Thought for the day
“The power of accurate observation is commonly called
cynicism by those who have not got it.”
-
George Bernard Shaw (Irish, 1856-1950)
Word for the day
Boîte (n)
A nightclub; cabaret
(Source: Dictionary.com)
Teaser for the day
Who plays the game of anarchy better AAP or MNS?
Nothing new to panic about
The sky over global financial markets has suddenly turned
overcast. There is little sign of sunshine that was bedazzling investors’ eyes till
middle of last week. The problems which were always there for everyone to see
and feel have captured headlines in perfect synchronized fashion. Consequently,
here it is – the first risk off trading spell of the year 2014.
Since there is little evidence of any fresh catalyst for the
synchronized global “risk off”, the only plausible reason I could think is the
impending FOMC meet on 28-29 January and expectations of Fed further moderating
the bond buying program.
With the benefit of hindsight, we know that in past there have
been many occasions when synchronized market movements have been orchestrated
to influence major policy decisions by Fed, ECB etc. If this is the case, the
current weakness in the market may continue for another couple of days. However,
if the current sell off is result of serious realization that the bullishness
seen since second half of 2013 might be a case of undue optimism we might see a
much deeper and prolonged correction over next couple of months.
Nonetheless, as I have been highlighting since past many months,
it is important to note that while the “whatever it takes” attitude of world’s
largest central banks (Fed, ECB, BoJ, BoE and PoBC) has prevented the global
financial system from collapsing giving a semblance of stabilization, the
objective of sustainable and faster economic growth is far from met. The
repression of “savers” across the globe has brought the global economy at the
verge of deep deflationary abyss.
I, like most others, hope that this will the “point of return”
and all will be well by the end of this decade. However, you may call me
cynical for I do not expect a miracle to happen in next couple of quarters.
In the particular context of India, I have consistently maintained
that any sustainable equity rally will occur only due to domestic factors –
growth stabilizing close to 6%; substantial balance sheet corrections –
corporate balance sheet correction by distress sale of assets and financial
institutions assuming a large share of stress (like mid 1990’s) and government
balance sheet correction through stronger financial repression (higher negative
real rates and weaker currency); sale of public assets, fiscal prudence (higher
taxes – lower subsidies) etc.
I believe that nothing of this sort happening in next couple of
quarters at the least (Modi or no Modi). The Indian economy should continue to
struggle with stagflation like conditions for at least 4-6 more quarters. High
inflation and rates should keep growth below potential and financial stress
relatively elevated. Investment and credit as investment theme may therefore
not perform in short to medium term.
The substantial downside in Indian equities may come from the
global factors, primarily negative flows due to whatever reasons.
A sharp shallow bubble building rally similar to 1999-2000, will
not surprise me. I am though not too inclined to participate in such a rally.
Rather whenever such rally occurs, I’ll be busy in the side show preparing for
the next boom.
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