Several investors worry whether the optimism of the 2003-7 period will return. The hope about emerging as the next big economic miracle has been replaced by despair. Everything that seemed to be a good thing feels like a burden now.
Investors refuse to see some of the issues as cyclical and agree that a downturn will unleash the very factors that shall take the economy back to an up cycle. The reluctance to build economic cycles into an investment strategy comes from a dominance of structural factors that have influenced returns for a long time.
Economic cycles represent the correction of excesses that take place over periods of time. During an up cycle, there is an overall optimism. Capital is available to set up several new businesses as investors are confident about the future.
Economic activity expands with assumptions about revenues, costs and profits riding on growing consumption and demand. Investment increases as revenues increase. Inevitably, these assumptions tend to be too sanguine to convert into reality over sustained, long periods. Unless unlimited capital is available at low costs and demand remains high even at higher prices, the up cycles cannot last forever.
The up cycle collapses and businesses soon reach the bottom, trying to protect against failure, while cutting investment and costs, and looking for demand for their products and services. The cycle of boom turns to bust, then moves on to recession, followed by recovery, and back again. The investors in emerging markets such as India take time to align their portfolio strategies with economic cycles.
This is because a dominant number of structural factors influence their returns, sometimes overshadowing the logic of economic cycles. If someone were to tell Indian investors that real estate prices tend to move cyclically on the basis of the demand and interest rates, they would laugh it off. The real estate market in India is structurally insulated from the developments in the economy by a blanket of black money.
It is a parallel asset market funded at high rates by cash, used dominantly by investors who want to acquire and hoard the asset. Several of these people are not impacted by the interest rates set by the RBI, the tax regime, the processes of the banking system, or the rules of law. When such an asset defies the laws of the economic cycle, it begins to attract ordinary investors, who see it as a safe haven during difficult times.
The problem with this approach is that the simpler investors assume risks they are ignorant about and could be hurt if these risks everal investors worry whether the optimism of the 2003-7 period will return. The hope about emerging as the next big economic miracle has been replaced by despair. Everything that seemed to be a good thing feels like a burden now.
Investors refuse to see some of the issues as cyclical and agree that a downturn will unleash the very factors that shall take the economy back to an up cycle. The reluctance to build economic cycles into an investment strategy comes from a dominance of structural factors that have influenced returns for a long time.
Economic cycles represent the correction of excesses that take place over periods of time. During an up cycle, there is an overall optimism. Capital is available to set up several new businesses as investors are confident about the future. Economic activity expands with assumptions about revenues, costs and profits riding on growing consumption and demand.
Investment increases as revenues increase. Inevitably, these assumptions tend to be too sanguine to convert into reality over sustained, long periods. Unless unlimited capital is available at low costs and demand remains high even at higher prices, the up cycles cannot last forever.
The up cycle collapses and businesses soon reach the bottom, trying to protect against failure, while cutting investment and costs, and looking for demand for their products and services. The cycle of boom turns to bust, then moves on to recession, followed by recovery, and back again.
The investors in emerging markets such as India take time to align their portfolio strategies with economic cycles. This is because a dominant number of structural factors influence their returns, sometimes overshadowing the logic of economic cycles.
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