Review, recap - and invest

Jul 11, 2022
Author: Ajit Dayal

It is difficult to remain a committed investor these days with the headlines of a sharp decline in the Indian Rupee and surging inflation. Furthermore, fears of political stability from the reckless invasion of Ukraine by Putin, the impending bankruptcy of Sri Lanka and Pakistan, and the likelihood that China may soon devour Taiwan adds to uncertainty - and markets hate uncertainty. All this on top of the fact that IPOs of many "new-age" individual stocks have lost over 50% from their peak prices while the NAVs of the popular "hot" mutual funds have collapsed 20% from their peaks. If foreign investors are on a relentless selling binge, some feel it is foolish to consider investing in equity mutual funds. Well, despite all the gloom and doom, there is enough history to support that this may just be a suitable time to review your portfolio, recap your objectives - and invest.

We have been here before.

Despite the turbulence of the recent months is the Indian Rupee really in a crisis mode? Is India about to go into a freefall? Over the past 30 years, India has done spectacularly well. From the Manmohan Singh reforms of July 1991 till the days before the election of the first Modi government in May 2014, the BSE-30 Index gained +14.5% per annum while the MSCI World Stock Market Index gained +12.7% (in Indian Rupees). This was in a period when the Indian Rupee lost -5.2% each year against the US Dollar over that 8,342-day period. Looking at the date from just days before Prime Minister Modi took office in May 2014 till July 1st, 2022, the BSE-30 Index gained 12.6% per annum while the MSCI World Stock Market Index gained +10.8% - maintaining India's outperformance in stock market returns. Again, this was even though the INR has lost -3.7% each year against the USD over this 2,984-day period.

During the past 31 years, the price of crude oil has surged seven times from USD 20 a barrel in 1991 to USD 140 in 2008; then it collapsed 65% to USD 50 in 2009 before rallying 100% to cross USD 100 by 2011. Shortly thereafter, since 2014 oil prices trended downwards and collapsed to below USD 30 after the pandemic broke in March 2020. The global economic recovery took oil to USD 60 per barrel and then, recently, the leap to USD 100 when the G7 and EU imposed sanctions on rogue Russia. Over the past 42 years, India has seen its GDP grow by an average of 6.2% per annum (after adjusting for inflation) - a performance bettered only by China - even though we have seen two Prime Ministers assassinated, governments change, and multiple natural disasters.

The headlines announcing the continued exit of Foreign Portfolio Investors (FPI) shout out selective numbers. Yes, there is a tectonic shift occurring in the field of investments as the risk-free rate of the safest asset in the world (the US Government 10-year bond) has surged from 0.5% during the early days of the pandemic to 1.5% by the end of 2021 to 3% today. When a risk-free investment suddenly offers you two times what it did a few months ago, any other investment opportunity must adjust its expected rate of return sharply upward. And, in a world where there is uncertainty accentuated by Putin's invasion of an independent nation, there is a fear that any potential of higher rates of return will not convert to reality. When people are influenced by all the shocking news around them, they do not have the patience to seek out the good news. Hence, the FPIs who sold USD 19 billion worth of shares in the first four months of the pandemic February to May 2020 (only to bring back USD 40 billion in the next 10 months when they could start seeing visibility on expected, future economic activity and profits) are recalibrating their 'India exposure' given the existing uncertainty. That is natural and does not require any panic reaction from us.

Keep grinding, keep focused.

The concerns over the selling by foreign investors are overblown and the RBI or the Ministry of Finance should avoid any sort of knee jerk. Share prices were high, they are now correcting that is all. Fundamentally, India is in a far better position than it has ever been during any previous international crises. The Lehman bankruptcy exposed India's weak link and questionable policy of allowing P-Notes the use of which have since been curtailed. The 2013 crises in the INR when the Fed indicated they would raise interest rates, was controlled within 6 months when the RBI took steps to calm nervous investors. Yes, there will be periods of sales and exits because there will always be the 'tactical-allocator' in the FPI category consisting of hedge funds, university endowments or foundations who - driven by near-term analysis of risk and reward - will wade in and out of India. The explosive growth of ETFs has added another layer of foreign retail investors who can enter and exit India on a whim.

While there are many who will run at the first sign of smoke, the overall strength and ability of FPIs have been enhanced with the larger ownership of Indian stocks by Sovereign Wealth Funds and pension funds as compared to the era of the Lehman crisis. Furthermore, when the dust settles, FPIs will scan the horizon to see where they can deploy their trillions of dollars of savings and capital. Even with a 4% rate of interest on the US 10-year risk-free government bonds, the FPIs - particularly the pension funds - need to earn over 7% per annum in USD to meet their liabilities to their pensioners. For over 31 years, point to point, India has delivered superior returns for those who were smart enough to invest in the Indian stock markets. My optimism is driven by the reality that multinationals need to find new markets and diversify their supply bases away from China who may be inspired by rogue Russia to close out the Taiwan issue finally and is preparing itself to be further alienated from global commerce. This focus by the Foreign Direct Investors, the multinationals, will mean new investments of factories in India and aid the process of job creation and a spurt in economic growth. Economic growth translates into growing profits, and this translates into higher share prices of listed companies - which means a higher potential for returns for the FPIs and local investors in India's vibrant stock markets.

The headlines that should worry us.

This is not the first time that India has had to withstand global shocks: whether its oil prices or higher interest rates in the USA. The decline in the INR or higher oil prices need not, by itself, have any bearing on the outlook for India's economy or India's stock markets. In fact, the sensible, long-term foreign investors recognize that a country like India - which is deficient in capital and needs external flows to fund its long-term growth potential - will have a weak currency for decades. Sure, the decline of the INR against the US Dollar over the past 31 years took away 4.8% from the spectacular 14% per annum INR returns that Indian stock markets delivered - but the long-term returns from investing in India at 9.2% per annum is still very impressive.

The risk to India is not the sale of shares by FPI or high oil prices - those are manageable. The headlines that one should worry about are:

  1. India will issue a sovereign bond: this means that the Government of India has succumbed to the pressure of issuing a bond owned by foreign investors, priced on the exchanges of New York, London, and Singapore and over which the government and RBI have no control. In a crisis such as 9/11 or Lehman - which have nothing to do with India - any energetic and young 22-year-old trader sitting on the desks of the large banks may hit buttons to sell Indian bonds, resulting in an increase in interest rates in India, and creating distortion and panic in the real economy of India. The common factor between the Latin America countries - and even Sri Lanka - is not only poor economic policies but the fact that they all issued Sovereign Bonds and lost control over the most important variable in any economy, the interest rate. The countries that issue sovereign bonds surrender the ability to control the risk-free rate of their economies - the very foundation of any economic policy - to the 22-year-old bachha looking to maximise his return for that day! Periodically, these news items about India issuing Sovereign Bonds pop up as fee-hungry investment banks moot this idea to the Ministry of Finance and RBI. So far, the MoF and RBI have resisted.

  2. The social fabric continues to be torn apart - and get noticed by the G7. China has allegedly gotten away with ethnic cleansing and the murder of Uyghurs. Its contempt for human rights is well recorded. India, a vibrant democracy, has been in a state of strife on caste and religious grounds for decades. However, the recent violence based on the desire to correct centuries of wrong comes with the risk of the wrong kind of headlines that may start attracting the attention of the western world. Though the G7 is preoccupied with Russia and China, India cannot risk actions that could result us in being outlawed by the west: we still need the financial and technological capital to grow the Indian economy to its full potential. China has gamed the system well and no longer needs the west while Putin's game plan is a return to Soviet supremacy and economic bankruptcy. The recent controversy over statements about the Prophet is proof of India's vulnerability. The burning of churches, if that were to happen, will catch the attention of the G-7. Their reactions could put us back in the bullock cart age - we will not need to worry about the price of oil then!

Despite the worry and the flood of near-term negative news, the MoF and the RBI are on the right track and should do nothing out of the ordinary. The leadership skills of those steering our economy have come a long way since the fiasco of demonetization in November 2016 and - like the recent records being set by India's cricket players - may they bat on fearlessly.

My simple suggestions on how you may wish to invest and build a portfolio of mutual funds for your many long-term goals - and navigate you through challenging times - require you to:

  • Spend 3 minutes on the Quantum Mutual Fund website ( which will give you access to a simple and powerful tool to build your own solution, or

  • Click here for PersonalFN to help you check on the health of your mutual fund portfolio

(A version of this article first appeared in The Wire)

Ajit Dayal is the Founder of the Quantum Group which includes Quantum Mutual Fund and PersonalFn. Ajit has over 35 years of research and investment experience. An avid writer and speaker, Ajit has been profiled and interviewed by many international and local newspapers, magazines, TV channels and radio shows and is never shy of speaking The Honest Truth. Sign up here to get The Honest Truth delivered every week into your mailbox. It will change the way you think about your investments.

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