‘Low equity prices can lead to higher wealth when market recovers'

The popular adage – buy when others are selling and sell when others are buying – is never more relevant than now with global markets on turmoil and doubts about US economic recovery and more European nations slipping into the red pushing markets into a volatile phase.

While only a die-hard optimist would believe that the Indian stock markets are decoupled from global uncertainties, stock market pundits seem to believe that the alarm bells being rung about Indian markets plunging into an abyss seem to be unwarranted.

Mr Prashant Jain, Executive Director & Chief Investment Officer, HDFC Asset Management Company Ltd, explaining his optimism on the mutual fund's Web site, says that Indians could take heart from positive headwinds like lower PE ratios because of falling stock prices, declining crude oil prices that would lower inflation and the beaten down stock prices that offered a great opportunity to pick up high value scrips at attractive rates.

He said that “good returns materialise over time on investments made at cheap valuations (meaning low PEs) and PEs are more likely to be low when the news flow is adverse”.

He said while the market was flooded with reports about US downgrade, slow growth in the West, rising interest rates and persistently high inflation in India, what was missed was the falling crude prices, the “positive impact of which is more than the negative impact of the rest” since oil was the largest commodity to the imported and every decline of $20 a barrel saved $18 billion a year, equivalent to 1.1 per cent of GDP for the country, bringing a bouquet of benefits such as lower fiscal deficit, lower inflation, and lower interest rates over time.

Slow down in West

Mr Jain, referring to the turmoil in Europe, said India's share of exports was 1.6 per cent of the world trade and with ‘improving competitiveness of Indian exports', the slowdown in the West would not affect India, as the country was less export dependent. There was also a difference from the 2009 crisis after the Lehman bankruptcy as it was unanticipated due to a “paralysis in bank lending and a consequent sharp inventory de-stocking”, which was not the situation today.

He felt that except for “unforeseen developments of a large magnitude”, the country should “grow faster in the next 10 (years) than in the last 10 years and could emerge as the fastest growing economy in the world”.

Lower inflation would reverse the trend of rising interest rates and Indian exports were becoming more competitive against China because of the depreciation in rupee value vs the yuan and the higher wage inflation in China, leading to accelerated growth.

Mr Jain said the longer the markets stayed low, the more was the money that can be invested in equities, leading to higher wealth whenever markets recover.

‘Companies better prepared'

Franklin Templeton AMC was also of the view that the global economy and companies were better prepared now to tackle market volatility and “there is no expectation of a 2008 type of drag on growth”. It did not expect any direct impact of the global crisis for India “except in the form of increased risk averseness impacting FII flows”.

Franklin Templeton said that “investors can look at the current volatility and weakness as a long-term buying opportunity”. Indian economy was held in good stead by a well-balanced growth model alongside the lack of excesses, high savings rate and large young population and “the government needs to put in place the requisite reforms to achieve long-term potential.”

The fund asked investors not to panic but focus on long-term goals, and as quality scrips were available at attractive valuations due to “indiscriminate selling”, it made sense for “long-term investors to increase their exposure to the growth potential of equities”.

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