2017: A year of bumper equity returns

Equity markets continued to defy logic throughout the year, posting their highest yearly gains since 2009. Like many analysts, I also failed to read the bullish undertone of the markets, especially in the last quarter of the year, post GST implementation. The Indian equity benchmarks closed the year at new highs (BSE Sensex crossed the 34000 mark whereas Nifty closed above 10500), clocking an annual growth of over 35% in US $ terms. The returns in Rupee terms were slightly muted at 28% as the INR strengthened against the US $ from a level of 68 to 63.75 by the end of the year. Overall Indian equity markets ranked among the Top 3 best performers along with Hungary & South Korea.

The spectacular rally was largely led by global factors and the continuing liquidity overhang. The perception about the rebound in the economy based on the reforms unleashed by the BJP Govt. also helped the cause of stellar performance of our markets. Yet again, fourth year running, Mid Cap and Small Cap stocks out-performed the front line indices. The sectors that led the rebound were Consumer durable and Real Estate, followed by Metals, whereas Pharma & IT proved to be the laggards. Domestic Mutual Funds contributed Rs. 1,15,000 crores to sustain the rally, their contribution outstripping the Foreign Funds flow.

With this stellar performance behind, the equity markets are poised for subdued returns in the year 2018 due to global factors:

• Liquidity tightening: With the Central Banks in the developed world led by US FED poised to raise interest rates, excess liquidity is likely to be sucked out
• The much awaited economic turn around may be delayed as emerging markets like China are likely to slow down
• The threat to global peace still looms large with North Korea & Gulf region still eluding permanent peace.
• Energy prices: The rise in energy pack could be detrimental to the growth prospects of developing nations like India, China

In addition, the Fiscal deficit target for India is unlikely to be met, the rising inflation could also be a major spoiler in the party. In such a scenario equity indices could at best give a modest single digit return for the entire 2018, they will probably struggle in the first half of the year, and a 10% correction from these levels may not be ruled out.

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.

Global Currency Reset: Will Illinois be the epicenter of the upheaval?

With a majority of global stock market indices closing the last week of July at record highs, the bull run seems to have entered its final phase. While NSE Nifty index reached a historic landmark of 10000 during the week, Dow Jones Index inched closer to the 22000 mark. The stock market rally in the US has now run for over 7 years on the back of Quantitative Easing (QE) support from the FED. Finally, the bulls are now showing signs of fatigue indicating that the final top for this bull run is near, although the indices have already run up far ahead of economic fundamentals.

The unprecedented rally has been supported by an orchestrated liquidity push by major Central banks led by the US FED and supported by Bank of England, European Central Bank and the Bank of Japan. In a clear departure from the past, most of these Central banks today hold a major share of the Govt debt and the equity stocks in their respective countries, which is the primary reason for the non-stop bull run in world markets. It is not surprising that these Central banks are outside the control of the respective Governments. and are controlled by Jewish Community. In addition to the Central banks, top investment banks in USA and Europe also hold a substantial chunk of equity assets and have over leveraged positions in the F&O segment of equities as well as commodities. I was surprised to learn that one of the large US banks enjoys a leverage of 349:1 in the markets. One can well imagine what would be the plight of these banks if there was a sudden fall in the markets.

Now let us come to the issue of 'Global Currency Reset'. It would be interesting to understand the history of the 'Reserve Currency'. A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The dominant reserve currency has been changing over the past years. The Dutch Guilder emerged as a de-facto reserve currency in the 18th century due to dominance of trade by the Dutch East India company. By 1860, followed by the industrialization in UK, majority of the trade took place in British Pounds which became the Reserve currency during that period and it was based on the Gold standard. The Gold standard fell after the great depression of 1929. After WW II a formal currency system based on the Bretton Woods accord was put in place and US Govt. guaranteed a fixed rate of gold in lieu of US$, thus making US Dollar as the Reserve Currency. However, the Gold backed currency system was discontinued in 1971, but US Dollar continued as reserved currency in its new avatar as 'Fiat Currency' not backed by gold. In order to continue its status as the Reserve currency US Government made it mandatory for nations to do oil trade in US Dollars only.This led to the emergence of the term 'Petro Dollar', which continues till date. But there have been chinks in the armour of US as many countries have now decided to trade in their own currencies, the biggest such block being led by Russia and China, which includes India (BRICS). This is the reason why the search for an alternate global currency is on.

London based 'Economist' magazine came out with an interesting cover story 30 years ago, in its issue dated 1st September 1988, titled 'Get ready for a World Currency by 2018', they named this currency 'Phoenix'. And it is not a mere coincidence that Economist is owned by the Rothschild group which also have a substantial stake in major central banks world over. Does this mean that they had envisaged the end of the 'Fiat Currency regime' 30 years later, and will they slowly bring down the US economy to usher in the new era. This seems to be the most logical explanation of the impending crash of the debt ridden US economy and with it the 'Petro Dollar'.as a reserve currency.

Now another important issue: About the timing of the currency reset and how Illinois could be at the epicenter of this reset? Illinois is the 5th most populous and 25th largest state in USA. Chicago is a famous city in this state. Illinois has been in the news for quite some time due to its financial woes, and is on the verge of bankruptcy. It has not presented a budget for the past 2 years, and has a huge accumulated debt and $15 billion unpaid bills. The plight of at least dozen other states in USA is also far from good. How Illinois could trigger the great collapse? The answer to that lies in a celestial phenomenon that is going to happen in US on 21st August 2017, when a total solar eclipse will occur and the path of the eclipse would divide the USA into two parts. Many astrologers believe that the planetary configurations are not favourable for the USA and its President during this period. Some of the vulnerable spots on the path of the eclipse are the West coast of US, the Yellowstone national park, and of course South Illinois, all of which fall on the path of the eclipse. Interestingly USA came into existence after a total solar eclipse was seen in USA in 1776. Interestingly another total solar eclipse will be seen over USA on 8th April 2024, and the paths of the 2 eclipses will overlap each other at Carbondale (also known as Little Egypt) in South Illinois. This makes for a deadly combination: Natural calamity may strike US in the form of Tsunami on the west coast or Volcanic eruption at Yellowstone, combined with economic collapse of 'Illinois'. The effects of the Eclipse are normally felt for several weeks after the event.

A global Currency reset is now inevitable. Can the BRICS nations play an important role in providing an alternative global currency? The BRICS summit at Xiamen, China from 3-5 September could play an important role. We can only pray that the transition to a new World Economic order is peaceful and without much destruction. 

Markets hit new highs: 'Make hay while the sun shines'

On Thursday 13th July 2017 BSE Sensex scaled a new landmark: Mount 32000. Entire media went Gaga over the event, every newspaper carried the news as their headline. Maybe the media will have another event to celebrate soon: NIFTY hitting 10,000: it is only 100 odd points shy of the coveted mark. Now a flashback: NDA Govt. under PM Modi presented its first budget on 28th February 2015 and the Nifty touched 9129 that day, which became a headline the next day. We all know what happened thereafter. Again when NDA presented its 2nd budget on 29th February 2016, Nifty did a U-turn and touched 6826 three days later. The newspapers carried this as their headline on 4th April 2016. Rest is history: Nifty in July 2017 is at 9900 grabbing another headline. I need not tell you what is going to happen next: because history repeats itself.

That is why the title of this post is 'Make hay why the sun shines'. I had heard stock markets being labelled as 'Satta Bazar' or 'Casino' but never believed that stuff. But the way stock markets are being manipulated around the world today, we need to rethink. The major Central Banks around the world (US FED, ECB, BOJ etc) have colluded with one another to create a slush of liquidity to lift stock markets to unsustainable levels, having total dis-regard to the principles of economics. The artificial money created by Central banks has not helped the poor sections of society, instead they have created a greater rich-poor divide. They have also helped their respective Governments to pile up excessive debts which they are unable to service. Their game plan is now about to end, which will lead to the greatest asset bubble burst in history and the ensuing stock market collapse world over.

A global currency reset is inevitable: US Dollar will cease to be a global currency. We all know that the US economy is in a massive debt trap, so what will cause the bubble to burst. Today US is passing through one of the greatest political crisis in its history. The divide between the Democrats and Republicans has reached dangerous proportions. Democrats who thought that the post of President of USA was their right have not been able to accept Trump at the helm of affairs. Several stories are being cooked to implicate Trump and his family, and they might even try to get him impeached. On the other hand Trump is also collecting evidence against Obama and Hillary, and may open criminal investigations against them. All this does not auger well for an economy that is under serious threat of exploding. As I have mentioned in my previous post several US states are on the verge of Bankruptcy. US Dollar is fast losing its grip as a 'Reserve currency' with as many as 23 countries bypassing US Dollar as a medium of payment for international transactions. The fall of the Dollar, and along with it the Equity markets is a foregone conclusion.

What could be the alternative to the US Dollar? The Euro zone has its own share of problems, so Euro may not be looked upon as a viable alternative. A viable alternative can be provided by the BRICS (Brazil, Russia, India, China, South Africa) nations. Together these nations account for 43% of the world population and about 25% of the world GDP, which is equal to the GDP of USA. They have already launched their own alternative to the IMF called the New Development Bank (BRICS Bank). It would be in the interest of India & China to strengthen the BRICS agenda rather than fight over petty issues. The 9th summit of the BRICS nations is scheduled to be held at Xiamen, China in September 2017. This would be an opportunity for this group to provide global leadership in the aftermath of the US Dollar collapse.

Now coming to the markets and the behaviour of various asset classes in the aftermath of the global crisis. This is the last opportunity for the investors to book profits in the equity markets, as the markets may start correcting within the next couple of days. We are looking at a 40-50% erosion in US stock prices, which will lead to a correction of up to 20% in Indian markets as well. The crisis may also lead to softer energy prices, which will be good for countries like India. That is why we shall fall much less as compared to western markets. The best investment bet in these troubled times would be precious metals (Gold & Silver). The prices of Gold & Silver have been artificially suppressed by big US banks operating in the derivatives segment, whereas the physical demand for these metals continues to be high. Gold and Silver touched record highs of $1900/ ounce and $34/ ounce in 2011, and since then they have corrected substantially. They are likely to regain these levels, and even beyond, within the next one year. This translates into a return of 55% and 110% respectively from the current levels. Investors are advised to switch a part of their investments into Gold ETFs or Silver futures to make a killing in the emerging scenario. Please enjoy the last leg of the global rally in equity markets and await for the turn of the cycle, which may kick in sooner than most people expect.

Global Economic Meltdown: Its impact on Indian markets

In my last post I had discussed the prospects of a global economic meltdown likely to be triggered by a US economic collapse. I have got an overwhelming response to the post: It ranges from appreciation to disbelief, some of the readers have painted me as a doomsayer, some have questioned the legitimacy of the 'bombshell' I have dropped. I would like to assure my readers that whatever I have written is based on thorough research backed by hard facts. The reasons for the shock and disbelief is confounded on the fact that the information I have shared is being suppressed by mainstream US media, so most people are unaware of the activities of the 'Deep State'. However, a lot of information is available through private channels on 'Youtube', which includes serious warning by top economists, which has often been ignored by US administration. I would request readers to read about 'Deep State' in context of USA and you would understand how deep the conspiracy is.

The actions of the 'Deep State' and the 'Federal Reserve' have helped in creating the biggest bubble in the history of USA, which is now threatening to explode anytime. The 'Deep State' has become so powerful that even the US President and the US Congress are forced to tow their line on several occasions. About Federal Reserve it is said that the statement of FED chairperson has more impact on the US markets than the actions of US President. And this is the root cause of the malaise that has set in the US: The vested interests of Deep State have been responsible for trampling upon the rights of US citizens as well as the Sovereignty of Independent nations. The policies of the FED in the garb of 'Quantitative Easing (QE)' has led to creation of a debt monster which is now impossible to contain. In the process the number of billionaires has increased manifold in US and the middle class has been wiped out. These billionaires are now running the Deep State and the mainstream media, which serves their vested interests. The top 1% of US citizens hold over 50% of the wealth of US, According to estimates 40% of US citizens are living below poverty line, as they have no means to buy food beyond one week, if a calamity strikes. And this has the potent of a civil war engulfing the nation if any calamity strikes. Donald Trump has shown signs to challenge the Deep State which may create a conflict within the US administration. As is it, the mainstream US media (the likes of CNN & NBC) are against Trump and his policies due to their vested interests.

We all know that US is a Confederation of 50 states, each state enjoying very high autonomy. At least 9 out of these states are on the verge of bankruptcy as they have amassed huge budgetary deficits. They can levy taxes on their citizens, but they cannot print notes like the Federal Reserve. Further, US laws allow institutions to file for bankruptcy but states are not empowered to do so. Readers are advised to read about 'the plight of 'Illinois' a US state which is already bankrupt, it has not presented a budget for 2 years and has no money to pay its employees. The state of several other states is no good: to name a few: Connecticut, Massachussets, New Jersy other than Illinois. It may not be possible for the Federal Govt. to offer bail-outs to these states. Disaster will be the first to strike these weak states as soon as the stock market crashes and US Dollar goes into a tailspin.

What will be the impact of this crisis situation on the Indian economy. Let us analyse the performance of our economy and the state of our markets. The Indian economy is not in the pink of health. Our economic growth is over dependent on the services sector, the 'Industrial' and 'Agricultural' sectors being continuous under performers. Despite the slogans of 'Make in India' employment generation has been at the lowest in several decades. The golden lining has been the remittances from Indian diaspora working abroad. which keeps us going. But this phenomenon is now under serious threat due to the escalation of global tensions and inward looking policy decisions by developed nations. Notably, US and UK have announced policies to limit white collared jobs to expats. The conflict within the Arab world (Qatar being marginalized by powerful Saudi Arabia & UAE) does not auger well for our citizens working there.

Our stock markets have been artificially propped up by prospects of a good monsoon and the passage of GST bill. But the progress of monsoon is now showing serious faults in the distribution of rainfall across the country. Implementation of GST is again fraught with several risks: Slowing down of the economy, escalation of inflation. Our markets have been thriving on excess liquidity which has returned to the economy in first quarter of FY17-18 as money supply limped back to normalcy. FIIs have also pumped in huge amounts due to surplus liquidity available with them. The results for Q1 are not likely to give any comfort to the FIIs. The situation is likely to change soon. The first signs of the slowdown have given jitters to the stock market on 27th June. Investors are advised to book out from equity markets/ lighten their positions ahead of the impending crash. Indian indices are likely to correct on their own fundamentals, which has the potential to take NIFTY to sub 9000 levels in the next couple of weeks. In the event of a global meltdown we could see sub 8500 levels on NIFTY in its aftermath. Although we are better placed than US markets, the contagion effect will play out: If US falls 40% we may also fall 20% from the current levels. The only safe havens in the turmoil would be precious metals; Gold & Silver. Investors are advised to safeguard their portfolio in the event of the occurrence of a global meltdown, which is coming soon.

The countdown has begun: US economy faces a grave economic crisis, US Dollar will cease to be a global currency

The writing on the wall is crystal clear: US economy is heading for its greatest collapse in history, far more serious than the great depression of 1929 and the Stock market crash of 2008. But unfortunately the manipulators are busy rigging the stock market to dizzy heights, ignoring serous warning from several senior economists and legendary investors like Warren Buffet, George Soros, Mark Faber, James Davidson among others. But the endgame has begun, it is only a matter of time before it is all over.

What ails the US economy and what would be the timing of this much awaited collapse, let us try to understand. The biggest problem with US economy is the ever ballooning debt: The national debt of the US economy is over $ 20 trillion (up from $ 1 trillion in 1980's) However, this figure does not include unfunded liabilities like unemployment grants, retirement and social security expenses. If these are included the figure is well over $ 210 trillion. The average US citizen carries a debt burden of over $ 600,000, which the highest debt per person in the world. In the past two decades the Political class and the Federal reserve have moved from productivity linked growth to debt financed growth. In the process US now boasts of a most corrupt political class and a highly irresponsible media which have been hiding the truth from the US people. The figures of official unemployment rate are 5.5%, whereas the actual unemployment is a staggering 23%. The US Dollar has been artificially propped up and interest rates artificially pegged too low to avoid the catastrophe. But the more the FED prints notes more deeper it gets into trouble. The FED has financed/ bought 71% of the US economic debt by printing dollars. The latest figures reveal that many countries including Russia and China have been aggressively selling US treasuries, and buying Gold instead.

Rampant gambling is going on at Wall Street where the top US investment companies are propping up the markets by over leveraging the funds lent by US Govt. The average exposure of the Top 5 investment companies (includes Morgan Stanley, BOA Merryl Lynch) is over 30 times their net worth, any stock market hick-up can force them into bankruptcy. The argument that these companies are too big to fail does not hold good any longer. Politically also US is passing through a very bleak phase. Donald Trump is trying his best to revive the economy, but the corrupt administrators are busy thwarting his decisions. They have also hatched a conspiracy to malign Trump. Even the FED Chairman is not supportive of Trump's policies and is waiting to shift the responsibiliy of the economic failure on the doorsteps of Trump. 

The crash now seems inevitable. It will lead to:

• A stock market correction of up to 50% (The current PE of the market at 27 is well above the historical average of 16, despite stagnating performance by companies
• The real estate market may follow suit with a fall of over 30%
• The US dollar will cease to be a global currency and its value may fall by over 20%
• The unemployment rate in US may double from the current level
• The banking system may be shut for few days, and there could be shortages of food and essential items
• Other global markets may also fall in tandem with the US market

Now about the timing of the impending crash. Although fundamentally time is over for the US economy, but the actual timing of the death knell will be signalled through a peep into astrology.:

A Great American Eclipse is going to occur on Monday, 21st August 2017. It is the first Solar eclipse in 99 years that will engulf the entire USA, total eclipse will be visible in 10 states. This will likely trigger the collapse of the US economy. The impact of the eclipse will be felt one month before its occurrence, coinciding with the Leo moon cycle (July 23 - August 21, 2017). This period would likely produce earth shaking moments for the US, which may lead to startling revelations against the US President or radical moves by him causing public anger & violence.

In a nutshell, US economy is likely to face a severe shutdown between June 21 & September 21, 2017. As a matter of abundant caution please advise your friends and relatives living or working in US to prepare themselves for this catastrophe. Those of you planning a trip to US may also take necessary precautions rather than getting caught unawares.

(Disclaimer: The aim of this article is not to create panic but help readers to understand the situation and take informed decisions about their wealth and property. The impact of this US crisis on Indian economy shall be analysed in a separate post)

Uncertain Global scenario may lead to turbulence in equity markets

I have been cautioning investors about the risks in Indian markets over the past few months. Equity markets have corrected substantially to the levels of 7900-8000 on Nifty, which I had anticipated. However, our markets have not factored in all the immediate global risks and the negative impact of 'Demonetization'. So where are the markets headed in the next few months from now on? Let us try to find the answer to this question.

Global research houses are now coming up with their revised estimates for India's GDP growth, and most of them have painted a rather gloomy scenario. There have been serious downgrades for GDP estimates for second half of fiscal 2016-17. As equity investors always take a forward looking bet on the markets, they are likely to take a bearish view in the near term. The 2 most important factors that stunned the markets in November (Modi's Demonetization & Trump's victory) would continue to drive the fortunes of our markets in the medium term.

International Factors:

• US Monetary policy action of raising interest rates has led to the strengthening of US Dollar. The Dollar index has risen beyond 103 and is likely to test 105 in the short term, putting pressure on inflows into emerging markets
• After several rounds of negotiations OPEC and non-OPEC countries have arrived at a consensus on cutting global oil output, leading to a sharp uptrend in Crude oil prices. Crude is like to head towards $60-65/ barrel, which is negative for net importers like India
• Protectionist stance by global leaders: Britain & USA may impose restrictions on overseas workers leading to a shrinking in global trade, which is negative for countries like China & India

Domestic Factors:

• Economic activity has slipped to multi-year lows, leading to a sharp decline in GDP growth for next couple of months. India may clock a GDP growth of 5.5-6% for FY 16-17, a sharp decline over the previous year
• Large scale unemployment in SME sector and Rural sector will put adverse pressure on consumption demand from the rural markets, leading to a big blow to our 'consumption theme'
• Rupee would continue to decline, leading to further exodus of FII money from our markets. FIIs would take any new bets on emerging markets only after January 2017, after Donald Trump takes over as US president on 20th January
• There is also a likelihood of an escalation in Indo-Pak hostilities across the border, adding to the economic uncertainty.

Considering the above factors corporate earnings of India Inc. are likely to grow by a meager 2% during FY 2016-17. The markets are likely to take the final plunge sometimes in January 2017, after the inflow of Corporate results for Q3 ending December 2016. The markets may react to levels of 7500 or lower on Nifty during that period. But due to the 'Spring effect' we could see a U-shaped recovery thereafter. The upcoming Union budget to be announced on 1st February 2017 could prove to be a game changer for the markets. Investors are advised to buy aggressively in the 7500-7700 range on the Nifty to lock in handsome gains during the next year. Long term investors should continue to hold on to their investments in the market mayhem.

Demonetization demystified: A 'Hormegeddon moment' for Indian economy

A fortnight has passed since 8/11, when PM Modi announced the 'Demonetization' of Rs.500/1000 currency notes, a step that has been hailed by many as a 'bold initiative' and 'catastrophic disaster' by others. While I fully support the PM's crusade against black money, corruption and counterfeit currency, I would like to analyse the issue of 'demonetization' from the perspective of an Economist. "Hormegeddon" is a term coined by entrepreneur and New York Times bestselling author Bill Bonner to describe 'How too much of a good thing leads to disaster'.

Demonetization is the act of stripping a currency unit of its status as legal tender. In order to understand the effects of demonetization let us have a peep into history. Demonetization has been tried by several countries in the past to meet the under noted objectives:

• To take out of circulation higher/ lower value notes that have become redundant
• To reduce Govt. debt and reduce inflation
• To remove counterfeit notes in circulation
• To curb parallel economy and illegal trade

In 1969, Richard Nixon, the then United States president, had, in one go, demonetized $10,000 and $1,000 bills. He kept only $100 as legal tender, which achieved its stated objective. But demonetization attempts by Ghana in 1982 and Nigeria in 1984 failed miserably as these debt ridden economies collapsed after demonetization. In 1987, Myanmar’s military invalidated around 80% value of money to curb black market. The decision led to economic disruption which in turn led to mass protests that killed many people. The demonetization that happened in North Korea in 2010 left people with no food and shelter. Mikhail Gorbachev ordered to withdrew large-ruble bills from circulation to take over the black market. The move didn’t go well with the citizens which resulted into a coup attempt which brought down his authority and the led to Soviet breakup. 

Several countries in the past have taken up demonetization drive. but those exercises were too small in nature. India also attempted demonetization in 1978 under PM Morarji Desai when Rs.1000/5000/10000 notes were banned. However, at that time the notes banned formed a minuscule 3% of the total currency in circulation. The present demonetization drive in India is unprecedented and biggest in the monetary history of modern world, as it attempts to take 86% of the issued currency out of circulation. The most acceptable argument in favour of the recent move seems to be a strike against counterfeit notes which have been widely used for terrorist funding. As far as black money is concerned about 97% of the black money generated in India is parked in foreign accounts, real estate and precious metals (gold & bullion), and only 3% may be held in the now banned currency notes. As per RBI estimates out of total currency notes issued worth Rs.1754000 crores, 86% are in denominations of Rs.500/1000.

The immediate likely advantages of this move are:

• A size able curb on Hawala trade from across the border, a big blow to terror funding in India
• A huge surge in liquidity for the banking system, paving the way for lowering of lending rates
• A one time windfall gain of around Rs.3,00,000 crore for the Govt. (in the shape of notes not getting deposited in the banking system), leading to lowering of Govt. fiscal deficit.
• A drastic fall in inflation due to scarcity of money.

Now let us analyse the disadvantages of this move:

India has been billed as the fastest growing economy in 2016-17, which resulted in it getting the status of the most favoured destination for foreign investment. Demonetization will lead to a major dent on our growth prospects leading to a catastrophic effect on future investments in India. The major ill effects are listed below:

• India's GDP is expected to shrink by almost 50% during the second half of fiscal 2016-17. Our GDP estimates for the whole year would be revised downwards to 5-5.5%.
• Indian economy adds approx. 1.2 crore people to the job market every year. With the shrinkage of economic activity most of these people would add to the unemployment stream, leading to widespread discontent.
• The capacity utilisation of the Corporate sector which is already at a low of around 63% is likely to dip further, leading to a fall in turnover and employment generation.
• The likelihood of small business sector taking a major hit are very high. This may lead to closure of several businesses leading to widespread unemployment and higher NPAs for banking sector.
• The shoddy implementation of the scheme is already adding to the woes of the underprivileged sections of the society, especially the daily wage earners.
• The political deadlock over the issue is causing delay over several important legislation, like GST, which is likely to get postponed by one year. 
• The cost of replacement of 86% of the currency is going to be pretty high, although RBI has not given any figures yet.

How far the Govt. is capable to cope up with these challenges will determine the success or failure of this exercise, till such time the patience of millions of honest/ law abiding citizens of our country shall be continuously put to test.

Investors fasten your seat belts: The D-Day has arrived!

Investors across the world are on their tenterhooks as US awaits the announcement of its 44th President. There has been a lot of discussion/ speculation around the world as to who is going to be the next incumbent to the White House. But from an economists' point of view it is hardly significant on who occupies the coveted position, as it is certain that the next incumbent would have to sign the obituary of the current 'Super Power' of the world. 

Believe me, the US economy is in shambles and the outgoing President Barak Obama must take due credit for this sorry state of affairs along with the Federal Reserve of the US Govt. In response to the faulty economic policies followed by the Obama administration, FED has been printing money to be distributed amongst the borrowers at the cost of the savers. This policy can be termed as 'rich getting richer'. US GDP growth during the eight years of the Obama administration averaged half the rate of the Clinton years and only one-third the rate of the Kennedy and Johnson years. The FED has followed a Zero interest rate policy for the past 8 years and is still shy of reversing it, but this artificially managed rate is no longer sustainable. When the US moved away from the Gold backed US Dollar standard in the early 70's, its credit to GDP ratio was 1.5:1, today it has shot up to 3.2:1. The new US President would have to address this anomaly, and the chances of declaration of a 'Financial Martial Law' in US are extremely high.

Thus, whom so ever wins the November 8 election, the markets around the world are likely to slip into a 'Coma' for a while before they are able to appreciate the reality. The next 2 months are going to be extremely volatile for the markets, as the transition of power in the US is not going to be a smooth affair. Things are likely to settle down only after the new President assumes office in the middle of January 2017. It is not going to be easy for the new President, as he would also have to prepare for transfer of the 'Super Power' baton to another nation. Who the next Super Power would be, will be decided in the next couple of years, but China seems to be a front runner for the crown, provided it is able to address its growth issues, which have taken a temporary beating.

Post the results of the US election, US markets would almost certainly lead to a fall in the markets worldwide, they could correct anywhere between 10-20% during the course of next 2 months. Investors in India are advised to tread cautiously during this period, as there is a likely hood of heavy FII outflows during this period. But at the same time it would provide a good opportunity to enter the market on declines, as India is on the cusp of a sustained bull run due to 2 major favourable factors: Low crude oil & commodity prices and a low interest rate regime. Indian markets could turn attractive after a 5-6% fall from hereon, that is around the levels of 8000 on the Nifty, when the risk-reward ratio would turn attractive. Mid Cap and Small Cap indices could go down more during this period, after their recent dream run.

Uncle Sam faces grave 'Economic Crisis': Will it go the Russian way!

While going through the history of 'Business cycles', we stumble upon an interesting fact: An 'economic crisis' or 'recession' repeats itself every 7-8 years on an average. Consider the historical evidence: Ever since the 'Great depression of 1931', the world has undergone a crisis situation at regular intervals. The last two crisis are still ripe in our memory: The crisis of 2001 (known as 'Dot-com bubble'), and the 2008 crisis (known as 'Sub-prime mortgage crisis'). This theory points towards another impending crisis in 2016-17. 

With the stock markets world over in the midst of an unprecedented 'Bull run', it is virtually unthinkable that a crisis is coming. So I had to brush up my knowledge of history to pin-point from where this crisis would emanate: Would it be Greece, China, Britain or any other country. The financial markets have braved all the negative news: be it failure of Greece, China's slowdown, Brexit or continuing recession in Japan, but will they be able to absorb the biggest shock that is knocking at our doorstep. Let me tell you a breaking news: 'Uncle Sam aka USA is broke' and will lead the crisis of 2016. I have been consistently warning my readers that the markets are over-heated, but the markets have continued to defy all logic in the recent past. I am happy that now people are giving heed to these sane voices. Here are a few statements, about American markets, recently made by some famous market experts:

•  “A $68 trillion ‘Biblical’ collapse is poised to wipe out millions of Americans.” - Jim Rogers
•  “Investors are on the Titanic” and stocks are about to “endure a gut-wrenching drop that would rival the greatest crashes in stock market history.”  - Marc Faber
•  “U.S. stocks are now about 80% overvalued.” - Andrew Smithers
• “Sell Everything” because “in a crowded hall, the exit doors are small.” - Royal Bank of Scotland

These American seniors have been worried about their nation's ability to pay out social security. Let us understand the reasons for their grave concerns about the future of American economy:

1. US is staring at mind boggling debt of $19 trillion, and an unmanageable fiscal deficit of $200 trillion
2. Inflation and Falling Real Wages: Retail inflation is higher than the figures declared by the Federal Govt., leading to an erosion in the real wages earned by a majority of Americans
3. American's have little or no money set aside for emergencies. According to a survey almost half (47%) said their savings would cover their living expenses for 90 days or less
4. The Federal Reserve’s fund rate has been coming down for more than 30 years, any hike would cripple the budget of an average American
5. US companies are increasing relying on foreign sales for survival, with global recession looming large these companies will find it hard to remain profitable
6. With the west losing its supremacy in the global sales, the world is looking with suspicion at US$ as the 'Reserve currency'. The recent decision by IMF to declare 'Rem nimbi' as an additional Reserve currency will add to the woes of US$.

These conditions are pointing towards a grim reality: The crash of US$ and the US stock market. To avoid this catastrophe US Federal Govt. may impose a 'Financial Martial Law' to shore up its resources, which means bad news for American citizens. At the same time US is also facing two more challenges: The US presidential election (The campaign so far has been reduced to a non-serious business with personal vendetta to the fore and major issues in the back-ground), and the chances of a full fledged war with Russia over Syria - as Russia has decided to challenge any diktat from USA or the NATO. Financial Emergency was last invoked in USA by President Nixon in 1973.

Will USA go the USSR way? The answer is 'No', because USA has a Federal Structure where states enjoy sweeping powers, and the US President is 'All Powerful' in the sense that he can be ruthless with the enemy as well as its own people in times of 'Emergency'. USA has enjoyed the status of the 'Sole World Super power' ever since the end of the cold war. But if the simmering discontent among the common US citizens spreads to the streets it may pose a serious threat to the Presidential form of Govt. in its present form. Will USA come out ever stronger as it did after the 'Nixon shock' of 1973, or will its supremacy as Sole World Super power threatened, and Barak Obama going  down in history as the last strong US President? Only time will tell, but the world is definitely moving towards a tectonic shift in the 'Balance of Power'.

Based on the above, my prognosis is: USA will lead the world into a deep economic crisis sooner than later. Investors are advised to reduce their holdings in risk assets like equity and real estate, and focus on alternate investments. An increased proportion of Debt and Gold in the portfolio would be a better option. If US markets are expected to crash by 30-40% as per estimates of analysts, Indian equity markets would also bear the brunt, although to a lesser extent,

Markets enter a short-term downtrend: Prepare for 'Bargain Hunting'

Indian equity markets have got the trigger, which they were looking for, to start an intermediate downtrend in the garb of 'Surgical strikes' by our armed forces in 'POK'. As pointed out earlier, our markets had moved far ahead of fundamentals, and a meaningful correction was long overdue. The correction is now underway and we may witness the markets sliding gradually to reasonable levels during the course of next 2 months or so. But at the same time it would be prudent to be flush with cash, as there would be opportunities galore for picking up blue chips at 'bargain prices'. As the festival season unfolds in India, companies would be launching mega sale of their products, similarly this year stock markets would also be offering bargain sale of blue chip shares of companies for the long term investors.
Those of you who have booked profits in shares, as advised in these columns earlier, can enjoy the festivities with purchase of your favourite products or take a dream holiday to your favourite destination. But do keep some profits aside to be re-invested in equity markets as they correct reasonably to give a better risk-reward ratio to long term investors.
Let us analyse the factors that are responsible for the on-going correction in equity markets. Let us first analyse the 'Geopolitical risks' prevalent in the world at this juncture:

• The diminishing role of US in the world affairs, will lead to escalating conflict in the middle-east, with Russia playing the role of a spoiler.
• Post 'Brexit' a closed Euro zone will face an enormous challenge grappling with the twin problems of economic stability and refugee influx due to terrorism.
• The economic instability in China looms large as it grapples with the 'Debt bubble' which could have far reaching consequences for the global economy.
• The 'Oil shocker' could escalate the war for supremacy in the middle-east, especially after lifting of sanctions against Iran, and its competitive stance against Saudi Arabia.
• The US presidential elections would keep the world on its tenterhooks till November, as it unfolds into a swinging battle between Hillary Clinton & Donald Trump.

India specific issues:

• Most positive news has already been factored in: A near normal monsoon & the effect of the 7th Pay commission arrears on consumption and inflation. The markets may get a temporary bump up if RBI announces a surprise rate cut in its October 4 policy, but it would be short lived
• Tensions across the border would give the markets enough jitters, leading to an increase in volatility.
• The 3rd quarter results may again prove to be a dampener, as most companies continue to be weighed by excessive debt, with no signs of demand pick up except in a handful of sectors.

The above factors indicate that the markets may have entered into a short-term corrective phase which may last for about 2 months, and the price correction has the potential to lead to a substantial correction in the indices: I would be comfortable with a Nifty level of around 8000 to commit fresh funds for long term. This would be the level around which I would advise investors to seek 'bargain hunting' in accumulating blue chips for the next bull run on Indian bourses.

Equity markets are overheated: Do not reflect Economic fundamentals

Indian equity markets have entered a danger zone, and a severe fall can not be ruled out once global liquidity dries up. Equity markets made new highs today with Nifty touching 8800 during trading hours. Markets seems to have discounted all the good news, however, seem unconcerned about the impending domestic & global concerns at this juncture. Most of the analysts are misleading the common investors by giving absurd targets for the indices in the days to come. I would like to caution the investors about the challenges faced by the global economy, which are likely to have an adverse impact on our equity markets.

Domestic issues: The GDP figures for the first quarter of this fiscal, released in the evening, have exposed the weakness of the economy. GDP for Q1 has slipped to 7.1% as compared to 7.9% for the previous quarter (Q4 of FY 2015-16). Industrial growth is down to 6%, Agricultural growth is down to 1.8%. The day has been been saved by Service sector growth at 9.3%. More worrying news comes from the Fiscal deficit front where the Govt. has reached 73% of the budgeted target within the first 4 months of the year, implying that it will exceed the Fiscal deficit target by a huge margin. Despite passing of the GST bill, the Govt. is not fully prepared for its roll-out from April 2017. The prediction for an above normal monsoon had been discounted by the market, but the progress of monsoon reveals that its distribution has not been up to the mark. The markets are again irrational in discounting the impact of  'Arrears paid to Govt. employees' as the same is likely to be inflationary in nature.

Global scenario: The global markets are flush with stimulus funds which are driving equity markets to crazy levels, far ahead of fundamentals. I would like to mention 3 inflection points which would lead to a negative slide in our markets:

1. Interest rate hike by US Federal Reserve: The oft postponed rate hike is now inevitable, it is likely to be announced in September. This will lead to strengthening of the US $, leading to the flight of capital from equity markets to safe havens like US treasuries, Gold & Silver. It would also have a negative impact on our already shrinking exports to developed markets

2. Impact of Brexit: As euro-zone prepares for Britain's exit, the instability would lead to drastic cut in Capex budget in the euro-zone and consequent decline in IT exports to these countries from India. New regimes in UK and US are seen moving toward stringent immigration laws, leading to a fall in global Indian companies operating in or supplying to these countries.

3. Financial turmoil in China: China's growth has been an enigma for the entire world, but now the cat is out of the hat. The next round of global instability is likely to be inflicted by China, as the country's debt has been mounting to unreasonable levels. China may resort to further devaluation of its currency to stem the rot, but it may have a cascading effect on developing markets, and India is unlikely to be spared.

In such a scenario our equity markets will need to correct substantially, to make them reasonably priced (Nifty index currently trades at a PE multiple of over 23, as against the average of 14-16). Nifty index has had a non-stop run from 6825 to around 8800 within the past 6 months. A reasonable correction from these levels would take the Nifty in the range of 7800-7900 levels (a 50% retracement of the recent rise). Investors are advised to book substantial profits at the current level, and wait for a correction to around 8000 levels on the Nifty to re-enter again. The fall in Mid-cap & Small-cap stocks could be much deeper.

India's GDP Growth: Myth & Reality

If statistics are to be believed, Indian economy has become the fastest growing economy in the world, raking in a GDP growth rate of 7.6% in FY 2015-16. What is even more shocking to digest is the GDP number of 7.9% for the 4th quarter ended March 2016. Many economists are scratching their heads in disbelief at one of the biggest 'economic fraud' of the Govt. of India. A section of media and the crony capitalists may be singing praises for the Govt., but the figures simply do not add up. Here are some bitter facts about the real economy:

• 2/3rd of the population living in rural India continues to be in extreme distress
• Salaries may have gone up in urban India, but high food inflation is keeping the folks unhappy
• Even the benefit of low crude oil prices has not been passed on to the people: Petrol is back at Rs.70 a litre
• Most corporate houses are shying from fresh investment as the profit margins have shrunk to multi-year lows
• Bank's have been unable to pass on the benefit of low interest rate to the population as they are grappling with the worst NPL crises.
• Exports, imports and remittances from abroad are sharply down
• The manufacturing PMI of 50.7% for May 2016 is the lowest in the past 5 months
• Growth in public spending, which should act as the key driver of growth, marked a sharp drop by 5.4% in fiscal year 2016 
• Employment growth plunged to a six-year low in 2015 across the eight key labour-intensive industries and only 0.1 million jobs were created last year.

The above data highlights the real report card of the present Govt., at a time when it is celebrating completion of 2 years in office. The Govt. has failed to provide any economic stimulus during the past 2 years. Private consumption has been calculated to have grown by a whopping Rs.1,27,000 crores without any evidence supporting the figures. Many economists argue that there are anomalies in the new series of GDP estimates released in January 2015. As per the old methodology Indian economy may have barely grown by 4%, or half of what has been reported recently. The economic jugglery or the biggest 'data fudging' may soon be questioned at international forums, and India may risk a downgrade in its sovereign rating.

There are 3 main culprits responsible for India's current dismal economic situation:

1. Arun Jaitley, FM: A man without a political stronghold, who never won an election and yet catapulted to the position of FM, he has failed to handle the situation effectively, despite the windfall received due to the crash in global crude oil prices. During his tenure rural demand has slipped to its lowest ever, and consequently fresh investment has struggled. He may turn out to be the most incompetent FM India ever had.

2. Subramaniam Swamy: The loose canon of BJP, who has prepared the ground for passing the buck of Govt's economic failure at the doorstep of the RBI Governor. The man chosen by BJP to counter the Gandhi family may turn out to be an embarrassment for the party.

3. TCA Anant, CSO: For doing the data fudging at the behest of his masters, Modi and Jaitley.

The Govt. may be relying heavily on the better monsoon forecasts for the current year for a turn around in its fortunes, but there are far too many other factors like the distribution pattern, which play an important role in the overall impact of the monsoon on the economy. Relying merely on a single factor for a turn-around could be asking for further trouble. A lot needs to be done by the Govt. on the economic front, before it is too late, they need to compensate for the uneventful first 2 years in office.

Equity markets on 'Tenterhooks' on Financial sector flip-flop

The short term recovery in our equity markets that brought the Nifty close to the 8000 mark, failed to sustain as Financial sector outlook remained uncertain. Nifty did make a smart come back from the levels of 6825 touched on the budget day, but the status-quo announced by Bank of Japan (BOJ) on quantitative easing took the wind out of the markets. On the other hand, weakening of the dollar (after taking ques from BOJ) stretched the rally in gold as the precious metal traded close to the 1300$/ ounce mark. We have seen a sharp decline in global equity markets towards the end of the month. Our markets have other issues to digest beyond the weak global signals.

The most important question for our markets is the Health of our Financial sector. The dilemma before the analysts is to decide whether the declaration of bad loans in the balance sheets of Banks (responding to the dictat of the Central Bank), and the corresponding hit on the bottom line, a positive development or it should be treated as alarm bell for the health of the Financial sector. As at the end of December 2015 the gross NPAs of 39 listed entities of the banking sector amounted to over Rs.4.38 trillion. And a staggering Rs.6 trillion is classified in the categories SMA 1 & 2, a portion of which will definitely find its way to the NPA category over the next financial year. 

To add to the woes of the Banking sector is the alarming situation existing vis-a-vis NBFCs (there are over 11000 NBFCs registered with RBI). As per RBI's report on NBFCs, where the norms for NPAs are less stringent as compared to banks, they have 3.5% bad assets on their books. The sectors contributing towards the stress assets are: Infrastructure, Steel & Power to name a few. 

With the economic revival still at least 2-3 quarters away, the stress on the books of Financial sector companies is only going to escalate before it begins to decline. Given the acute drought situation prevailing in the country, something more that an above normal monsoon will be needed to help the Financial sector overcome its current set of woes. The equity markets have perhaps sensed the alarming situation, and are likely to remain subdued in the immediate future. A marked improvement in the market fortunes is linked to a meaningful turn-around in the health of the Financial sector. 

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.

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.

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.

 

 

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.

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.

'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.