Dipen Sheth

How quickly the hopeladen winds of exuberance turn into ravaging gales of despair! US, the world's driver of consumption and prosperity, is staring at the sceptre of a full-blown recession. Stock markets across Asia, Europe and America are seeing vicious sell-offs. Commodities like oil and gold, which were outperforming stocks till recently, have suddenly reversed. The yen has appreciated 16% in six months, triggering sells in all asset markets where punters were using it as free ammo for their leveraged trades.

India seems to be firmly “coupled” with this contagion. From FII money backing out, and derivatives losses on the books of leading banks, we are seeing it all. The Sensex is down over 30% from its peak. So is it a time to average out your trades? Just look at the evidence. Some really big “countryproxy” stocks like Bhel, Reliance, Bharti Airtel and State Bank of India are down by over 30% from their recent peaks.

However, the larger picture coming through from global financial markets says that there’s a pretty strong turn in the tide. And it is this reversal of sentiment and momentum that concerns me more than the fundamentals right now. If you say that the pendulum is swinging back, do consider the possibility that there’s still a lot of room for swinging back into gloom and despair.

No, I am not a deserter of the faith. While equities will always be “slaves of corporate earnings in the long run”, let us not forget the emotional side of markets. The side that brings out the “voting machine” (popular sentiment) in them, rather than the “weighing machine” (intrinsic value). I’m afraid it’s the voting machine which is revving up with fear right now. My view (and I’ll be happier than you if it’s wrong) is that there’s more fear to come.

I can’t back this with any aggregated ratio analysis of companies, or with economic or fund flow data from anywhere in the world. It’s just that the events of the past few weeks tell me that the pain is nowhere near peak levels as yet. Yes, we might see a relief rally, and all sorts of reassuring events like commodity price falls, and central bank actions that serve to boost money supply or improve investment sentiment.

But we are still not seeing the classic signs of a market bottom:

• Painful, forced selling across investor classes

• Capitulation by some leadinglight investors (institutional and individual)

• Disillusionment with anything connected with equities and, indeed, investing

• Outbreak of a “scam” or two involving some or other poster-boy of the bull run

• Government intervention or new regulation that attempts to put right some perceived wrongs

Some of the above events are already panning out admirably in the US, so my rough checklist actually puts the US closer to a bottom than India! In fact, I see Indian investors invariably laden with hope in the face of a near free fall so far. That would ordinarily sound nice, and lend me confidence for the near term.

But their hope is, at best, a restatement of the old arguments about why India is the country to invest in. There’s no understanding or recognition of the painful realignment of the financial world that is under way.

A free carry in a zero interest currency (yen) is coming to an end. The world’s largest economy is coming to terms with its profligate ways after years of denial, and threatens to slow down the world with a looming recession. The economies of the euro zone and the world’s largest supplier—China— are less understood and may throw up some nasty surprises. Geo-political developments pose another hidden concern.

Realignments of this sort tend to take some time to happen, and then to sink in. And having sunk in, the current realignment will probably lead to a re-pricing of the riskreward equation that India offers the global investor. By that time, some more changes would have happened to the country. A new election, a new monsoon and the usual confusion and non-performance on regulatory and governance issues will come to the fore.

Whether it will take another quarter or whether we will see a bottom in a year is something I cannot pinpoint. But it’s clear that we are still some way off that bottom. The odds are tilted against us in the near term. Then again, the weighing machine theory tells me that there’s some great opportunities in India for businesses to flourish, and investors to grow wealthy. All this is, of course, beyond the near term.

I’ll use my cash to buy when these opportunities look almost invisible to the investing fraternity. And when magazines like this are full of gloom stories with no end in sight. Till then I’m selling.

Dipen Sheth is Head of Research, Wealth Management Advisory Services. He can be reached at mailto:dipen@wealthmanager.ws%20