The Hindu Business Line : Home country bias

It should be noted that in times of uncertainty investors seek the familiar and tend to divest from markets that seem unfamiliar or uncertain, irrespective of the investment merit, which partly explains the selling by FIIs and the subsequent dollar strength. This home country bias tends to operate over the short term. In the longer term, investors will seek out areas of maximum relative growth or appreciation and will invest in markets that provide it. We think this will b e the case for emerging markets like India, which will continue to deliver an internally driven trend rate of growth of 6.5 to 7 per cent, albeit with some hiccups (due to the global economic slowdown etc).

At current relatively low valuations with many stocks near reported trailing book value and Sensex at the lower end of the historical price to earnings range at about 10x estimated FY 09 earnings, it is necessary for investors to ignore timing issues and invest (in a phased manner if necessary) as they are likely to be rewarded for the risks taken. Going ahead the markets will keenly watch the collective actions of governments / monetary authorities in dealing with the global credit crises. Domestically, state elections, liquidity, inflation, corporate performance and reforms agenda will be of prime interest. — Tata Mutual

Lengthy period of low risk appetite

Over the past six months, we have witnessed a spectacular reduction in risk appetite among players in the financial sector (Freeze 1). The collapse of financial institutions has been integral to this story. Central banks have pumped in close to $2 trillion in an effort to rectify the situation. Though there has been improvement, there is a long way to go before trends closer to normal are restored on a sustainable basis.

If this is the picture at the level of financial players, the freeze is more pronounced when it comes to flow of money between them and users — companies and individuals (Freeze 2). That the US Federal Reserve has over the past month started to lend directly to needy players in the corporate sector gives us an idea of the freeze between banks and their customers.

Freeze 3 is likely to be at the level of individuals, as they seek to move away from years of spending in excess of income and towards more conservative deployment of their savings.

This will be accompanied by a decline in risk appetite of a kind that we have not witnessed since foreign institutional investors were allowed to invest in India and for multiple decades in the global context. The carnage that has been witnessed across asset classes in 2008 could also exaggerate the emerging risk aversion.

This could have implications at three levels:

• A reduction in existing exposures to riskier assets, the value decline notwithstanding;

• A shift in asset allocation patterns towards capital preservation as the primary objective and then income; and

• A lengthy period of low risk appetite for riskier asset classes such as emerging markets for investments, going forward. — Sundaram BNP Paribas Mutual

Equity markets price in negatives

Never before, the world faced the unprecedented scale of financial crisis in the same year after the economic slowdown, inflation and shortage of food and fuel. As far as developed world is concerned, the crisis is finally translating into the much-speculated recession as first signs of de-growth appear. Pressure on corporate profitability of Indian companies is visible on account of cyclical slowdown from high inflation, high interest costs and tight credit scenario. Also , the issues are not only internal as even though India is not an export-reliant economy, it is clear now that the impact of global recession is likely to be felt here too, albeit to a limited extent. Worries about earnings and global weak markets have seen the Indian equity market plunging to new lows. As long as risk aversion continues to drive the global market, FIIs may remain on the sell-side notwithstanding our fundamentals and valuations.

The positives for the Indian equity market lie in the fact that inflation seems to be easing off, RBI is likely to focus more on growth and infuse liquidity and interest rates are headed down. We think the equity market has priced in the negatives to a great extent. Having said that, markets are unlikely to stabilise on the back of global shocks. But as building blocks steadily get established to maintain economic growth, the equity market will start reflecting that. While in the short term it is difficult to predict where the markets will settle, from a valuation point of view, we are reaching from fair level into attractive level and it makes sense to be overweight equity. — ICICI Pru AMC

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