upside.
Also, one can't help but surmise that we are indeed looking at the fag end of this disaster. Maybe there are a couple of more potential victims out there, but gradually, central banks the world over are coming to grips with the fact that cumulative losses could be nearer the $1 trillion mark.
Though by no means easy to digest, measures will be taken to provide relief and most importantly, never ever to let this sort of a thing repeat. Risk management will become the key and derivatives will start to get recognised as indeed weapons of mass destruction. At the end of the day, this cleansing of the entire global financial system, though very expensive, bodes well for the true long-term investor.
So, amidst all this noise, do not let go of the basics. Keep it simple, keep it real.
Asset allocation is key. Have around 10-15% of your portfolio invested in gold, for the yellow metal is an effective hedge during uncertain times. But, don't buy physical gold, go for exchange traded funds. Allocate another 15% to relatively safe gilt funds.
Cash can command around 10%. The balance is to be invested in equity, not in a lump sum, but in a staggered manner through systematic investment plans.
Hold fast, hold tight and hold out. Let this imported storm blow over. Don't get swept by it.
sandeep.shanbhag@gmail.com
