May 18, 2012

Current economic uncertainty is an excellent buying opportunity: Navneet Munot, CIO, SBI MF

Striking a positive note Navneet Munot says India's growth story is intact and investors should ignore doomsday predictions.

"Gloom to deepen: India Inc.", screams the headline in a leading business daily. The global media has been even more critical about India and no wonder, not only foreign investors, but even Indian corporates are on a 'Quit India' movement like never before. Given the macro conditions and political situation, you can't argue against them.

Every economic data release points to a worsening macroeconomic situation (current account deficit, inflation, IIP) and the rupee is crumbling despite RBI using every possible weapon from its armory to support it. Inflation is rising at a time when growth is slackening making it difficult for RBI to loosen monetary policy. Liquidity is extremely tight and fiscal position is going out of control. The political situation couldn't have been worse than this with a leadership showing no intention to rise to the occasion and take charge. Investor sentiments are at a nadir with the possibility of the country facing an acute shortage of risk capital going forward.

Exactly 5 years back, things were so different. India was the darling of global investors and domestic investors were queuing up to buy equities. We could have been a great oasis of growth and hope when the rest of the world is dealing with such deep structural problems. But alas, we missed an opportunity. Future generations wouldn't pardon us for what we have done in the last 5 years.

Amidst this gloom, should we just give up hope? No, we should not.

The structural India story because of which everyone was bullish on this country is almost intact. Favorable demographics, rising incomes and consumption levels, high savings, opportunities in infrastructure and outsourcing, robust market infrastructure—all these are still positive factors. The dust is settling from the boom years. Of course, policymakers have disappointed us in a big way, but don't forget, democracies have their self-correcting mechanisms. Look at the last decade, at the state level, leaders focusing on 2G (growth and governance) are the voters' favourite. For the first time in our history, powerful ministers and corporate executives have been put behind bars. Don't underestimate the power of institutions like the Supreme Court, Election Commission and the Fourth Estate. We are going through a massive transformation in our political economy when the rest of the world is going backwards (just follow the political debates and government actions in Europe, US and Latin America to feel a little better about India).

10-year bond yields in the developed world are much below 2%, one can be pretty sure those central banks would keep their money-printing machines working overtime to ensure low interest rates and ample liquidity. Will it fuel a commodity boom? It won't. Structural demand destruction in China and other parts of the world will ensure softness in commodity prices. China will surprise on the downside. Core inflation is unlikely to shoot up. Having said that, headline inflation in India may remain sticky due to primary articles prices—but I hope RBI will focus on core inflation. The weak rupee has negated the gains from low commodity prices, but I have a contrarian view that the rupee is very close to the bottom and unlikely to depreciate much from current levels.

I also think global investors will look at India more positively as on a relative basis and the economy and corporate sector would deliver better than its peers from most of the other parts of the world. We have always been dancing to the tune of global risk appetite and liquidity, but this time, we will gradually decouple. Indian investors are severely underweight on equities and with gold losing its glitter of late and the boom in real estate coming to an end, I expect domestic investors to put money in equities and long bonds.

There is no denying that the macroeconomic situation is scary and very close to the crisis days of 1991. The global environment couldn't have been worse. Political leadership is missing and condemnable to say the least. Don't forget, reforms never happen out of conviction; politicians deliver them out of compulsion. We are reaching that point.

If history is any guide, these are precisely the times when you get great opportunities to accumulate risk assets. Periods like October 2008 to March 2009, where headlines scare you.  And not when everything looks so rosy, the way it was in 2007.

The next few months will offer a great opportunity to invest in long bonds and equities. Maintain the discipline of asset allocation rather than getting swayed by the high volatility that we are likely to witness.

Patient investors would be suitably rewarded for risks.

(Navneet Munot, CFA, is Chief Investment Officer with SBI Funds Management Private Limited)

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