It’s been two years now since everyone has been screaming hoarse for want to reforms. Hence, it is ironic that at the first sight of what one dare call big-bang reform, people want to run for cover.
I am referring to the massive cleanup in the banking system initiated by the Reserve Bank of India after its asset quality review? Banking sector stocks, and more specifically PSU bank stocks, have had a nightmarish run on the markets with the Nifty PSU Bank Index losing over 50% of its value in the last one year and over 20% of its value in the last one month alone.
There has always been wide-ranging conjecture about the possible size of non-performing assets of banks in India and now we are being shown the mirror. While markets are selling off in a hurry, we need to see this as emergence of clarity and end of uncertainty before a new era begins.
Coupled with FIIs selling emerging markets in general for their own set of reasons, the fall is getting accentuated. A large part of the problem has been the severe correction in oil and metals. While this has initially resulted in Indian shares being sold off leading to prices being depressed, again the eventual benefits that will accrue to the Indian economy cannot be denied.
This is how things look in the near term when serious surgeries begin for a better future. Industrialists forced to sell assets for paying debts instead of political patronage of rolled over debts, government-owned banks being repaired by the owner and infrastructure being built by long-term funds of foreigners instead of highly leveraged local groups.
Isn’t this some of what we wanted when we said we want to rid corruption at the highest level and we want reform?
As regards selling from FIIs is concerned, the experience of 2008-09 clearly shows that if we react to foreign selling, we will lose out. Money chases scale and scale with growth is irresistible, eventually when dust settles they will put back more than what they removed and we will be left out watching the market touch new highs, only to buy in at higher levels.
While Lehman Brothers defaulted in September 2008 and our market fell 60% through 2008, the quarter ended December 2008 saw all-time high sales for two-wheelers, four-wheelers and white goods manufacturers. The government’s fiscal stimulus in form of Sixth Pay Commission, the newly enacted NREGA, series of MSP hikes for agricultural produce and farm loan waivers resulted in a consumption boom.
While we have a lot of respect for fiscal stimulus from the US Fed and the US government, we would do well to have at least a fraction of respect for our own stimulus coming up in the nature of Seventh Pay Commission which impacts 5 million people. We need to take note of recent interviews by the finance minister citing rural spend as his top priority. With two years of drought and elections in multiple states coming up, a boost to rural households is writing on the wall.
When participants from my industry say it is time to buy, it must be taken with a pinch of salt because on a lighter note, we are said to be “paid to be bullish”. May not be entirely untrue, but fortunately investment is a personal decision grounded in personal circumstances. While it is definitely time to buy equities, I’d qualify it by saying it’s time to review your asset allocation with your financial advisor. If you are over-invested, then do not worry; we will most likely see a repeat of 2009-10 when market bounced back post a severe correction. If you are under-invested, it’s a no-brainer at current levels. But even if you are adequately invested, it would be good to go overweight equities in these times.
By Aashish Somaiyaa
The writer is MD & CEO, MOAMC