The certainty in uncertain times

Thu, 11 Mar Pre-Open

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Recovery or a move back into recession? Higher stock markets or revisiting 2009 lows? Inflation or deflation? These questions have invariably shown up at the end of every financial crisis and towards the beginning of a recovery process. And more often than not people have usually voted in favor of a recovery. However, the scenario this time around is slightly different. What we witnessed was not just another crisis but amongst the most devastating ones. Secondly, it struck at the heart of the US financial system, affecting consumer demand as well as its housing market, two segments of the economy that have always played key roles during the previous recovery processes. Little wonder then the opinion over whether the world is going to witness some sort of recovery or will it move back into recession seems to be sharply divided this time around. Infact, more people seem to be predicting a double dip recession than the ones predicting a recovery.

Thus, we were surprised when BlackRock, amongst the world's largest asset managers, struck an extremely bullish tone in its latest strategy note. The chief strategist of the firm seems rather convinced that March 2009 marked the primary low for this bear market. "Skepticism about the durability of a recovery is common following recessions, especially after a severe one, but recent history suggests that the world economy almost always adapts and returns to growth. Minus any significant negative external shocks, we believe this recovery should follow suit", he is believed to have said.

We believe that the recovery, if any, would be rather muted. Although the government has unleashed one of the biggest stimuli measures, the huge run up in stock markets and the presence of a significant debt overhang in the system would continue to act as dampeners to a strong economic recovery. Thus, there is a strong likelihood that the US grows at a lower rate than what it has historically been accustomed to for considerable years in the future.

However, in India, there seems to be no such debate. Infact, the debate has been over whether the country will go back to a higher growth path in the region of 9% or will it be stuck at 7% for some time to come. It should be noted that 9% growth for India was made possible on account of global economic buoyancy and thus, with the same absent this time around, there is a big question mark whether the Indian economy can retrace the higher growth trajectory. The country's policymakers though seem pretty sure that within a couple of years, India should be able to go back to the higher growth trajectory.

If there is one point where the debate is rather conspicuous by its absence, it is in the realm of the Indian stock markets. Everybody seems to be of the opinion that they are likely to emerge as one of the most attractive asset classes over the next couple of decades. And it is this reality that matters to the Indian investors more than anything else. Thus, rather than focusing on whether the US economy recovers or relapses into a recession, if an Indian investor channels his energy towards identifying fundamentally sound Indian companies that are run by honest and competent management and are available at reasonable valuations, he would have done his net worth a world of good over the long term.