Sensex fell by 1,624 points (5.94%) on August 24, 2015 to
reach 25,741 in what is now termed as Black Monday. That was unprecedented
given the normal movement of say 100 to 200 points in a day. Though Sensex
subsequently recovered to 26,392, the unease continues amongst many of us. So,
what has caused this sudden panic and how should we (NRI’s) prepare ourselves.
The following questions may be appropriate to answer.
1.
What is this crisis?
The Chinese stock market has been on a roll since November,
2015. The Shanghai index increased from 1,924 to 4,098, representing a gain of
113%, within a matter of 8 months. This was due to easy money available through
banks which lured retail investors into the market. Everyone from fishermen to
laundry cleaners were busy making money in the stock market. However, as we all
know, such a sudden increase in the market through mindless buying can only go
on for some time and not for ever. Companies have become extremely over valued
and smart investors started exiting the market. This created a panic among
retail investors and they were rushing out of the market creating further
slide. The government tried to intervene and prop up the market but it failed.
The Chinese stock market fell 35% within a span of 2.5 months. On August 24
(Black Monday), the Chinese market fell by a whopping 8.96% and immediately on
the next day all global markets fell including India.
But the question is why a Chinese stock market collapse
should cause such a global panic. This is because there is a larger worry among
global players than the Chinese stock market. That of Chinese economy.
Since 2008 when the last financial crisis hit the world,
there have been fears about slowing global growth. While USA has been trying to
recover, Europe is in shambles with only Asia left to support. China is not
only a significant part of Asia but also the world. It contributes heavily to
the global growth in terms of trade (exports and imports). Before 2008, Chinese
economy was growing at the rate of over 10%. Today, the growth has slowed down
to 6-7% with fears that it will be even lower. When economic growth is low,
countries will find it difficult to create employment which will lead to social
unrest. It will also find it difficult to attract foreign money which will
hamper investments. Business confidence will fall and businessmen will not make
any new investments. Hence, it is important for any country to enable economic
growth.
China was predominantly depending on exports for its growth.
After 2008 financial crisis, the overall growth of trade (exports and imports)
reduced thereby reducing China’s growth. Hence, this panic all over the world.
In short, today when China sneezes, the world catches a cold!
2.
How is India affected by
this?
The impact on India is more symbolic than real. Many
emerging markets (Indonesia, Brazil, and Russia) are highly dependent on China
as commodity exporters. China is one of the largest consumers of many
commodities to run its global factory. When China signaled a slowdown in
growth, many emerging markets (dependent on china) started feeling the heat and
this heat has spread to all other markets including India. Even countries like
Germany and Australia (not part of emerging markets but part of developed
markets) fell as they have strong links and dependence on China.
India’s economic link with China is very limited. India is
not a commodity exporter (like Russia). The only risk India faces is that it
can be swamped by cheap imports from China that can threaten local companies.
With Yuan devaluation, this threat is real.
The main impact on India will be through its currency. As a fallout
to Chinese crisis, many emerging market currencies hit their lows during 2015. (Brazilian
Real -26%, Turkish Lira -20%, South African Rand -13%). India is among the least
affected currency where the INR fell only by 4% so far in 2015 against the USD.
If the Chinese crisis deepens, it will further impact emerging market
currencies and we can expect India also to feel the heat in terms of further depreciation
of INR.
On the positive side, continuous strain on China can open
doors for India as one of the fastest growing economies in the world with least
linkages to external world. With America not showing any great signs of
economic rebounding and Europe in a limbo state, only very few destinations for
investments in the world are left and India can definitely count as one.
3.
What should NRI’s do?
In this Chinese crisis, NRI’s experienced both good news and
bad news. The good news came in the form of lower currency. For eg., the Kuwait
Dinar spiked to Rs.224/KD and seem to be hovering around Rs.217/KD now. NRI’s
that remit money regularly back to India will certainly be smiling and would
hope for even more depreciation of the Rupee!
On the other hand, the steep fall in Sensex/Nifty caused
their stock portfolio values to plummet and they were left worried on what the
future course of Sensex could be.
For NRI’s, the following observations can be helpful:
a.
The current Chinese crisis is
not just a China issue but a global issue that can affect all markets including
India.
b.
If China slows down (as is
feared), it will result in global slowdown, and may negatively affect stock
markets and currencies.
c.
However, India’s
fundamental strength (Strong economic growth, ample forex reserves, less
linkages to outside world, new government that is reform minded, and a prudent
RBI) will make it as one of the safest destinations for investments for foreign
investors
d.
The long-term story of
India remains solid
e.
NRI’s should benefit from
the depreciating rupee by regularly remitting money back home and invest in
various avenues.
f.
Diversify your investments
by spreading your savings among risk-free fixed deposits/bond funds, and volatile
equity funds with some exposure to gold (as insurance). The RBI governor is
likely to decrease interest rates in response to lower inflation and hence
presently FD rates are looking attractive. Also, when interest rates come down,
bond funds will do well. In equities, for those that do not have time to follow
markets on a daily basis, invest regularly in well performing diversified
mutual funds. If you have the time to select sectors/stocks, favor healthcare,
auto, FMCG, infotech and banks. Avoid Realty, metal, power, PSU’s and small
cap.
One final note of caution to NRI’s in the Gulf. GCC has more
linkage to West than to East. Oil prices have fallen from a high of $140/barrel
some years before to $40/b now and are expected to remain at this level for
some time. Hence, government spending on projects will likely come down which
will put pressure on many companies. Hence, restructuring, cost cutting and job
retrenchment can be expected. Job security for NRI’s can come only through
increased training and further qualifying. Job security should not be based on
the hope that oil price will rebound.
