Preserve Your Capital

Global markets have been destroyed by concerns about the Greek bail-out being a case of “too little, too late”. Add to that melting pot, a growing skepticism about the outlook for growth in the Chinese economy and a nagging fear that despite the SEC initiative to nail Goldman, genuine reforms in the US financial sector are a myth. Given the febrile atmosphere investors are beginning to question the future of the EU. Equally, the prospect of the “Aegean contagion” spreading to larger economies with beleaguered public finances such as Spain and Italy appear potentially catastrophic.

It is even scarier, though, to reflect on what got us here. First, the incredibly high level of government indebtedness in developed markets shows no signs of being on the mend. The realisation that sustainable prosperity is joined at the hip with fiscal rectitude seems to have vanished. Second, the desire by political leaders to protect their own turf rather than act in unison to ensure global stability is mind numbing. It is fair to suggest that their ineptitude is based on a lack of understanding and ego rather than a flawed evaluation of the circumstances. Finally, policy makers seem to consistently under-estimate the need to suffer pain in implementing structural reform in order to see light at the end of the tunnel. Given the extraordinary incompetence of our current leaders, it is hardly surprising that investors have been seriously rattled and appear to be panic stricken.

Despite the gloom, the Greek crisis does have a silver lining! Investors are finally waking up to the fact that de-coupling is bunk and India is significantly dependent on international capital flows to achieve its economic mantra of inclusive growth. The recent turmoil has also led to another positive fall-out – the return of common sense in coping with the challenge of corporate valuation. Thankfully, results for the fourth quarter have met investor expectations and support the hypothesis of a strong recovery in domestic demand and resilient operating margins in future despite the gains from weak input costs last year. Perhaps, the most heartening outcome has been the solid performance of the commercial banks despite a noticeable dent in treasury income and the need to re-structure the loans of weaker borrowers.