…and save my fears!
As discussed in yesterday’s post, the best case for Indian
equities could be a selective rally, similar to 19
However, this rally should not sustain beyond a point in time, if the domestic
economic conditions fail to show substantial pick up. This prompts some
thoughts on the worst possible case.
In our view, the worst possible case for Indian equities
could be as follows. It is important to note that this is not the base case for
us, but nevertheless possible.
(a)
The pre-conditions for emergence of green shoots
of recovery that have been taking shape globally, especially in US and China,
subside prematurely; leading to abortion of famous “great rotation”.
US spending cuts, scaling down of Chinese growth estimates,
gradual unwinding of commodity trades, and 10% fall in US and German treasuries
over past one week, suggest that nothing is a given as yet.
(b)
The governments world over are mostly out of
fiscal options. The EU, US, and Japanese central banks are determined to back
stop any financial or liquidity crisis. However, post Italy election market
reaction suggests that the Central Bank Put may not be as effective, especially
in case of a political crisis. The much feared “currency war” which is mostly a
political phenomenon, could become a reality should the EUR weakens
substantially due to political instability, particularly in Southern Europe.
In this eventuality, there could likely emerge new points of
vulnerability, especially in commodity world, e.g., Latin America, Central
Europe, South Africa and Australia.
(c)
Indian economy fails to grow beyond 6% in next
two years, thus worsening the unemployment conditions, CAD grows as external
demand shrinks, and lower investment keeps domestic supply conditions tight.
WPI eases but the consumer prices remain elevated, preventing major monetary
easing. Next general elections throw a fractured mandate with none of the two
national parties going beyond 140.
(d)
Corporate earnings stagnate for another 3years
like FY09-FY11, and market gets
In this scenario, with Sensex EPS of Rs1300-Rs1400, market
trading at trough period average multiple of 12x, the market will be stuck in
15000-17000 range for more than two years, with occasional violations on both
the sides.
The worst case scenario in our view thus projects a scenario for
Indian equities, where even the nominal 2008-2015 returns could be negative in
absolute terms.
However, we may reiterate, this is not our base case outlook. We
shall discuss the more likely (our base case) scenario in tomorrow’s post.
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