LEHMAN Brothers has filed for bankruptcy. Merrill Lynch was bought by Bank of America. And America's largest insurer AIG is in need of funds.

This is a result of what has come to be known as the sub-prime crisis. Reams of newsprint and scores of web pages have already been devoted to analysing, discussing and dissecting the nature of the sub-prime problem.

Read: Why Lehman and Merrill fell

So, I will not delve into its finer nuances. Instead, let's see how we investors must react to the events of the past one week.

For starters, it must be said that going slow on the so-called 'financial reforms' by our policy makers has actually resulted in India being more or less insulated from this problem.

If America has caught a severe infection, we have got away with barely a sneeze. Of course, there's the odd exposure (ICICI Bank is reported to have taken a hit of USD 28 million due to the Lehman collapse ) but largely the direct damage is restricted.

Of collateral damage:

-- Your import bill will get flabbier.
Foreign Institutional Investors (FIIs) are pulling out of our domestic market, hand over fist. USD 8.3 billion has been pulled out, already. The consequent pressure on the rupee has seen the exchange rate falling to almost Rs 47 to the dollar. This does not augur too well on the price front as at the end of the day we are a commodity importing country and our import bill may go through the roof.

-- These folks may lose their jobs.
This refers to employees working in the India offices of the organisations in trouble. However, our home grown indigenous financial sector is strong and vibrant enough to more than absorb this additional employment. Okay, so these guys won’t get their fat bonuses that they were looking forward to. But as far as basic employment is concerned, it shouldn’t be that much of an issue.

-- Real estate will cost less.
The other constituency that could be adversely affected is our capital intensive real estate sector. Now these guys would no longer be able to sell ludicrously over priced property and you and me may just be able to look forward to affordable housing. So, actually this becomes a silver lining of sorts.

-- BPOs and KPOs, watch out.
The outsourcing industry will obviously be affected since the end consumer that it serves is suffering. Large software companies should be able to withstand the storm as over time they have worked on de-risking their business model and not concentrating on any one consumer market for all their revenue. However Tier II companies and other BPOs and KPOs may not be so lucky.

-- Credit cards and loans will cost more.
Lastly, credit will become generally more expensive for the industry at large. The escalating interest costs may affect the viability of some projects thereby ultimately affecting growth. However, here one must look at the big picture.

Even a full-blown US recession is expected to shave only around 40 to 60 basis points (0.4 to 0.6 per cent) off our GDP growth rate which was a healthy 7.9 per cent for the first quarter.

The industrial production numbers for July also displayed a respectable 7.1 per cent growth. The EPS growth for Sensex stocks over the forthcoming year is expected to be around 19.2 per cent.

Add to it an earnings growth rate of around 15 per cent to 18 per cent per annum (in spite of the higher input cost) and a return on equity (ROE) at the same level and what we have is nothing but a safe haven for investors spooked by risk.

Net, net, India, while being affected by sentiment and negative exchange flows would overall come out largely unscathed.

Read:

• When US markets go bust, refer to these 5 basics
• Why Lehman and Merrill fell
• DSP Merrill Lynch, TATA AIG investments: SAFE?
  
  

e-mail: Sandeep Shanbhag

Suggest a story idea! Write to us!