Chuck De 2008!
Dec 31, 2008

Author: PersonalFN Content & Research Team

In an exclusive article, Mr. Devendra Nevgi, CEO & CIO – Quantum Asset Management Company, (www.quantumamc.com) sums up the year that was.

The year 2008 will be best forgotten by many who are directly or indirectly connected to the financial markets in India and the world. It turned out to be the most tumultuous and eventful year in its history. The mismatch between irrational expectations - the hangover of the above-average returns in 2007, and a reality check from a disastrous 2008, came to the fore.

The year was more like a Bollywood (Hindi) flick with all the usual ingredients in it i.e. heroes, villains, action, different locations, romance and break ups, twist and turns and an unfortunate climax. And the audience were investors across the country and many beyond it.

Like a typical opening in a Hindi movie, the year went underway in a euphoric fashion with the economy continuing to grow at over 9% and the stock markets skyrocketing to levels of 21,000, fuelled by the “gas” of hot foreign money that crossed over onto the Indian shores. And as it happens in every bull cycle, the next level “forecasted” by experts, media and market participants at large, was 30,000, which lured in more and more retail investors into the stock markets, including those who did not understand the inherent risk. And typical of every bull run peak, a large public issue came up and proved to be disaster.

India’s ruling Government and Finance Minister were on a “song” and kept on promoting India’s “9%+ sustained economic growth story” without adequate reforms and investment in infrastructure. They turned out to be the “heroes romancing” the wrong kind of global investors, the short-term ones. The 2008 Budget then doled out goodies in the form of farm loan waivers and pay hikes in Sixth Pay Commission, like sweets are distributed at a Hindi movie wedding

“Action” came up from unexpected quarters; inflation raised its ugly head, and breached the level of 12.50% on a year-on-year basis. The economy expanded and commodity/food prices surged unprecedently, lead by crude oil which inched closer to $150 per barrel. The “action” in form a blame game shuttled from one “location” to another-from Mint Street in Mumbai to the Opposition in Parliament at Delhi. The ruling coalition government almost broke up with its coalition partners, but managed to stay afloat with “supporting actors”-the Samajwadi Party, the proverbial white knight. The burden of inflation management fell squarely on Reserve Bank of India, which in response raised the interest rates at regular intervals, in turn increasing the cost of credit to the industry.

The “twist” in the movie, which was not a part of the original script written by any policy maker in the world, was the second wave of the global financial tsunami-the sub-prime crisis. It shook the foundations of the world’s financial economy, on both sides of the Atlantic. This twist resulted in unprecedented outcomes, such as the “break ups” or insolvency of giant investment banks in the USA. Risk, innovation, and leverage went out of the window and credit was frozen. Return of Capital took precedence over Return on Capital.

The developed economies hit by the sub-prime crisis, were on the verge of an impending recession, liquidity crisis, defaults and deflation. Commodity prices including oil, responded to the recession led demand destruction and fell sharply, taking down inflation with it. There was an “item number” thrown in by the government in form of petrol price cuts. Gold rose sharply in midst of the uncertainty to USD 1,033.

The US and other national governments offered generous “bail-outs” to the sinking financial/banking sector, to the tune of USD 1 trillion - almost equal to the size of India’s GDP. Akin to the saviour of a leading lady from the clutches of the villains. After nationalising a few bankrupt banks, the US Federal Reserve became like the largest hedge fund in the world. As the only solution available, it started cutting rates aggressively to as low as zero. Barack Obama, the new president elect of USA has a Herculean task ahead of him- to turn around a limousine in a small alley.

The impact on India was no longer like “suspense” in a Hindi movie. The global twist ensured that the risk appetite crashed resulting in the FII money (USD 13 bn) flowing out of India. It eroded the stock markets and the INR values by almost 55% and 20% respectively. The global “villains” had struck the Indian financial system. As the massive outflow disrupted the banking system squeezing out the liquidity, interest rates rose sharply with inter-bank money rates shooting up to 21%, and hoarding money became the order of the day.

As the foreign liquidity taps went dry and with domestic liquidity being tight, Indian corporates struggled to borrow money or roll over past borrowings. The liquidity crisis and the FII outflows gripped the mutual funds in the country which saw a run on their assets. Investors quickly lost faith in banks and mutual funds, resulting in mass redemptions. Some of the mutual funds had to resort to borrowings from RBI to tide over the crisis. Tighter liquidity, fall in asset prices, lack of funding and global crisis put the brakes on the growth rate of Indian economy. Job losses and negative sentiment followed the slow down.

The “special appearances” in the movie were made by some of the shining stars in Indian sports history. The Indian cricket team did extremely well and India won its first Olympic gold medal for shooting.

The year unfortunately “climaxed” with the terrorist attacks on some of the Mumbai’s iconic landmarks - The Taj, The Oberoi and VT Station (CST).

We salute the martyrs who laid down there lives to defend the country - the real “heroes” of the movie. It’s unfortunate that in India, lives have to be lost to get tighter security, new rules and regulations in the system. We hope that the citizens of India in 2009 will effectively demand their rights by using the power of exercising their votes.

After the movie got over, the audiences echoed “Thank God, it’s over; we don’t wish to watch it again in 2009”

The winners of 2008 (as upto 29th Dec), as far as different asset classes go were, Government Bonds (10-Yr) & Gold (INR) which returned 20.90% and 29.70% respectively. And the losers were the stock markets (SENSEX TRI) and Crude oil (in USD), which shed 52.37% and 58.51% respectively. The INR also lost 22.87% of its value vis-à-vis the US Dollar. Real estate prices across the country in general, were lower by around 15%-30%.

To conclude, the winners in 2008 were - the “two G’s” i.e. Government Bonds and Gold.