"Preach the Gospel at
all times and when necessary use words."
-
Francis of Assisi (Italian, 1182-1226)
Word for the day
Foison (n)
Abundance, Plenty
(Source: Dictionary.com)
Malice towards
none
What happens when you spit
at the Sun?
How could someone defame me?
How long this macro trade can drive the equity returns?
Wednesday morning the financial markets appeared quite relieved
and cheerful. Grexit concerns out of way for now and prospects of further
reduction in energy cost on resumption of normal supplies from Iran charged the
bulls and bears equally. Bull traders were motivated to take fresh positions as
the benchmark indices crossed some key technical resistance levels and bears
were pressurized to reduce short positions.
This all occurred despite consensus on poor corporate performance
and worsening political landscape clouding the key legislative business like
GST and Land Acquisition Bill.
An analysis of the Indian equities' performance in past one year
makes it clear that the trade has so far been mostly on the macro side.
Improvement in fiscal conditions has mostly been driven by cut in
government's social and administrative spending, lower energy subsidy, delay in
implementation of national food security law, higher service tax and higher
road cess on fuel sale, and asset sales (including spectrum and coal).
The current account looks better primarily due to lower crude
bill, lower capital goods imports, lower gold demand, and higher remittances on
rising rate differential.
Retail inflation appears under control - courtesy some deft market
management, crash in global food prices, high base impact and to some extent
due to moderation in demand. Wholesale inflation is in deflationary mode for
past eight months primarily due to lower demand, lack of pricing power with
manufacturers, and issues with the construction of the price index itself.
The credit demand is at multiple decade low. Consequently the
rates are trending lower. After a gap of many years the real rates are now
positive - a good omen for arresting the declining domestic savings.
The macro trade has also been driven to a large extent by the
relative strength of Indian economy and political establishment as compared to
other emerging markets. Indian currency has been rather resilient as compared
to most emerging markets. The growth has collapsed in commodity driven emerging
markets (e.g., Brazil, South Africa, Chile, Venezuela etc.) due to global
economic slowdown. Many emerging markets (e.g., Indonesia, Thailand) have
witnessed political and civil unrest. Recently, Chinese equities have corrected
majorly sparking fears of collapse. This may also lead to little higher
preference for relatively stable Indian markets amongst global investors.
However, the question will remain "how long this macro trade
can drive the equity returns?"
At some point in time, the traders will become pious and try to
invoke investment fundamentals. Then the corporate earnings and micro economic
conditions would be evaluated at their face value.
This in my view is both an opportunity and threat for the Indian
equities. If macro strength finally manages to permeate through the corporate
performance, we may see a massive rise in the investors' interest in Indian
equities leading to a bubble like condition in prices. Else, the correction is
as far as the next negative headline.
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