Two of the biggest and most successful hedge fund managers hugely bearish on India

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 When foreign capital dries or is withdrawn (much of it due to a better economic recovery and US Federal Reserve decision to ‘taper’ monetary easing), India is left with little and, as a consequence, the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.”

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    COMMENTS

    Vinayak Bhimarao Mudholkar

    7 years ago

    Economics is not a science like Physics;so I take these forecasts with a load of salt but reforms is an emergency. Will the next Govt. be able to that is a million dollar question....otherwise investors potential multibagger stocks would turn into MULTI-BEGGAR STOCKS!

    Ramesh Poapt

    7 years ago

    Just today,RRajan told that we have enough reserve for many years!But the game will be more thrilling then T20 match where winning will be miracle and 'tie'will delay the final outcome!

    Nilesh KAMERKAR

    7 years ago

    Forecasts like these offer comfort to:
    1) Those who missed out on buying at lower levels &
    2) Shorts which are trapped.

    But, will the markets oblige? - Only time will tell.

    India’s external debt stock stood at US$390 billion at end-March 2013
    The rise in external debt of 12.9% is mainly due to increase in short-term debt, commercial borrowings and non-resident Indian deposits, says a status report from the Finance Ministry
     
    The level of India’s external debt (at US$390 billion) is on a rising trend with the elevated level of current account deficit and hence overall external financing requirements. With rising debt flows, deceleration in GDP  growth  and  depreciating  rupee,  key  external  debt  indicators  witnessed  some  deterioration as  at  end-March  2013  as  compared  to  end-March  2012. This is according to a status report on India’s external debt published by the department of Economic Affairs, Ministry of Finance.
     
    However,  debt  service  ratio,  measured by the proportion of total debt service payments to current receipts (minus official transfers) of balance  of  payments,  at  end-March  2013  showed  some  improvement  over  end-March  2012, coming down from 6.0 to 5.9 and India’s external debt has remained within manageable limits as indicated by  external  debt-GDP  ratio  of  21.2%  during  2012-13, the report added.
     
    India’s external debt position in recent years is given below:
     
     
    At end-March 2013, India’s external debt stock stood at US$390.0 billion, increasing by 12.9% over the end-March 2012 level of US$ 345.5 billion. The rise is mainly due to increase in short-term debt, commercial borrowings and non-resident Indian deposits, the status report stated.
     
    The  share  of  commercial  borrowings  in  total  external  debt  stock  stood  at  31.0%  at  end-March  2013,  followed  by  short-term  debt  (24.8%),  NRI  deposits  (18.2%)  and multilateral debt (13.2%). Government  (sovereign)  external  debt  stood  at  US$  81.7  billion  at  end-March  2013  vis-à-vis US$ 81.9 billion at end-March 2012.  The share of government external debt in total external debt was lower at 20.9% at end-March 2013 as compared to 23.7% at end-March 2012.
     
    The International Debt Statistics 2013 of the World Bank, which contains external debt numbers for 2011,  shows  that  India’s position was  fourth,  in  terms  of  absolute  debt  stock  amongst  the  top twenty  developing  debtor  countries, the report concluded.
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    No sustainable turnaround in BoP for 6 months
    Weak growth and poor flows, both equity and overseas borrowing by corporates, will keep up the pressure on balance of payments
     
    India’s trade deficit narrowed to US$10.9bn in August (Nomura: US$8.5bn) from US$12.3bn in July due to strong exports. Exports rose 13% y-o-y (year-on-year) in August, following 11.6% growth in July, led by improving global demand. Even as global demand improved, weak domestic demand and the clampdown on gold imports kept imports under check, contracting by 0.7% y-o-y in August compared with a decline of 6.2% in July. Within imports, gold imports moderated sharply to US$0.65bn from US$2.2bn in July; non-oil imports contracted 10.4% y-o-y versus a decline of 5.3% in July; while oil imports rose sharply to 17.9% y-o-y from - 8%. Hence, higher oil imports (due to high oil prices) largely offset the benefit of lower gold imports and slowing domestic demand.
     
    Even as the macro backdrop appears to be stabilizing, it is not expected that there will be a sustainable turnaround in trade deficit and balance of payments. Continuing concerns over the growth outlook, rising credit risks, deteriorating bank asset quality and worsening fiscal pressures suggest that risks remain skewed to the downside over the next six months. This is according to a research note by Nomura Financial Advisory.
     
    According to Craig Chan, Nomura’s head of Asian FX strategy, the recent measures announced (on FCNR(B) deposits and the dollar swap window for oil companies) provide a near-term respite. But Nomura remains cautious on a sustained rally in the Indian rupee because of the continued negative fundamentals, mainly from weak growth.
     
    Nomura’s research note adds that it would expect weak growth to result in a slowdown in growth-sensitive flows, both equity and overseas borrowing by corporates, which can offset inflows through other routes. Hence, it expects the balance-of-payment pressure to persist.
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