Cash is king; focus on existing investments now: Experts

Bharat: Absolutely not. It is not a temporary risk. It has been staring us in the face for a long time. Oil has been going up steadily from USD 40 per barrel to USD 140 per barrel. All commodity prices across the globe have been going up. But we still seem to be clinched to the belief that the inflation number that is put out which is based on a wholesale price index and subsidized prices is actually the real inflation number. Even on that basis, when we a see number which is 11% plus, we panic. Had the number today been 9.8% or 10%, may be the market wouldn’t have panicked. So, in a perverse kind of way, the number that has come out today is actually for the long-term benefit of all of us.

If it had been 9.9% or 10%, we would have brushed this also under the carpet. But there is this huge danger but there are other dangers as well.

We can forget about a soft landing not just in this country but also across the world. The problem that we are facing today is because central banks across the world and indeed governments across the world have themselves turned a blind-eye to the inflation problem.

They have refused to raise interest rates allowing asset price inflation across the board, which in turn is now forcing them to do what they should have done earlier.

Therefore, while we should have seen a gradual increase in interest rates over time to ensure a soft landing, now you will perhaps see more spikes which will ensure that we don’t have a soft landing but probably a hard landing which makes this whole process much more difficult to handle than otherwise might have been the case.      

Q: Do you see underperformance for equities for a long period?

Subramaniam: I describe it is it is a window of opportunity, which is wide and long. It is hard to pick a spot and say this is when things might actually turn around. The only thing you need to keep in mind is that eventually the markets will bottom a little ahead of when the economic data starts to bottom out.

There is still a sense of denial, particularly when you talk to companies. Everybody is talking about the pressure that the economy, their competitors or other industries might be facing. But I really do not see too many of the large companies coming out and admitting that the demand environment as well as the environment for business is much tougher than what they thought it would be and that this is going to have implications for them in terms of growth, profitability, and plans, going forward.

We have to go through that confession period where people start to own up that things are not as rosy. There is a secular story, but we have hit a cyclical rough patch and need to work our way though it.

So, we need to get through that confession period before we actually get to that point where we can hope that things will start to turn around.

Q: I have heard too many people saying there is a macro problem but we are fine; companies will do fine and earnings will be fine. What are we worrying about? Is that a little detached from reality?

Bharat: Absolutely, in fact I would go one step further, it is not just corporates who are in denial, it is market participants who are in denial as well.

It is not just companies that are in denial. Virtually, everybody connected with the capital markets seems to be in denial. We have an opportunity, not from a perspective of people who want to buy equity but an opportunity for policy makers to finally do what they were not doing for years which is take big long strides forward on the reform path. That is what we need to be doing.

Companies are in denial. Depending on the company and industry, it is going to take one to two quarters for the impact to be felt. Equally it is time for a lot of us as well to come out of denial and to say that we are in for a very hard landing.

It is going to be difficult and whether is 9-12% or goes even further forward, I don’t know. It depends on what we do to solve the problem. I don’t see anyone coming up with suggestions on what we need to do in the light of the crisis that we are facing today. All we seem to be worried about is whether it will take 9-12 months.

It will take 9-15 months provided we do something now to alleviate these problems. But I don’t think there is enough serious discussions on what these things are that we need to be doing. We seem to somehow be harboring in an illusion that the powers that we will take, will take care of this problem. I don’t think it is just simple as that.

Q: What about interest rates? Do you see those rising more than what people anticipate today?

Bharat: Absolutely. Central banks have been loath to gradually raise interest rates and ensure soft landings. You are now in a situation where interest rate hikes will be rather larger than what people want or predict. So, there is that problem.

The already high interest rate bill that companies are facing will increase further. Those that have built capacities in anticipation of demand will have to handle those problems as well.

It is doom and gloom today but it is not doom and gloom for the rest of our lives. This is not the beginning of a bear market, as a lot of people will have you believe. It could turn out to be a bear market if we don’t do something to resolve issues that are begging to be resolved.

These are testing times and the men will be separated from the boys. Hopefully, it will be a prod to tighten our belts and come up with policies that are good for the economy rather than tinkering around with short-term measures because there could be an election.