The International Monetary Fund (IMF) uses data denominated in local currencies to make its global growth projections. In those terms, it estimates that global GDP (gross domestic product) will grow 3.1 per cent in 2015, and 3.6 per cent in 2016. The Fund has cut 0.2 per cent off both estimates and says growth will be the weakest in several years.
HSBC has recently done an estimate of global data denominated in dollar terms. The HSBC study suggests the global economy is in recession, with global GDP down 3.4 per cent so far in calendar 2015. Global trade is down eight per cent in dollar terms this calendar year.
Part of the difference between the projections is due to the strength of the dollar. But every institution tracking similar numbers concurs in the expectations of low global growth, though the estimates differ quantitatively. So, investors should be braced for a period of either slowdown or recession.
This has several direct and indirect implications for India. India's physical exports have collapsed. This has been balanced by an equally sharp collapse of physical imports. So, the trade deficit has actually reduced. However, neither contraction is healthy. Exports are not expected to improve significantly in either value or volumes while global growth remains slow and trade volumes shrink. Sectors such as textiles and auto would be under pressure.
The reduction in imports is partly due to lower energy and gold prices. However, non-oil, non-gold imports have also reduced in value and volume. That suggests the industrial recovery is stuttering because industrial imports rise and fall in tandem with industrial activity.
Such a situation of falling exports leaves the Indian economy vulnerable to any serious uptick in crude or gas prices. The domestic economy is also vulnerable to cheaper imports. If China has excess capacity, there could be dirt-cheap steel and manufactured goods landing in India.
India also garners forex inflows from tourism, remittances and from services exports, meaning IT (information technology)and ITeS exports. If the world is feeling the pinch, tourism normally tapers. We could see this sector being hit - the peak season will play out over the next six months.
Services exports have not been affected badly as yet. But the rupee declined six-seven per cent year-on-year (y-o-y) in the July-September quarter versus the dollar. Revenues and profitability of the IT sector have to rise at least that much in rupee terms to compensate for the devaluation. By that reckoning, the quarterly results received so far have not been too impressive and the IT sector's forecasts are not upbeat for the next six months at least.
There will be some money flowing out of emerging markets and heading back to safe instruments such as US treasuries. In the earlier major global downturn, in 2008-2009, there was a reversal of foreign portfolio investment inflows and a drying of foreign direct investment (FDI). The former led to a sharp stock market correction.
Though India is the fastest growing and relatively least risky of emerging markets at this instant, it will not be totally insulated from outflows to safe havens. We have already seen signs of such caution in the start-up and venture capital markets where the frothy valuations of the past few months are now being moderated. A slowdown in FDI flows is quite likely.
India will likely see GDP estimates being pared for 2015-16 and for 2016-17 if global growth breaks down. From first principles, investment is necessary and if investment slows, the growth rate will also drop. Corporate earnings will be badly affected for a large swathe of companies.
There are no guarantees this will happen because even if there is an economic downturn, high liquidity might keep valuations up. But, there is consensus about a global slowdown and if there is a market downturn, there could be an opportunity for long-term investors.
The market could fall to a point where valuations become attractive. The best way for a long-term investor to handle such a scenario is to increase equity exposure in a falling market. A systematic investor can add to monthly commitments as the market falls. A selective investor should target specific stocks and buy more of those once valuations dip.
In logical terms, this is easy to understand. The market will recover and lower prices offer an attractive entry opportunity. But, there are psychological issues involved in dealing with steep, if temporary, capital erosion. Every investor has to learn how to cope with those.
