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A Contrarian view

I’ve said bad things about the market earlier – that the dollar will drop, that the interest rates are high, and that too much money is in the market. Let me now take a contrarian view and see how things can be very different.

How much does the rupee affect the Nifty?
Around 30% of the Nifty index is concentrated on the IT/Pharma/Export oriented sector. But that’s only 30%! A falling dollar helps certain companies like:

  • Oil companies (HPCL, BPCL)
  • Net Importers (Capital goods companies, power & infrastructure companies etc.)
  • Companies that have borrowed in dollars (ECBs) – Reliance Communications, Reliance Industries, Ashok Leyland etc. – a falling dollar means they have to use less rupees to buy back the dollars they need to return.

These companies have more weightage in the Nifty index than the exporters. So a falling dollar may actually boost the earnings of the Nifty, but the perception on the street is: If Infosys earnings are bad, the Nifty has to crash. If so, that provides you a good buying opportunity to buy the non-exporters in the index.

Interest rates: High enough?
Inflation seems to be down to below 5% and will probably stay there till October, if the interest rates continue to stay this way. But are they high?

In 2002-03, we saw interest rates around today’s levels of 11-12%. That did not stymie growth. Yes, a higher interest rate will curb speculation in certain areas like real estate or others, but will it really kill a business which is growing at 30-40% or more? Probably not.

Cheaper loans are available through External borrowings (ECBs) for capital expenditure (like buying equipment, planes, etc.) Even big capital purchases like Tata Steel’s acquisition of Corus is being funded through external debt rather than funds taken from Indian banks. The only high cost funds are working capital loans – but again, most of your index companies don’t have that in a high proportion.

What high interest rates do is affect the retail industry a lot – meaning, small shops that have lines of credit with their bank, you and I in terms of personal and housing loans etc, and banks because you and I and the retailers will hesitate to take more loans. These three kinds of companies (Cement, Banks and FMCG) form a reasonably high part of the index but other than Banks the other industries are already showing lower prices. For Banks, a higher interest income will perhaps offset the lack of new business growth, at least for the next quarter.

Lastly, of course, some of the biggest companies in the index, the debt-equity ratios have steadily decreased and are below 1. In fact many have zero debt! So the high interest rates are a concern, but perhaps not as much as we might think.

Economy overheating?
Foreign magazines such as the economist have always been negative on India’s growth, citing reasons from the silly to the mundane. Surjit Bhalla refutes their arguments saying their view is short sighted and ignorant of the wests own past practices. The U.S. went through a story similar to ours, from the 50s to the 80s. Yes, the stock market did go through up and down phases, partly because of their ridiculous policy of getting involved in wars they did not really need to. If we stay shy of such stupidity and focus on growth we can reach where China is today within 10 years perhaps.

We can complain a lot about our infrastructure, about the lack of potable water and pluggable electricity, but the basic funda is: This stuff takes time and money. We have the time. And we are making the money. In the long term, India is going to be big – way bigger than many in the west want to give it credit for, because it is easier to be myopic.

In all, what this means is: The short term influence of the rupee and interest rates may be negative, but does it really matter much? The longer term outlook is still positive, and any serious dips today provide more reasons to buy.

But will there be a big dip? Given the propensity of retail investors to panic at falls, there is enough reason for the market to have regular 10-20% dips. Very healthy stuff for the markets, like spinach. It may not taste very good, but it makes you stronger.

  • hari says:


    Since this article relates to a contrarian call,I would like to clear one doubt of mine. Maybe in a few months time if the tech stocks are battered to a great extent, it could provide us an incentive to buy more. This is because as we all know that technology as a sector is great and has grown by leaps and bounds in the past 5 years. If we miss this oppurtunitity will it be possible to acquire to these good tech stocks at such cheap prices?
    I think that is a difficult task.


  • Deepak Shenoy says:

    >Hari: You know they said the same thing about IBM in the 90s; great stock, great sector. But did it move all that much? From its 1987 highs, IBM has just become 3x = meaning a $100 investment in 1987 would have recovered just $300 in twenty years. It is actually trading lower than it did in 2001!

    But still, technology as a sector has done very very well! Look at google for instance.

    WIll the current Indian tech stocks be the same tech stocks that lead the next wave? With rising rupee, rising salaries, taxation issues, other cheaper nations etc. this technology outsourcing sector is bound to travel elsewhere. These companies may eventually become commodities, and no one gives big valuations to commodities.

    So be assured that tomorrow’s heroes are what you will bet on – if you go down this route, perhaps companies that have more product orientation (Naukri, Subex etc) will be a better bet for the tech sector.

  • Siva says:

    Nice to read. Thank for info – Positive on India Inc.

    I have INDIA CEMENT stocks.2 months back when it reaches 190, people said that it wont go UP beyond this level. Now also, people say the same. Then, it is better I can sell it with minimum loss rather than waiting for long time.

    Please give your comment.So that I can decide by tomorrow to sell/hold

  • Deepak Shenoy says:

    >Siva: Cement companies are not doing all that well. I don’t know about India Cements but do you see any reason for you to hold? THere’s a real estate slump coming up, cement imports are causing damage and all cement stocks are down – it’s a cyclical and the cycle doesn’t look like it will turn positive anytime soon – perhaps you can sell and wait for a trigger to re-buy.

  • Siva says:

    >Deepak, Thanks for your immediate reply.
    Today it is UP by 10% due to FinMin stmt.
    Slowly I am coming to the pt – LONG TERM investment as most people including u adviced.. Previously I used to book-profit.