Skip to main content

Strong, Resilient and Shining Star in a Gloomy World

- Vikram Kotak

Dear Investor,

If you would have asked me or any other market expert a year back if Nasdaq, Hang Seng, or Kospi were to go down by 25-30% in the next 12 months, how much would Indian indices fall? I could have answered that Nifty could have fallen by say 10% at least, if not more.

But the results are surprising and show a great amount of decoupling to the Rest of the World. Indian markets closed flat over last one year during this crisis period. (Both our Funds are in a positive return zone). What an outstanding result!!! I will give credit for our market outperformance to three factors, first and foremost to Indian retail investors for keeping the faith and incrementally focusing on allocating more towards equities. Second credit to the massive population and creating internal demand (17% of the world lives here) and last but not the least apt response by the government whether Covid or post-Covid and believing in and implementing the “Make in India” dream. We will reap the benefit of seeds sowed in the last few years. While I am writing this Nifty has crossed the 18,000 mark after topping out a year back. One more piece of data to harp upon is that in the last 18 years ‘MSCI India' is up by 9X, vs ‘MSCI EM' which is up by only 2x. This is India's time and there are no two ways about it. We have enough room to grow in a subdued world. Over the next 10-15 years we are going to have a boom ride with some short bumps. We all know what can go right but let's look at a few things which bothers me and can hurt the short-term mood of markets and can delay recovery by a few quarters.


  1. Inflation:

    Inflation is currently out of control and remains a challenge for most central bankers in the world. Supply-side shocks backed by geopolitical challenges, deglobalization, and the Coronavirus pandemic are drivers of inflation which can lead to dangerous stagflation, soaring food prices, and wage rates which can hurt demand and inflation may remain elevated. Underinvestment in capacity, big money printing, and free pay cheques have led to higher prices which is more structural than cyclical, and over and above that the governments made life difficult for central bankers by running expansionary fiscal mandates. The power to control the creation of money has moved from central banks to governments. By issuing state guarantees on bank credit in the Covid era, governments took the leading role to control the creation of money. Let's accept the new norm for the developed world, inflation is 4-6% minimum from 2-3% earlier.

    So, it may hurt the world including India. It can create supply-side issues and bottlenecks which can lead to elevated inflation for a long time; and believe me, I am assuming oil will not go up from here. Oil now will remain a catalyst in forming views on slowdown and inflation. More conflicts can be expected to take place for geopolitical dominance and control over resources. A situation like Russia and Ukraine can re-emerge in some other countries too.

    It's a new world with fewer co-operations and more shortages. India will need to continue to focus on the shortages and supply side issues.


  2. Risk of currency movements:

    Since we are so integrated into the world in terms of trade and flow it may be difficult to really keep ourselves decoupled from the world in terms of currency protection. We have seen many of the currencies this year that have come under severe pressure. The Indian Rupee has done extremely well vs emerging market peers and some developed world currencies over the last 12 months, Euro/US Dollar is 17% down, the Yen/US Dollar also is 30% down and even the Pound is 19% lower against the US Dollar which is unheard of. The best currency against the US Dollar in last one year is Brazilian Real. It is down by only 5% vs the US Dollar. The Indian Rupee has also managed well but is still down over 12%.

    I believe the interest rate rise in the USA is not only about inflation alone but also to keep the US Dollar strong, and the USA has played a master stroke by taking lead as always on rate hikes making the Yen, Euro and many more currencies vulnerable. The Yen weakened past 150 signalling a crisis brewing in Japan as the Japanese central bank continues to keep its interest rate policy at a lower level (possibly one of the most independent central banks in the world). Japan has double trouble with one, depreciating Yen and the second, has a very high external Debt-to-GDP ratio which can hurt Japan badly. In such a rogue world of currency, India needs to work hard on keeping its currency stable by import substitution and increasing exports to the developed world, this needs to be quick and sustainable. The biggest opportunity as well as the risk to currency in my opinion is FPI/FDI money flow. Sustainable policy and earnings can bring more money to India particularly when China is looking un-investable.


  3. Reducing inequality of income:

    In medium to long term India has one more challenge to address, reducing inequality of income, that can not only spur consumption but lead to higher earnings and higher GDP growth and can also make India's growth and rating more sustainable in the long term. I always give credit to the Americans for their innovations in most fields but now they deserve credit in areas like reducing last-mile poverty by paying cheques and managing the currency extremely well when fear was there that the world would cut the dollar trades. I am sure Indians are very smart to catch up with such case studies and implement them in a more prudent way in our approach to dealing with these new unprecedented world changes.


Having said this, India currently is in a full-blown mood and festival mania. Whether it's Rishi Sunak of Indian origin taking over as the UK leader or India-Pakistan cricket thriller or stable Indian leadership vs what's happening in China, the UK, Italy and might see some winds of change in the USA in the forthcoming midterm election. Can't take away the full festival mood of India where we are enjoying the best season in the last 4 years. Spending on redoing homes, new clothing, new consumer durables, spending on jewellery as passionate gifting to the loved ones. India has seen massive numbers in fuel sales, iPhone sales, e-shopping, auto sales, and needless to say traveling. Places like Andaman, Kerala, and Goa have been rocking this holiday season. There is no doubt that India's time has come but we need to get better at inflation management.

By the time I finish this note, Dow Jones has given the best monthly returns in October since 1976 and is up by 14% this month.

Hope You had a Great Deepawali, here's Wishing you a Fabulous Year Ahead !!!