After a very hectic couple of months, the financial markets
globally have been mostly calm in past few days.
Globally, the sensationalism seen ahead of US Federal Reserve’s
FOMC meeting earlier this month has certainly subsided. The US government shut
down threat is getting only guarded response from market participants.
The Fed statement post FOMC meet, caution urged by legendary investors like Warren Buffet,
Mark Faber etc. and ECB’s dissatisfaction over speed of EU economic recovery
has also calmed the over enthusiastic bulls who were unusually upbeat on the US
economic growth in particular. UK housing prices also briefly provided fuel to
bull’s flight, but the regulatory concerns over the trend has highlighted that
it would perhaps be a mistake to see housing prices as reflection of economic
strength. The alternative global financial center Singapore has also echoed the
same sentiments.
In domestic markets, the recent RBI policy statement facilitated
a tryst with reality. In our view, the following five points are amply clear:
(a)
Inflation continues to be a worry. Consumer
inflation should at least be an equal consideration in policy formulation.
There is little to suggest that composite inflation will ease substantially in
near term.
(b)
The evidence suggests that interest rates alone
cannot spur the economic growth. A lot needs to be done at fiscal and economic
policy front. This will inevitably involve many unpleasant decisions that may
cause pain in short term. The visibility of this occurring in near term is
obviously low due to impending elections. In the meanwhile, the monetary
instruments like higher rates and tighter liquidity would continue to remain in
operation.
A Reuters’
poll post Friday rate hike has indicated that “expectations for monetary
policy have shifted towards further tightening”.
(c)
Higher inflation, higher rates, tighter
liquidity should essentially lead to slower economic growth for next few
quarters at the least. Most independent forecasters are now forecasting FY14
GDP growth between 4.5-5% and a muted recovery in FY15.
(d)
Consensus earnings growth expectations are
implying double digit earnings growth for FY14 and FY15. However, given the
demand environment this does not look sustainable. We may therefore see
earnings downgrades for FY14 and FY15 post 2QFY14 results to be announced over
next six weeks.
(e)
Despite earnings growing over 55% from FY08
level, Sensex is almost there where it ended the year 2007. This is a clear
indication of de-rating of Indian markets, along with other BRIC peers. A
serious re-rating does not seems to be in offing.
However, what is plausible is the
correction in “Re-rate quality and De-rate stress” trade due to political
optimism that seems to be building.
This is a trading opportunity,
provided you could identify the “quality” within the “stressed universe”; a
tough task, for sure. But take your chances.
Thought for the day
“The superior man understands what is right; the inferior man understands what will sell.”
Confucius (551-479BC)
Word of the day
Ploce (n)
The repetition of a word or phrase to gain special emphasis or to indicate an extension of meaning.
(Source: Dictionary.com)
Shri Nārada Uvāca
Why no arrest so far in NSEL case?
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