In your interest.
Online Personal Finance Magazine
No beating about the bush.
Ray Dalio and Jeff Gundlach—two of the most prominent hedge fund managers believe that the Indian economy and the stock market is on the precipice of a big fall
Two of the world's biggest and most successful hedge fund managers are very pessimistic on India and have cautioned investors that investing in India will be fraught with big risks. Jeff Gundlach, who manages a hedge fund DoubleLine Capital LP, believes that India’s currency is weak because of reliance on foreign capital and that he would rather not own Indian stocks. He also said that India’s stock markets look “very scary” because of high oil prices and rupee depreciation. He is short India amongst emerging market countries. Ray Dalio, another hedge fund who manages $150 billion in assets at Bridgewater Associates was quoted as saying that India should “prepare for the worst” since it has been one too vulnerable to foreign capital inflows which may now avoid emerging markets.
In his webcast titled “What If”, Gundlach said, “emerging markets currencies with the largest capital dependence on foreign capital flows to fund currency account gaps have been particularly hit.” As you can see one of his slides from his presentation, India’s short-term debt coverage ratio doesn’t look good. In fact, it has cratered below the average threshold limit. This essentially means that India has fewer reserves to meet short term debt obligations.
Dalio was quoted as saying, “We are going to have an emerging market crisis” particularly due to adverse balance of payments. He also said that emerging markets like India is not an attractive place to invest because of the unfavourable pricing and flows. He said that emerging markets have to confront the balance of payments problems and had little doubt about the tough times ahead for emerging markets. He pointed out that India’s stock market had been benefiting a lot, thanks to the quantitative easing, and unusual monetary policies adopted by the United States Federal Reserve and other developed countries like Japan. More dollars came to India as a result of this, boosting India’s stock markets. However, lack of economic reforms and political will, particularly in the infrastructure sector, meant that India solely depended on foreign capital to plug both current and fiscal gaps. This is a recipe for disaster. When foreign capital dries or is withdrawn (much of it due to a better economic recovery and US Federal Reserve decision to ‘taper’ monetary easing), India is left with little and, as a consequence, the rupee got clobbered.
The Economist believes that India has been complacent and failed to take advantage of incoming foreign capital to stimulate economic reforms. It said in a piece on 24 August, “India’s troubles are caused partly by global forces beyond its control. But they are also the consequence of a deadly complacency that has led the country to miss a great opportunity. To prevent a slide into crisis, the government needs first to stop making things worse”.
One would expect that a weaker rupee would help plug trade gaps as exports become more profitable. But it is not so because of economic mismanagement which has resulted in poor productivity and higher inflation which has eroded domestic competitiveness and resulted in higher input costs for some industries. As a result, the manufacturing sector which stands to benefit from a dearer rupee is not able to export competitively, although the information technology sector is expected to benefit. “India’s structural problems also make it harder for local exporters to cash in on the weak rupee,” says Bruce Einhorn and Kartik Goyal of Businessweek.
Soberlook.com, a financial blog, believes that India is headed for a full blown stagflation. It said, “At this stage, rising prices, sharply higher interest rates, and a loss of confidence within the business community will bring the economic growth to a standstill, potentially pushing the country into a full blown stagflation.”
India now pin their hopes on Raghuram Rajan, the smart economist from University of Chicago who had predicted the US economic crisis in 2005, to fix the economy. However, this will be a tall order. Gavin Davies, a writer for Financial Times blog, says, “It will not be easy for Rajan to restore credibility to monetary policy, but that is an essential task, without which all else will fail. Rajan believes that, with appropriate structural reforms, India can one day return to the heady 8%-10% growth rates of the 2000s. Maybe, but most of these reforms seem politically beyond reach at present. International investors should expect a painful period of tighter monetary policy and even slower growth before the crisis is over.”