Last few weeks saw the domestic stock market fall precipitously. It would seem that the world is collapsing around us, or a major calamity has befallen on the Indian economy and capital markets.
Pink papers and business news channels are full of gloom and doom. The most oft-repeated question among investors is, “Is it worse than 2008?”
Before answering the question, let us see what the problems are. The economy is visibly slowing down. Large sectors like automobiles are in dire straits. June passenger vehicle, two-wheelers and tractor sales were down 23.6 per cent, 11.7 per cent and 13.6 per cent YoY, respectively. Rail freight traffic is down 2 per cent YoY. Core sector growth has weak, down to a 50-month low of 0.2 per cent in June.
Corporate earnings and commentaries have been dismal. Powerful voices like that of Rahul Bajaj, AM Naik have raised concerns about the state of the economy. Bharti AirtelNSE -0.27 % has reported a staggering quarterly loss for the first time in 14 years. FMCG sales are stuttering.
Monsoon rains were poor for much of the season, but have improved in the past few weeks. Real estate and all its dependent industries are struggling. Household savings are going down consistently for many years now.
None of these augurs well for the health of the economy.
And to top it all, there has been a continuous flow of policy announcements, which are perceived to be anti-industry.
First, there was this completely needless tax on FPIs and tinkering with tax rates for the super-rich, in my view. The socialistic mindset that the rich should pay more as a percentage of their income is something that troubles me. On an absolute scale, a person earning very high also contributes very high amounts in taxes. Now, adding to that sends out a wrong signal of penalising prosperity. In a globalised world and age, capital and residency are not very difficult to migrate.
After this much gloom and doom talk, let me try to answer the question I started this with. Yes, to me it looks like it is worse than 2008. In 2008, we knew that the problem was global, and but our domestic economy was doing well, demand was strong and industrial activity on the ground had not dipped meaningfully.
There was a visible realisation of the challenges the world economy was facing among policy makers across the world. There were various policy announcements to address those challenges, like synchronised quantitative easing, TARP funds in the US, etc.
The biggest challenge I see today is that there seems to be no acknowledgement of the issues the economy is facing. Instead, there seems to be an effort to put up a brave face, saying we are better off than other countries in terms of GDP growth. Since, there is no acknowledgement of any problem, obviously, no steps are being taken. More than anything else, this is what is making the market nervous.
I don’t think I have ever seen such pessimism in Indian markets in last 20 years that I have been investing.
So, what do investors do with the stocks getting hammered every day? I am getting calls and emails from fellow investors, fund managers and members on what to do in such a scenario. To me, if you have invested in good companies, which will be able to continue to be in business and do fine in a three-year period, then in general the best option is to do nothing.
I say this because I don’t know how the market will act in the near term. I don’t know if the policymakers will wake up and take some decisive actions to kickstart the economy.
There are positive actions that can have some impact like recapitalisation of PSU banks, RBI’s rate reduction, global rate reduction, a rise in liquidity, fall in crude prices and steady fiscal deficit, among others. So, if you act out of fear and sell your holdings now, it is possible that you will not be able to get back in when the time comes.
The only exception to this is if you have the need for cash in next 1-2 years. If you have long-term capital, then remaining invested and bearing the pain could be a prudent strategy, because the turnaround is going be sharp and sudden.
I am hopeful.