Revving Up : A Halt For Rest And Then….



 The downward Interest rate movements have started, and a couple are already behind us. I don’t think we should count our chickens before they are hatched. Just mere monetary loosening does not justify any bullishness. The bane of Indian markets has been inflation, which is dependent on supply-side issues, the investment cycle, the monsoon, and various nefarious Govt policies (like subsidies and handouts).

Declaimer: This article was originally in June 2013 and some of the data points may be outdated.

Another huge factor comes from the currency markets, i.e. $: Re movements, which are seeing some cataclysmic changes as the Dollar takes over as “King Gold”. The purchasing power that is getting bunched up in US markets will head somewhere, and it is not clear yet that India is going to be one of the favored destinations.

Let us take these issues one by one:
  • The investment cycle is going to take some time to get started, at least a year more of deleveraging before we see stronger Balance Sheets among the top 200 companies at least. NPAs will start to taper off from next year, and the boom psychology (a.k.a. animal spirits) will take some time to come back.
  • Food prices might provide some respite this year, with surpluses in the major food items, particularly wheat. The monsoon is anybody’s guess, although we haven’t seen any signs of a drought projection from the Met, nor any actual delay in the chronological milestones or weather formations that have been reported so far. But this is always a time to cross your fingers.
  • Govt subsidies are as capricious as the monsoon, but this time round, fuel, and fertilizer should be kinder, while the new Food Bill should be a bigger load on the Fiscal Deficit. In an election year, it will be difficult, even with a chastened Govt, to keep the Fisc under control.
  • The big factor is the sea of liquidity swirling around outside, and where that money ends up. Mostly, there is a clear path for the Dollar to be anointed as “the next Gold”, especially as their shale revolution proceeds apace. If this impacts energy prices dramatically, then India will generally be a big beneficiary. This trend should be quite clear by the end of 2014, and I am praying for much good news on this front. The entire global resurgence that I am hoping for post-2015, is based on this coming “energy revolution”, of which I am hoping that solar will be a big part.

Politics and the environment for reforms will probably play the biggest part. If there is a Modi-led Govt with a clear mandate, for example, there will be a euphoric start, which will taper out after some early promise. It will certainly bring back the retail investor, although that might spell an early end to the bull market.

A jaded Congress Govt, struggling back with an incomplete mandate, will be a recipe for disaster. An even more unclear mandate, with much jockeying for power, will muddy the waters even more. The clear increase in economic productivity that must presage a bull market, can be driven by a technological revolution or a strategic shift in India’s position in the world economic order. That, right now, points to a steep drop in energy prices, and some sharp shift in global manufacturing, driven by Chinese demographics (which should show up as wage inflation, principally in textiles and other low-end industries).

Reputation and perception will matter a lot, and this is where I see Govt failing. This Govt will find it hard to retrieve an otherwise battered reputation and position itself as the creator of a vibrant economy that takes India to the vanguard of global economic growth. The next billion people to come out of poverty have to be mostly Indians, and that would need many things, chiefly a technological revolution in the area of energy. If the real cost of energy drops dramatically, it will first impact food and water management and then industry later. That will push down Indian inflation, which is mostly made up of food and energy costs.

India has its own “new normal”, i.e. 5-6% growth, at best 5-6% inflation, 12% nominal growth, and 15% market return.  At current levels, the market looks range-bound, a traders’ market, to be picked up at <5600 and sold at >6200.  Much depends on the growth in money supply and credit growth, which is a double-edged sword: too much of it is inflationary, but at this stage of the cycle, some uptick is good for the economy.

So finally. what do we make of it? I would say that we will see another 1-2 years of sluggishness before the market gets undervalued…..or a big ‘kick’ happens, courtesy of a technological watershed, as mentioned above. That would be a worldwide phenomenon, set off by the US, and squarely placing it (and its currency) back at the helm of the world economy. After that, we keep our fingers crossed to see how much we benefit on a net basis. To the extent that such an (energy) revolution is poverty-alleviating and increases domestic demand, we will do well….but to the extent that it shifts chunks of basic industry out of India, it will be damaging to our economy.

In short, bad news for the Rupee, but hopefully, with some good governance, we will get enough flows in the right places to get by…..

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