It requires skill to ride the Indian bull

Dubai: If anyone gets to publish a book on The Art of Bull Riding, it should surely come in three parts.

Part One, for those who want quick returns. Here the risk, of course, is massive. Serious market gyrations are prone to knock the investor off. Part Two, should be for the long term jockey. They would be strapped down during short term bouts of volatility in expectation that their exit point will be significantly higher than the starting point. This would make Part Three all about the "entry point" when do you get on the bull?

For insight, I noted the comments of Craig Farley, Ashburton's India specialist. Recently returned from India, Farley's first insight was the contrast in mood between December's investor and the shell-shocked investor of March 2008, "With the market firmly entrenched in a five year monster rally, participants had become accustomed to upside surprises at both the economic and corporate level. During one brief period, new records were being set on a daily basis as the index soared to dizzying heights on the back of huge liquidity flows and abundant risk appetite. Few could have predicted that events in America back in August 2007, the unearthing of the sub-prime issue, would have such a dramatic effect on India".

The Indian bull had been seemingly taking its own largely uncorrelated and definitely confident journey upwards. Riders were clear in their mind that one billion people increasing in wealth would build a valuable economy someday. Odd then, when happenings in the US and its globalised interests would unsettle the Indian bull.

Initial reaction

More accurately, according to Farley, sub-prime et al, "was not directly linked to the sell-off that would follow in India several months later but it would prove to be the catalyst. The initial reaction of many experts and commentators was that the sub-prime issue was contained, yet this would prove to be woefully inaccurate."

For some time, global and sub-prime concerns didn't affect India, as Farley states: "As global markets rapidly began discounting the worst (i.e. a US recession), India, now the eighth largest stock market in the world, shone as a beacon of stability. As the most insulated economy in Asia (on a net exports to GDP basis), and buoyed by strong economic growth and robust consumer spending, companies were continuing to deliver exceptional profits creating a perfect environment for equities. In addition, positive announcements from the authorities addressing draconian investment laws and improving market transparency led to a surge in foreign capital from investors desperate to gain market access. India was on fire."

So, how did India get infested with global woes? Back to Farley: "Fast forward to the present and the market is amongst the worst performers in Asia year-to date, having fallen over 20 per cent from its January 8 high. The East versus West decoupling argument has proved to be nothing more than a fallacy, with the last few months demonstrating that markets are more inextricably linked than ever before, thanks to globalisation. That India has suffered such a severe correction suggests she is still perceived as a leveraged player on global growth. This leads us to two simple questions; what has caused the situation to reverse and, more importantly, has anything fundamentally changed?"

Important questions, back to Farley for the answer: "What was clear from the increase in foreign capital inflows last year is that the India growth story was becoming too important to ignore as a destination for global portfolio capital. The sheer scale of demand was overwhelming and stocks were ramped to artificially high prices. Hot money began pouring in (particularly through futures and options route), exacerbating the impact, whilst analysts were revising stock target prices higher with little or no fundamental justification. The market quickly became priced for perfection. A correction was inevitable".

Over-pricing

The classic symptom of a volatile bull: over-pricing. Not easy to ride an over-priced animal! According to Farley: "there were several other factors at play that aggravated the impact. Lets not forget that India was the top performing regional market in 2007, providing investors and those facing redemptions with the perfect opportunity to book profits whilst repositioning themselves ahead of a new year. There was also the small matter of the largest initial public offering (IPO) in India's history as Reliance Power sucked over $25 billion of equity from the market as investors scrambled to partake. And with the crucial government budget due at the end of February, there was a clear reluctance on the part of investors to engage in any aggressive bets."

So where are we now on Indian fundamentals? On this Farley is more positive: "India's economic backdrop remains solid with over 8 per cent growth likely in 2008, and the finance minister publicly targeting something similar until 2010. Inflation remains firmly inside the RBI's comfort zone whilst the monetary authorities are in the enviable situation of being able to cut rates, should circumstances dictate. Most importantly, the market is now offering reasonable value, whilst the potential exists for positive corporate earning's surprises."

So, is it, or isn't it, a good time to get on the bull? Back to Farley: "In summary, recent activity has reminded investors that markets do not go up in a straight line. A market commentator once said 'only baboons pick bottoms' and whilst we would not totally rule out downside risk in the short-term, current levels provide a very attractive entry point to the most exciting investment story globally."

The writer is chairman of Mondial Financial Partners.

The East versus West decoupling argument has proved to be nothing more than a fallacy, with the last few months demonstrating that markets are in fact more inextricably linked than ever before, thanks to globalisation."

Craig Farley, Ashburton's India specialist