Thursday, August 31, 2017

Economic Growth Nosedives: How long can the Liquidity sustain Equity markets!

Indian equity markets closed the August series at a comfortable level (9917 on the Nifty), after showing a meaningful correction midway through the series, in the aftermath of global uncertainty induced by North Korea. However, the economic data released on Thursday evening was a big let down. GDP growth of Indian economy has slowed to 5.7% in Q1 of 2017-18, the slowest growth in 3 years. Analysts are blaming the blip on the after effects of Demonetization and implementation of GST w.e.f. 1st July 2017. The major question now is: How long can our equity markets sustain at these inflated levels on the back of 'Liquidity overhang' with deteriorating economic factors and global uncertainty looming large on the horizon?

Let us first analyse the economic data in detail: Not only has the GDP dipped to its lowest since March 2014, but Gross value added (GVA) has also clocked a dismal 5.6% on a lower base. Manufacturing sector growth dipped sharply to 1.2% and mining sector growth showed a negative growth of 0.7% during June quarter. A major chunk of the GDP growth comes on the back of a massive boost from Govt. consumption spending. Expenditure on gold and jewellery contributed over 40% of consumption growth despite Govt. efforts to shift investment from physical assets to financial assets. Another worrying factor for the economy is that the Fiscal deficit of the Govt. during first 4 months of FY 17-18 has ballooned to 92% of the full year target as compared to a comparative figure of 73% of the previous fiscal. 

Global uncertainty continues to be high with North Korea and USA engaging in a war of nerves. The situation could worsen if any one of them blinks. Central banks in the west are trying their best to revive the sagging US and EU economic growth, but the risks of a major recession are fairly high. In the midst of the global uncertainty, BRICS summit will open at Xiamen, China on 3rd September 2017. China and India have done well to end their border standoff ahead of the summit, as BRICS countries are likely to arrive at important decisions on major global economic issues like Global free trade and are also likely to deliberate on introduction of an alternate global currency in the future.

Precious metals (Gold & Silver) have finally broken out of slumber and are now trading above the major resistance levels of $1290-1300/ ounce for Gold and $17.30-17.40/ ounce for Silver. With this the major trend for these precious metals has turned positive for the medium term. The demand for these metals is traditionally higher during fall season which also coincides with the festival season in India. Investors are well advised to increase their allocation to precious metals for handsome gains in the medium term, by investing through Gold ETF. Long term investors could wait for the next series of Gold bonds. Equity markets have more or less made an intermediate top for the year 2017 at 10138 on the Nifty. Nifty index shall continue to trade in the 9700-10000 range for a while till any major global unforeseen factor hits the markets. A dip below the 9700 level on Nifty could take it down towards the 9000 level or so. The next uptrend in equity markets could start only after an earning upgrade which is expected only after 2-3 quarters. The mayhem in mid cap stocks could be much higher in the meantime. Investors can fine tune their portfolio accordingly.