Financial markets are in a turmoil’ is perhaps an understatement of the decade. Despite not being the epicentre of the pandemic gripping the world, India’s markets are witnessing volatility rarely seen in history. The India VIX index is at a record high level. It is the fear index that takes into account sharp price fluctuations in share prices and indices every day. The higher value denotes the fear among market participants.
A lot of conversations on social media, television and other media hovered around the ‘why’ and ‘what’ of the global financial markets meltdown. On one hand, caution notes are emanating out of every analyst report.
There are those talking of courage, capital and conviction to come into play.If everyone is a seller in the market, asset prices will see no respite. People cannot sell everything and convert it into cash. While shares have tumbled, currencies are weaker. Gold prices fell sharply last Friday. There is a fear of weak demand. Global interest rates are yet again hurtling to a record low. There is money available in global markets practically at zero interest rates. Interest rates and stock markets have an inverse relationship. Hence, that cannot sustain.
Who will buy
Be fearful when others are greedy and be greedy when others are fearful. That is a quote by Warren Buffett. In the event of the global financial crisis in 2008, he showed that characteristic by buying into flagship companies in America.
The Nifty 50 index has offered more than 30 per cent return in the year after a 30 per cent correction. That has happened in five of the last six instances in last two decades, according to an analysis by ICICI Securities, a Mumbai-based securities firm. The “courage, capital and conviction” theory is not for the faint- hearted.
To be a buyer in this market, you need to either be an entity like Life Insurance Corporation of India or an individual investor with a fortune in billions of dollars. LIC of India generates policy business income each month that needs to be deployed.
Under the LIC Act of 1956, the government guarantees every life insurance policy. It has resources to be a buyer in the market. It currently controls equity assets nearly equal to those held by all mutual funds in the country. There is a hope that LIC would use the cash pile or restructure equity portfolio quickly to buy when blue-chip companies have shed 25-30 per cent of the value.
Mutual funds are flush with over Rs 10,000 crore equity fund flow in February 2020, the highest in fiscal 2019-20. They cannot remain in cash for long and would have to deploy the money in shares. High net worth individuals, who do not have debt, may also support the market when share prices fall sharply.
The India advantage
After the sharp correction, a lot of things are going for India. The fall in international oil prices cuts the government subsidy bill on kerosene and cooking gas dramatically. The government has already hiked the excise duty on petrol and diesel.
It is out to generate quick additional revenue in March 2020 to compensate for the potential shortfall in indirect taxes. There is no significant pressure on the Rupee as India’s current account deficit or the money India owes the world, has narrowed to 0.2 per cent in the third quarter of 2019-20, according to the latest RBI data.
The second important point is the interest rate. For non-resident Indians, money in the US and Europe is available free at near-zero interest rates. India’s rates are much higher, and there is a risk-free return higher than anywhere else. Even if India cuts rates, yields in India would be higher. It is a pure arbitrage since there is no significant pressure on the rupee value.
The index of industrial production increased by 2 per cent in January 2020 over the year-ago period. It was way above expectation and higher than the contraction witnessed in December 2019. The coronavirus situation is likely to pose a risk to the industrial output, according to many analysts.
Exports are likely to be stalled due to a dramatic slowdown in the world economic growth and supply chain disruptions. However, here is a prediction that one can make after the storm is over and assuming that it is over sooner than later. India would be looked at by foreign firms as an alternative or a support location for global production and supply chain. The onus is on the Indian government to do the groundwork and simplify rules to ease that move. (The writer is editor-in-chief at www.moneyminute.in)