Thursday, February 21, 2013

Hopes, greed, and fear


Hopes, greed, and fear

Our recent interactions with investors and businesspersons have convinced us that the though the greed is staging a comeback with rising hopes, the fear still continues to be the dominating factor in influencing the investment decisions.

We conclude that the following three may be primary sources of high hopes:

(a)   The slowing growth rising stress in the financial system prompt RBI for an aggressive monetary easing in second half of 2013. Easing inflation, government’s resolve to return to sustainable fiscal path should support RBI’s easing decision.

(b)   The liquidity tightness seen since past few quarters should ease (i) as the government starts spending in new fiscal year; (ii) 9 state assemblies going for election followed by the general election due May 2014 should also prompt higher government spending; (iii) lower inflation and direct cash transfer scheme will leave more money in the hands of consumers to do some discretionary spending; (iv) a normal monsoon will prop rural income and consumption besides savings and deposits: (v) banks will be done with most of the restructuring in 1H2013 and should be willing to lend more in 2H2013 thus improving the liquidity.

(c)   Global economy shall stabilize in 2H2013 with abundant liquidity, still lower rates, stable energy prices (as US energy production continues to rise) and US, EU and Chinese consumers returning to market.

The greed is rising alongside hopes as the investor positioning is ultra conservative and manufacturing and services capacity addition has lagged in past four years. Besides, the valuations (and more importantly the current market prices of stocks) are looking cheaper relative to the boom years of 2006-07.

But surprisingly, no urgency is seen amongst investors and businesspersons to catch the first flight. Since the fear still continues to dominate

The fear is stemming primarily from the political uncertainty and structural weaknesses in the economy. The general sense appears to be that the 2014 elections may produce a fractured mandate with none of the national parties crossing 150 seats. In that case the 1989 and 1996 experiments will recur, deepening the economic crisis even further. This fear will not abate by any stock market rally. We shall have to wait till the 
election results are out.

Secondly, it is feared that the 8%+ growth seen during 2003-2008 period may not be seen in next five years as the economic potential of the country has suffered badly due to severe infrastructure bottlenecks, low capacity creation, falling savings and investments rates and consequent sticky inflation. The earliest evidence, if any, to allay this fear will be available only in 2H2013 when the monetary easing (if any) starts reflecting in IIP and consumption numbers.

Under these circumstances, we continue to remain hopeful that we shall get a better entry point in Indian equities during summer of 2013. Till then savor the cash and watch the targets carefully.
An interesting tag line behind a truck: Jinhe jaldi thi woh chale gaye (Those who were in hurry have passed away.)

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