We have been observing the developments in US very closely. We expect that the US authorities would be able to zero-in on the implications of the economy. This is clearly a catastrophe and may have a wide spread impact. It is still early to conclude that the global economy would be completely immune to the developments.
India has been reasonably prone to emotions and reacting to such global events in the past. In the past we have had India reacting to the gulf war and while the shock subsided we saw the markets rally smartly. This may be the time to actually look for opportunities selectively. Having said that, in the near term we could see periods of uncertainty and volatility. We also need to keep a close eye on the oil price movements in light of the developments. Selling at these levels would tantamount to capitulation. We have also realised that India behaves a little differently from the comparable Asian markets, which are reasonably more in sync with the developed markets.
From a medium term point of view (6 months and more), we feel that these dips would offer value but one must be capable of taking the volatility as an unsolicited gift. Our cash position in the portfolio is vindicated by the dips in the market. We have been looking for these sharp reactions to add to the names that we like. Selectively, we have been also adding stocks, which are relatively immune from global turbulence.
There are several internal measures, which are being initiated to pump prime the Indian economy, which also seems to facing challenges. We expect some of these efforts to also fructify soon and to improve overall investor confidence and sentiment.
The next few days are going to be critical as we wait for US to recover from the terrorist attack. We expect the US to react within the end of the week with either words or actions. US markets are closed and hence we cannot guess as to what could be erosion in the American markets. We could also see some emotions and lack investor confidence rubbing off to the other markets in the next few days.
On the back of these developments, we feel that these turbulent times will be a feature of global equity markets. Any knee jerk reaction or panicking would be succumbing to the situation. But we always insist that timing the market to the last rupee is not practical.
Outlook for Debt Markets
The attack has thrown the major markets across the world into a tizzy. Specifically major equity indices across the world have fallen drastically. But bonds worldwide have appreciated and major currencies have appreciated against the dollar as well. In a related event, Central Banks across the world have indicated that easing bias towards interest rates would be increased to tide over this event and liquidity would be increased, if required.
In our view, the impact on domestic bond markets would be very marginal. We did witness some panic selling in Government securities last evening with prices down 60-70 paise from the pre-event prices. Wednesday morning, however, was much better for the bond markets and bargain buying prompted the bonds to recover most of the losses from last evening. As we write this, the bond prices are down about 20-30 paise from the pre-event levels, which means a difference of 4 -5 basis points in terms of yields in the medium to long term government securities.
At this juncture there seems to be no economic reason for bond prices to fall, on the contrary most bonds have appreciated globally. The market nervousness stems from the possible course of action the US may take against groups / countries involved in the attack. The possible fears driving this nervousness could be increase in Crude Oil Prices or a pull out of FII money from the country. In terms of Oil prices, OPEC has gone on record saying that they will maintain the supply (Brent Futures are largely near their pre-event close - despite seeing some large volatility last evening). In times of global crises, this would usually happen. In terms of FII selling, we do not anticipate large selling at lower levels. Thus these two events look less probable and are unlikely to put pressure on the Rupee. Minor movement in the Rupee is unlikely to change the central bank's stance on softer interest rates. However we would continue to watch these events and the reaction of the US, closely.
In times of events like this Central Banks tend to provide more liquidity into the system to let it tide over the crises, We believe that RBI would also do so, if required. The macro economic factors remain favorable. The Deposit growth is still strong, growth in Bank Credit still weak. Overall we believe that the fundamental view still holds and thus would maintain our current maturity profile (around last month end levels) across funds, while containing price and liquidity risk within the portfolio.