This year was marked by unprecedented events that took the global economy and almost all global markets by surprise. The failure to predict the downside was unanimous: even respected regulators like the US Fed, the European Central Bank and the Bank of Japan were unsuccessful in pre-empting the downfall and taking timely preventive action. The global banking community also read the situation incorrectly, as was evident in risky lending practices and in erroneous valuations. For instance, the price paid by a Royal Bank of Scotland led consortium for the acquisition of ABN Amro Bank NV last year is today more than the combined market cap of some of the leading banks in the world. Excessive leverage, unwarranted risk taking, and reckless lending laid the groundwork for a banking crisis that pulled the entire global economy down, thereby exposing investors to extreme risk and significantly eroding investor wealth. Double whammy In the first half of 2008, the Indian economy fell victim to high oil prices, which translated into higher trade deficit, weaker rupee, higher inflation, higher subsidy burden, higher fiscal deficit, and lower growth. In the second half of 2008, the economy felt the impact of the global financial turmoil. The situation deteriorated further when foreign institutional investors (FIIs) began unwinding their investments in emerging markets, including India, in the wake of the liquidity crisis. This led to tightening liquidity, crashing commodity prices, and slowdown in demand. As a result, the estimated GDP growth rate has come down from above 8 per cent to about 6 per cent for FY 2008-09. While the situation could have deteriorated further, prompt intervention by the regulators through aggressive interest-rate cuts, liquidity infusion, and increased infrastructure spending provided the necessary buffer for the Indian economy. Looking ahead In 2009, events, more than fundamentals, will play a critical part. The year will begin with the baggage of 2008. The global financial turmoil will keep capital flows in check. The pressure on the RBI to ease monetary policy further and on the government to provide more fiscal stimulus will continue. Corporate profitability will be impacted by the troika of volume decline, margin pressure, as well as treasury losses. Factors like tight liquidity conditions for small- and medium-sized corporates and high interest rates for private corporates and individual consumers will continue to dent demand. Apart from these, the general elections that are on the anvil, the memory of the recent terror attacks, and general risk aversion in the country will act as dampeners at the beginning of 2009. The markets will have to overcome all these uncertainties before any signs of a rally become visible. Quite a few positives However, all is not gloom and doom at the end of the year; there are a few encouraging trends as well. Prices of food, oil, urea, etc have fallen. Inflation continues to decline towards comfortable levels, interest rates have softened, and good monsoons are expected to provide a fillip to India s rural and agricultural economy. All these factors are expected to provide the necessary fillip in 2009, making the overall outlook positive. Let us look at some interesting statistics that add to the optimistic outlook for India in the forthcoming years:
• Foreign direct investment (FDI) is averaging about USD 10 billion per quarter since January 2008. If this continues, it could pull the Indian economy into a higher orbit, like China s in the eighties.
• Drop in interest rates can help save about USD 2 billion in interest payments.
• The RBI has about USD 235 billion in forex reserves to ward off external threats and USD 60 billion of liquidity to pump into the economy in CY 2009.
• Though there was substantial correction in the equity markets, wealth destruction for retail investors was relatively low as retail ownership of equity was between 10-15 per cent of market cap. Indians large holding of gold helped mitigate the impact of the stock market decline.
• With the surplus economies of the western world suffering from near-zero returns in their countries, capital may search for better returns in markets like India.
• Indian corporates are significantly under-leveraged as compared to the past and also compared to global peers.
• India has a savings and investment rate of more than 30 per cent which is capable of supporting a 7 per cent plus GDP growth rate in the coming years. FDI will help accelerate growth, but even without it the base growth rate will continue. 2009 will be a turnaround year and will be decisive for those enagaged in long-term wealth creation. With valuations having corrected significantly and being cheap at around 10 times normalised earnings, investment opportunities abound for those with a three- to five-year horizon. With the comfort of the Indian growth rate being much higher than that of most global peers, capitalise on the present opportunity and benefit from the long-term growth outlook of India. u The author is deputy managing director, ICICI (ICICIBANK.NS : 471.25 +7.1
) Prudential AMC
