I am writing this note to you under extraordinary circumstances which are unprecedented in the living memory. We are in midst of a catastrophe which has hit our markets not due to our making, but due to factors external to India. Nonetheless, this has shaken the ground beneath and now most of us have let our hearts take lead over our heads.

The wealth is shrinking and no asset class seems safe except probably precious metals which too have turned weak lately. Cash is King at this juncture. The radical remedial measures of infusing liquidity and instilling confidence have to some extent corrected the precarious liquidity situation, but have done precious little to bring back confidence.

Although some compare this with the 1929 crash and the depression, the current knowledge overload and information flow is giving a different dimension to the grim situation we are in. No soothing words from the leaders would have any visible effect on our markets unless and until it is backed by action which can cushion the onslaught of panic sales. We cannot use a precedence to tackle this unprecedented situationand hence it’s time our leaders take certain actions which can change the doomsday anticipation of the investors.

As investors, we may not be able to drive the policies but we could take certain actions at individual levels to come out stronger after the storm blows away. I have been asking myself a few questions :

# Do we see doomsday ahead or do we see an opportunity?

# Do we notice the percentage fall in our equity portfolio or do we see the multiple increase in the purchasing power of the cash left with us?

# Do we see the credit bubble and liquidity crisis as the end of the “old order” or do we see the beginning of the “new order” in which India could be playing a more dominant role?

Every adversity provides an opportunity and my answer lies in the second part of the above questions. In this dark hour I see the so called drawbacks of India becoming our source of strength. Here are a few of them….

# Capital Account Convertibility - Every other corporate honcho and the intelligentsia were lobbying for capital account convertibility in the last few years. Can we imagine the quantum of co-lateral damage that would have done in the current scenario? The so called short sightedness has saved us from longer term damage.

# India’s share in the world trade is a miniscule sub 2 per cent unlike China or other emerging markets. This also means that we should be the least affected among our peers and have the head room to increase our share in the up-cycle.

# Industrial capacities we have in India are still below the economically optimum levels we see in the developed countries or even among our peers. The world has been witnessing a shift in industrialization which will see emerging economies especially India vying for a bigger pie. The growth we have seen in the past 5 years will give us a head start.

# Most of our Banks were not as savvy and adventurous as we would have liked to see them in the booming markets of 2006-07. Our PSU Banks were naturally getting a lower discounting than their private sector peers. We should be thanking Dr Reddy for keeping our banking system grounded. Today when there is fire all around, we will surely feel the heat but one can still prevent ourselves from getting burnt.

We are today at the cusp between the old order and the new. This could be signaling the end of the influence of the current economic superpowers on the rest of the world and beginning of an emerging set of power centers. A few decades down we may look back at history and probably find the current scenario as one of the biggest opportunities.

Should I ask you to go out and put all your cash in the Markets. Certainly NOT. A number of our frontline stocks are available close to their skinned valuations, so it should be a great time to buy and sit on the investments? Yes, but it is easier said than done. The toughest predicament for any investor is the pain one sees in the short to medium term when your invested capital evaporates faster than you blink. It is advisable to stay in cash and watch the buying power of your cash move up than to try and catch a falling knife.

The markets have to stabilize at some level; we don’t know where. But once it stabilizes and there is some clarity on the horizon, then it would be the time to start nibbling in. It’s possible that you may be buying at a level which is higher than current levels, but that’s the premium you pay for peace of mind.

The markets have the power to take the economy with it and that’s exactly what we have been witnessing elsewhere. We have been screaming that our Indian economy is still doing well but the question is how long it will keep doing well with a dead market. Investor confidence is the basis for any fund raising measure and with the state we are in, can we raise any worthwhile resources? Today it is not as much a question of “lack of liquidity” in the system but the “flow of liquidity”. Investors don’t want to risk the cash they have as they have seen capital erosion in the last 10 months and every passing day is accelerating the fall.

Inflation peaking out, oil at half the peak price and commodities retracing sharply, thus lowering the input cost should ideally be a positive trigger for the markets. Again the ticker tells you that logic doesn’t work in a market gripped by panic. 

The authorities have to tackle the root cause and that is investor confidence.

One of the measures could be a sovereign market stabilization fund which could bring back some sanity to the markets. The panicked investors need to realize that tomorrow may not be worse than today, and this can be achieved only through such path breaking measures. Once the market stabilizes, most of the other issues will fall in place since our economy is still firmly on track as of now. Unlike some of our peer economies we are structurally on a good wicket.

Market Stabilization fund was mooted in 2004 when the UPA Government was getting into the saddle but it was abandoned as the government didn’t want artificial intervention. I think it’s time for a re-consideration. If Rs.60,000 crores can be a farm waiver corpus, over Rs.1,00,000 crores as fertilizer subsidy, even a Rs.30,000 crore market stabilization fund could help restore investor confidence and hence the economy. Basically the government would be “Putting the money where the mouth is”.  And the money which they would put in will have a multiplier effect which no one else can match. The confidence of the investing public due to this move will be enough to give it the multiplier effect.

Other measures could be as follows :

# Encourage Indian Pension funds investment in index stocks through downside protection of the portfolio (through hedging which could be outsourced at a cost) for a period of 5 years by when one would expect Indian pension funds to become equity savvy.

# Although Indian Saving rate is among the highest, the amount flowing into equities is still miniscule. Encourage Individual Indian Tax Payers to invest atleast 5% of the Net Income in Equity Mutual Funds or Direct Equity by providing tax breaks.

# Provide special status of “Super FIIs” to International Pension funds. This will encourage long term funds to balance the “Hot Money”.

One of the foremost reservations our law makers would have is that the stock market investors are a minority and are aware of the risks involved; why should tax payers’ money be utilized to bail them out? I think this is a fundamental mistake in the thought process. It’s like letting your building collapse as you don’t want to repair the damaged column since it falls under a common area. Market’s health is of prime importance in a capitalist economy. If the markets remain in the current state for a couple of months, confidence levels shattered and the economy goes into a tailspin……what would happen to all the public-private partnerships for infrastructure development? Capital expenditure and expansion plans of corporates due to lack of equity participation? Pink slips and Salary cuts could lead to sub-prime crisis closer home!! And finally the farmer in hinterland waiting for his farm land to be bought at a huge premium by the SEZ, will never see the greenbacks. In short, crisis in markets have a cascading effect across all strata irrespective whether they are directly related to the markets or not. The great Indian consumption story will be relegated to the history books.  It would take much longer to get out of that rot than it took us to get into it.