Thought for the day
“If you can talk brilliantly
about a problem, it can create the consoling illusion that it has been
mastered.”
-
Stanley Kubrick (American, 1928-1999)
Word for the day
Inglenook (n)
A corner or nook near
a fireplace
(Source: Dictionary.com)
Teaser for the day
Mr. Murthy, please be informed that politicians,
bureaucracy and police in India do work on corporate compensation structure.
Low fixed – high variable.
Stock options are encashed by selling coal, spectrum, jobs,
roads, Apartments etc.
What to do?
The bad things are easier to believe. Haven’t you noticed
that?
-
Vivian to Edward in movie Pretty Woman
In past few trading sessions Indian equities appeared to have
lost the momentum seen since November 2013. Renewed concerns over sustainability
of global economic growth seen in 2013, QE tapering, further worsening of
domestic macro data, and rising stress in financial sector are some of the
factors prima facie responsible for
current round of sell off. A good (so far) earnings show by companies, perhaps
the best in many years, is a consolation.
The mute question now is what should investors be doing in under
the current circumstances? Should they be cutting their exposure to risk
assets, like equity, and sit on cash or they should use this opportunity to
build a risk portfolio keeping the next growth cycle in mind?
I feel before we devise an appropriate investment strategy and
asset allocation plan, it is important to comprehend what exactly is bothering
the markets and what are the likely scenarios that may evolve during the course
of next few months.
In my view, broadly the following three factors are likely to
impact our financial markets, especially equities, in next few months:
Domestic macro deterioration
The fiscal slippages ahead of elections, accelerated liquidity
tightening, persistent high inflation and therefore pressure on rates, higher
credit costs and slower consumer demand are some notable macro headwinds
impacting the investors’ sentiments.
Besides, new RBI norms on provisioning (if implemented) might
lead to accelerated recognition of NPAs and therefore further tightening of
already constricted credit market. This comes at a time when fiscal constraints
are anyways limiting the capital infusion in PSU banks.
Political uncertainty
As I expected,
the prospects of Modi led BJP getting close to 225 is already causing panic
amongst most regional and smaller national parties. This shall lead to united
opposition and hence even higher uncertainty about election outcome. If AIDMK,
BJD, JDU and SP, etc. join hands, and TMC, BSP, RJD etc. come closer to
Congress, NDA would be seen falling short by30-40 seats even if BJP gets 210
seats on its own.
This should keep investors guessing till the results are
announced in middle of May 2014.
Global economic conditions0
The global deflationary pressures have risen significantly in
past two months. Historically, QE withdrawals have usually led to accentuated
deflationary pressures and substantial fall in risk asset prices across the
board. EU, China, Australia, LatAM, Russia, South Africa are all giving some
worrisome signals. US yields, gold, copper, JPY indicate that perhaps a massive
risk off is building.
To my mind, the unusual strength shown by Indian equities post
Fed withdrawal is exactly that – UNUSUAL. At some point in time in next few
months, the market needs to normalize by showing some fear…to continue
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