Column

There is no doubt about the bad moon rising. At the time of writing this, the market is already down 10% within a month.

Regular readers of DNA Money would know that the so-called subprime crisis is the chief culprit. As Indian investors, all we need to know about this issue is that mortgage companies abroad fell over each other to extend housing loans to questionable borrowers.

Not content with this one indiscretion, they went a step ahead and sliced these iffy outstanding loans into small parts to be sold to reckless hedge funds, cavalier FIIs and a minority of unsuspecting but deep pocketed private investor groups.

In the course of time, the inevitable happened. The questionable borrowers lived up to their reputation by defaulting, thereby setting off a domino effect.

The housing finance companies couldn’t recover their loans and in turn could not keep up their obligations to the hedge fund guys.

Everyone lost and we were deep into what would be come to be known as the subprime crisis. Even now, no one knows how deep rooted the problem is —- the subprime market is estimated to be around $600 billion and as per current estimates, the default rates are around 1%. However, as we go along, these numbers may well change.

Of course, when it rains, it pours. So, as if the subprime predicament was not enough, the unwinding of the yen carry trade threw its hat in the ring, too.

Here, it was a case of simple interest rate arbitrage. Japanese interest rates are low (almost zero per cent)….so it is almost a no-brainer to borrow cheap and invest dear.

In other words, borrow at zero or close to zero and invest such borrowed money in any higher yielding markets, even India.

However, during this time, the dollar, not too happy with America’s mounting deficit, started sliding against almost all international currencies including the yen, thereby significantly diluting or even wiping out the gains earned due to the interest rate differential. Again, investors had to pull out in a hurry.

Now, the point to note in all this turmoil is that it is essentially of the international financial community, by the international financial community and for the international financial community. In other words, subprime as well as the yen carry trade is totally extraneous to the Indian market. No entity in India, may it be a bank or an institution, is directly exposed.

Yes, there will be collateral damage in terms of tighter and more expensive credit and a 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 to be safer markets. However, the other and the key reason is these investors are booking profits in India to cover up for their losses elsewhere.

It’s not as if this is the end of the world. Right now, the wounds are being licked and in course of time, these very investors will consolidate and regroup.

And once that happens, where do you think they will turn to? Of course, to the very markets that offered them a profit in the first place. It is logical, almost intuitive. So, I don’t care if the market falls to 13,000 or sinks to 9,000…..but mark my words, once this storm blows over, things will be back to the normal trot.

Think of it, it’s not as if we have not had our share of upheavals in the recent past. The dotcom bust, September 11, Afghanistan, Iraq, the US Fed swinging rates up, then down and then up again, not to forget oil shocks —- domestically, too.

Also, Parekh came and left, the Left came but is yet to leave, Reliance split… yet, in spite of all these apparent catastrophes, everyone would agree that our stock market hasn’t done too badly at all.

There is one common thread running through the events mentioned above — all of them are extraneous to the inherent health of our country in general and our corporate sector in particular.

In other words, there was never anything fundamentally wrong; these were just events that happened and will continue to happen in the world we live in. Meanwhile, your fortune as an investor would depend upon how you react or, more appropriately, don’t react to the situation.

Here’s what I am going to do —- nothing. After carefully studying them, I have invested in some stocks and some mutual funds and I am convinced that these remain intrinsically good investments.

The index falling isn’t going to suddenly reverse the quality of these investments. If anything, with every significant fall, I am looking forward to picking up some cheap but quality stuff. And when the affected come back to our rewarding markets, no prizes for guessing who will be selling.

A sale is nigh. Welcome this rise of the bad moon.

sandeep.shanbhag@gmail.com