Saturday, December 26, 2015

Will Emerging Markets bounce back in 2016?

Emerging markets (EMs) have had a bad yearly performance in 2015. Most EMs, including India, have delivered negative returns this year. Most of these markets are facing turbulent times due to various global/ domestic reasons. Brazil and Russia have been adversely affected by the consistently falling commodity prices. China has been struggling with a readjustment in its consumption theme leading to a sharp dip in its GDP. India, though taking a positive from the sharp drop in commodity prices (especially crude oil), has received a setback due to domestic factors like high inflation and political logjam. 

Analysts are now hoping that most emerging markets would find their bottom soon, and latter half of 2016 may see their revival. The uncertainty over hike in US Fed Rate is over and most emerging markets have responded positively to the event. The Indian Rupee has appreciated a bit and is now hovering around the Rs66/ $ mark. The stability of the Rupee is a good sign for our economy. The commodity markets are close to their bottom. Although lower commodity prices may seem positive for India, indirectly they lead to lower demand for Indian exports as the commodity exporting countries loose their competitiveness. Thus any further fall in commodity prices is not desirable for the global economy.

India is better placed than most emerging markets due to the revival of its domestic consumption story. There have been some green shoots of revival of consumer demand in urban areas, though rural demand is yet to pick-up steam. The pay hike for Govt. servants may boost the economy in the next fiscal. The passage of interest rate cuts by RBI will gain momentum in fiscal 2016-17, which will be a major force in revival of the earnings cycle. The clock seemed to have turned full circle for the markets, which are likely to stabilise in the range of 7500-8000 on the Nifty, before making the next up move. Surprisingly, the broader markets have performed much better in the recent down turn, and this augers well for a market rebound, sooner than later.

In conclusion, retail investors are advised to get ready for a revival, and continue to put money in the markets slowly, SIP would be a better choice. 2016 promises to be a better year for equity investment as compared to 2015.

Wednesday, September 30, 2015

RBI signals the end of 'Bear Market' in India

RBI Governor Raghuram Rajan sprang up a pleasant surprise handing over a Diwali gift to the market/ investors, by lowering the benchmark Repo rate by 50 basis points to 6.75%, in the bi-monthly monetary policy announcement on 29th September. The benchmark rate is now at the lowest in 4 years. This has ushered an era of benign interest rate scenario in the country over the medium term. Although, our equity markets may swing widely based on international cues, this action will serve as the most important catalyst for laying the foundation of a long term bull market in India. 

Let us analyse the implications of the policy announcement:
  • The Governor has articulated his intention for working with the Govt. to ensure transmission of the rate cuts by the Banking system
  • RBI has lowered the forecast for GDP growth from 7.6% to 7.4% for FY 2015-16, focusing on an urgent need to boost investment/ growth
  • Inflation projection for January 2016 has been projected at 5.8%, against the previous estimates of 6%, based on benign commodity prices
  • To improve liquidity with the banks, RBI has proposed a reduction in SLR by 1%, in a phased manner.
The single most factor responsible for valuation of stocks in the market is the earnings estimates. Unfortunately, earnings growth has been muted due to two factors: Excess capacity/ low consumption and Cost escalation due to high Interest rates. The lower interest rate regime will help the high debt companies to save substantially on interest service cost. Consumption led growth will have to be given a boost by Govt. spending. The size able saving by the Govt. on Commodity/ Oil imports will help the Govt. to increase spending.

The timing of the rate cut is perfect, as it coincides the busy festival season, which is an opportunity for Corporate India to boost its sales (top line), the profits (bottom line) will improve with largess's doled out by RBI. Banks have started responding to the RBI gesture by lowering their base rates, SBI taking the lead by lowering its base rate by 40 bips to 9.3%.

I can safely say now that the bottom of our markets has been made at around 7500 on the Nifty, although, in the short term markets may swing widely between 7500-8200 on the Nifty, based on global cues and expectations of lower earnings for quarter ending September 2015. However, it is expected that the earnings growth will improve steadily from December 2015 onwards, and the same will reflect in the growth of the bench mark equity indices thereafter. Now is the time to invest in the equity markets for long term, provided investors are ready to brave the short term volatility over the next 3 months.

Friday, July 31, 2015

Equity Markets hold their nerves in Turbulent times

July 2015 proved to be an eventful month in the history of Financial Markets: World markets oscillated between hope and despair as the 'Greek Paradox' and the 'Chinese Nightmare' unfolded amidst extreme uncertainty. After days of claims and counter claims Greece was granted another bailout by the European Union with some tough terms for the revised package. A crises has been postponed for the time being. But the bigger jolt came from China, as news of a major Chinese slowdown made severe dents in the commodity markets. All commodities fell in tandem as the US Dollar hit new highs exerting pressure on Gold, which hit multi year lows and slipped below the $1100/ ounce mark. Other metals in the metal pack hit new multi year bottoms as slowdown in China became evident. Crude oil continued its unabated southwards journey slipping below the $50 mark for 2nd time during the year.
 
Events on the domestic front brightened for India due to the soft commodity prices, but our politicians continued to play hide and seek by disrupting parliamentary proceeding day after day. The fate of several crucial bills including GST, Land Bill etc. still hangs in balance. The saga of Q1 results presented a mixed bag with muted growth in profits for a majority of the companies. While IT sector surprised with better than expected results, the Pharma majors and PSU banks disappointed with a drag on their bottom lines.
 
Markets remained resilient through the July mayhem, and have begun the August series on a positive note. Most analysts are again sounding positive on the future growth of our equity markets, based on the following reasons:
  • Monsoons have picked up contrary to the dismal forecast, and sowing of crops has been good in most parts of the country
  • Greece has reached an agreement with EU which augers well for the Euro-Dollar stability
  • Passage of GST bill may prove a sentimental booster for markets
  • EPFO would start investment in equity markets from August
  • However, bottom lines would start improving from December quarter only
Our markets may have made a bottom at around 8000 levels on the Nifty. A retest of these levels may not be ruled out in case of extreme pessimism. Otherwise, we can hope to see substantial re-rating of our markets in second half of this fiscal, when the positive effects of soft commodity prices and low interest rate transmission would be visible. Given that China will considerably slowdown India may find itself in a sweet spot. This augers well for our equity markets in the medium to longer term.
 
 

Tuesday, June 30, 2015

Greek default: Consequences for India

Greece has finally become the first developed economy in the world to default on IMF repayment. However, the stock markets around the world have taken the event in their stride. There was some selling of stocks around the world, but the euro itself was stable in currency markets and the main index of financial volatility (Vix) was much tamer Monday than it had been in some acute earlier phases of the crisis. Majority of global investors, seem to think that the European Union and the European Central Bank have the tools in place to contain any financial fallout from a Greek default and exit from the euro.
 
Our markets are also expected to rebound in the short term, simply because the looming uncertainty in now over, or at best would get over after the Greek referendum result on 5th July. In a way it is good that the Greek creditors have said no to the Greek bail-out, strengthening the cause of imposing financial discipline on errant borrowers. With the exit of Greece from Euro zone, which seems inevitable now, ends the ill-conceived dream of having a common currency- 'Euro'. In the medium term, it is likely to have an adverse impact on companies having a large chunk of their revenues from the Euro-zone.
 
India need not worry too much about the consequences of the Greek exit. On the other hand, India needs to focus on its own problems. The Govt. continues to roll out new campaigns one after the other, Digital India being launched on 1st July, but it is unable to arrive at a consensus with the opposition on passage on important bills in the parliament. The monsoon session of the parliament promises to be lack lustre unless some serious efforts are made by politicians to sort out their differences. The setback to the prospects of bountiful monsoon rains is looming large over the revival of the rural economy. A temporary rebound in our markets should not be seen as a return of the bull run. We must brace for an extended summer of discontent, before autumn brings some cheer to the markets. It would be a better option for investors to sit on the side lines and wait for the 'green-shoots' of economic revival to emerge.

Sunday, May 31, 2015

Markets to trade with a downward bias in short term

The May series of derivative contracts ended on a lack-lustre mode. Both the Nifty and the Sensex have been trading with a downward bias after rounds of extreme volatility. The June series has opened on a positive note, buoyed by better than expected GDP numbers and the hope of a 25 bips rate cut by the RBI policy announcement on 2nd June. However, this positive bias should be treated as a short term bounce and may be used to lighten commitment of funds to equity markets. The markets have already factored in the rate cut, and we might see the markets drifting lower in the course of next 2-3 months. The major worrying factors for the markets are listed below:
  • Corporate results: Most of the corporate results for Q4 of FY 2014-15 have been disappointing, and have not kept pace with the expectations of the analysts. This makes us to believe that a real ground level economic recovery is still a good 2-3 quarters away. Most company balance sheets have been artificially boosted by restructuring of doubtful loans, as RBI is seen tightening the restructuring norms from this fiscal. 'Make in India' does not seem to get off the ground despite many noises by the Govt. Companies have been reluctant to add new capacities immediately, fearing a demand slowdown.
  • Progress of Monsoon: Forecasts by Met department regarding a below par South-West monsoon have added to the worries of the Govt. as rural demand is already showing signs of slackness. Global scientists have a strong belief that the El-Nino effect will have a negative impact on agricultural productivity in Asia. Govt. will have to lend support to the farming community by raising support prices of essential crops leading to build up of inflationary pressures once again. RBI may press the pause button on further rate cuts after the most anticipated rate cut on 2nd June.
  • Rupee Depreciation: Indian Rupee, which traded with a positive bias against most currencies, has considerably drifted lower in the past 2 months and is now trading at Rs.64/ dollar. It is likely to drift lower toward the 67-68 mark in the short term. The instability of Rupee in the recent past has been the major cause of worry for Foreign investors, and they are unlikely to return to invest in Indian markets unless they perceive stability in the value of the Rupee. Although, Rupee depreciation will be a positive for exporters, it may lead to further exodus of funds by FIIs. IT and other export oriented sectors are likely to do well in such a scenario.
The above factors are likely to have a negative impact on the markets in the short term, leading to a 5-10% correction from these levels. This correction will be a good time to accumulate quality stocks from infrastructure, banking and automobile sectors for a long term perspective, provided the Govt. is able to maintain its tempo on fiscal consolidation and demand creation through development.

Thursday, April 30, 2015

'Clock Turns Full Circle': Brace for a deeper correction

As we approach the first anniversary of 'Modi Sarkar', the clock seems to have turned a full circle. Our markets gave a resounding welcome to the new Govt. after the declaration of 'Election 2014' results Our markets scaled the levels of 7500 on the Nifty on 16th May 2014, on the back of a clear majority for a single party in the Lok Sabha after a gap of many years, ending an era of coalition governments at the Centre. There has been a lot of noise by the Govt. but it has hardly translated into results, as measured by the quarterly results of Corporate India, the latest March quarter results are a poor reflection on the economic performance despite the hard talk by the Govt.
 
The good luck of the Govt. in the shape of drastic fall in crude oil prices has been offset by the unseasonal rains, putting pressure on the inflation numbers once again. After collecting a bounty through Coal auctions & Telecom spectrum sale, the Govt. is finding itself in a corner, unable to push the key measures of GST and Land acquisition bill. It is also seen dragging its feet in respect of key tax regulation in respect of FII's. In such a scenario there is no hope for the economy in terms of stimulation of rural demand, which has been the main driver of our GDP growth in the past. On the back of new series of GDP indices we may see growth of GDP in the region of 7.5% for FY 2015-16, it's impact on Corporate earnings is seen as muted.
 
The global scenario is also not favourable for India, as Euro zone worries are bound to surface again. The Rupee has started depreciating against the US Dollar, and it is likely to slip to the levels of Rs.67-68/ US Dollar in the next quarter. Although it augers well for the export sector, particularly Software exports, its impact would be severe in respect of controlling inflation. 'Make in India' campaign has been a non-starter so far as is evident from the IIP numbers and the lack-lustre credit off take from the banking sector. Erratic South-west monsoon predictions by IMD also pose a threat to the economic revival.
 
Equity markets have started giving credence to the ground reality, with the Nifty closing below the 8200 mark on expiry of April series. Nifty has already corrected by 10% from its peak level of 9119 attained on 4th March 2015. Our markets have been one of the worst performing markets in the first 4 months of 2015. Valuations may have started looking attractive to some analysts but the market sentiment has taken a severe beating. A deeper correction is looming large over the equity markets and they seem heading towards 7800 levels on Nifty. In a worst case scenario Nifty may drift towards the 7500-7600 range in the May series, these are the levels from where the markets started their ascent on 16th May 2014. The old saying 'Sell in May and go away' is likely to play out this year. Investors are advised to keep their cash intact in order to make a killing in the markets once they correct to the levels mentioned above. At these levels the risk-reward ratio would turn positive from the earnings perspective, that would enable you to make handsome profits from the market over the next 2-3 years.

Thursday, March 26, 2015

Honeymoon Period of Modi Govt. over: Markets acknowledge

As Team India bowed out of ICC World Cup 2015, our equity markets retracted by around 700 points on the Sensex on the day of March expiry (Nifty closing at 8342), giving a strong indication that the honeymoon period of Modi Govt. is over. Finally, reality has been acknowledged by the market that nothing much has changed for the economy at the ground level despite all the good intentions of the Modi govt. This reaction of the markets heralds the beginning of a short to medium term downtrend, which can take the markets all the way down to 7800-7900 levels on the Nifty in the next few trading sessions. The front line indices are likely to stagnate in the 7800-8500 range for the short term, as most of these stocks are now quoting at unsustainable PE multiples, with no visibility in earnings upgrade in the near term. However, select mid-cap stocks would continue to out-perform the broader markets, based on their FY 2014-15 numbers which would start unfolding from the 2nd week of April 2015.
 
I can safely stick my neck out and state that we have scaled the highs for 2015, when the Sensex topped 30000 and the Nifty 9100 on 4th April 2015, as a follow-up to the announcement of surprise rate cut by RBI. The markets are likely to consolidate for at least 2-3 quarters before making the next decisive up move. Investors are advised to commit fresh funds with a minimum horizon of 1-2 years when the indices move towards the lower end of the range described above. Money is more likely to be made in select Mid-cap stocks based on their performance in FY 2014-15. Those looking for fixed returns are advised to lock in funds for long term, as the Bank Fixed deposit rates are likely to fall drastically over the next 1-2 years. Don't be surprised to see deposit rates falling to as low as 5-6% per annum during this period.
 
The focus would now shift on the policy implementation of key decisions at home, and International scenario governed by geo-political factors in the US, Euro Zone & Middle-East. Markets would also closely watch the inflation numbers and the consequent policy action by RBI on rate cuts. The probability of aggressive rate cuts is most likely to materialise in the 2nd half of Fiscal 2015-16, depending upon the satisfactory progress of monsoon across the country. The impact of lower interest rates would start to reflect in Corporate balance sheets from Dec.'15 quarter, which would be the time when markets would re-rate the various companies, and trigger the next uptrend. Till then, market participants should prepare to negotiate the middle overs patiently without getting too excited, which could be very boring at times. But as they say in market parlance: 'Patience is the Key' to reap profits in the markets.
 
 

Saturday, February 28, 2015

Budget Blues: What did the Markets get?

Our equity markets engaged in intense yo-yoing on the budget day but managed to close marginally in the green in the end. Now that the event risk associated with the budget is over, our markets can go back to business as usual. Let us, at the outset, analyse the impact of the Union Budget 2015 on the market sentiment.
 
NDA Government's first full fledged budget has been hailed as a path breaking budget by a majority of market pundits for it's forward looking statements. The budget appears to be an excellent policy document for long term growth, but at the same time it has failed to clearly spell out the means to achieve the end result. The budget has tried to reverse the composition of spending that had become adverse in recent years as Capex spending as a percentage of GDP fell from 3% to 1% on the one hand and the subsidies more than doubled. This budget has stepped up the allocation by 0.5% of GDP and substantial reduction in subsidies, aided to a large extent by falling crude oil prices. The spending has been largely focused on roads and railways where the multiplier effect may be easily visible. Introduction of new fiscal federalism will shift the focus of greater spending responsibilities to the states.
 
Some other important policy decisions incorporated in this budget are:
  • Creation of a comprehensive bankruptcy code
  • Lowering corporate tax rates to 25% over next 4 years and doing away with various exemptions
  • Putting off implementation of GAAR for 2 years
  • Creating liquidity out of individual gold holdings through 'Gold Bonds'
  • Fixing 1st April 2016 for implementation of GST. Rationalisation of Excise duty and service tax are steps in this direction
  • Doing away with obnoxious 'Wealth tax' where the cost of administration was very high as compared to its benefits to the govt.
  • Work towards creating a universal social security system for the common man
  • FMC to be merged with SEBI, for orderly development of various markets
 
However, the budget has disappointed on the fiscal consolidation front, despite huge saving on oil sector subsidies. Fiscal deficit for the year has been pegged at 3.9% of GDP. To achieve a 8% GDP growth in FY 16 we need a substantial growth in demand side components. There has been no tangible measures to augment household disposable incomes. The demand side push has to come from the Central Govt. supported by various State Govt's.
 
Our stock markets have been steadily going up in the hope of some 'Big Bang' announcements in the budget (Nifty has rallied about 8% since 1st January 2015). Although the budget does not contain any nasty surprises, it has failed to meet the market expectations in respect of reasonable reduction in Fiscal deficit, Cuts in individual taxation, Steps to boost housing sector, Capitalisation of PSU banks etc. The markets would also view the progress of the Govt. in the Budget session, in its ability to get various important bills passed amidst stiff opposition. The 3rd quarter results have been below expectations, and the chances of a rate cut have diminished further due to the inflationary ramifications of higher excise duty and service tax. Under these circumstances the markets would take cognisance of the ground realities sooner than later, after the initial euphoria subsides. Although the long term trend continues to be up, markets are in for a short term correction which could take the markets down by at least 8-10%, before the next round of rate cuts are announced by RBI.

Saturday, January 31, 2015

Indian equity markets conquer Mt. Everest

January 2015 series has proved to be a record breaking success story for the Indian equity market, when both Sensex and Nifty scaled Mt. Everest, the highest peak on earth. For statistical purpose the height of Mt. Everest has been recorded as 29029 feet (corresponding to 8848 meters) above Mean Sea Level (MSL). At the end of January series, Sensex and Nifty closed at records highs of 29682 and 8952 respectively, after conquering Mt. Everest. So, henceforth, our markets have leapfrogged into an uncharted territory where only sky is the limit. Let me admit, many of us including myself, never anticipated the ascent to Mt. Everest to be so fast and effortless as it turned out to be.
 
There are a few coincidences between the ascent to Mt. Everest and the ascent of our equity markets. The two base camps for climbers attempting to climb Mt. Everest are established at 17600 feet (5365 meters) in Nepal known as South base camp, and 16900 feet (5150 meters) in Tibet known as North base camp. Signs of animal life beyond 21000 feet (6300 meters) are very rare. Ascent above 26000 feet (7800 meters) is often referred to as 'Fatal Zone' as many climbers have perished at this height due to blizzards. We may note that Indian equity markets came close to levels of 21000 on Sensex (6300 on Nifty) at the fag end of the famous bull run that ended abruptly in January 2008. From these levels our markets slipped time and again to the levels of 16900-17600 on Sensex (5100-5300 on Nifty), making this as a strong base for the next bull run. We broke past the 'danger zone' of 26000 on Sensex (7800 on Nifty) after the installation of the new Govt. at the centre in May 2014. Since then it has been a relentless quest to conquer Mt. Everest, chanting the 'Modi Mantra', which our markets have successfully achieved in January 2015. Where do we go from here?
 
It has been a vertical climb for our markets from 26000 on Sensex (7800 on Nifty), so these levels now become the new base camp in the current bull run. Life at the top of Mt. Everest is not going to be easy considering the hostile environment (a.k.a. global cues). But the trend of easy global liquidity may help sustain these levels till the presentation of a most anticipated Union Budget by the Modi govt. on 28th February 2015. RBI Governor Rajan may also lend a helping hand to the bulls by announcing another rate-cut. A word of caution: We may not forget that currently our markets have run ahead of time and a descent from these levels is inevitable when the euphoria subsides. Q3 results that have been declared so far do not present a very rosy scenario. The valuations of most front line companies are fairly high in comparison to their historic averages. Notwithstanding the fact that we are in the midst of a great bull run, we must not perch our aspirations too high to expose our portfolio to the risk of blizzards.