"No sensible decision can be
made any longer without taking into account not only the world as it is, but
the world as it will be."
- Isaac
Asimov (American, 1920-1992)
Word for the day
Mollify (v)
To soften in feeling or
temper, as a person; pacify; appease; to mitigate or reduce;
(Source: Dictionary.com)
Malice towards
none
Aug WPI down 4.95%. Will the
Government come forward to claim credit for this fall in prices?
or will it accept it as a
problem?
2008 like panic selloff (not likely) will certainly be an opportunity
The economists and strategists worldwide are busy preparing for
the first Fed rate hike ("the Lift") in over a decade.
The recent data has pushed the debate over "IF" to the
fringes. The debate over "WHEN" is also no longer aggressive. The
consensus is that it is certainly happening in calendar 2015.
Those whose strategy and portfolios are fully aligned are
expecting the Fed to begin lifting in right earnest from 17th day of September
2015 and reach summit before summer of 2018. Simply, look for OW USD, UW Gold,
UW EM Currencies & Equities to locate this group.
Those who are not fully prepared are hoping it to begin sometime
in 2015 and then pause for a long time giving them time to prepare for the yet
newer normal. To locate this group look for terms like "differentiated EM
strategy", "bull market in bonds not over yet",
"opportunities in peripheral European debt", "Chinese equities
offer great value", etc.
There is a small group busy in overanalyzing China and the
deflationary contagion it is exporting. The members in this group do not see
much chances of the "Lift" anytime soon. They are obviously least
prepared. Look for OW US Treasuries, OW EMs to locate this minority group.
The debate is mostly now focused on "WHAT" would be the
likely consequences of the Fed rate hikes.
First where majority is in agreement - USD will strengthen
in all likelihood against the EM currencies that have enjoyed weaker USD, near
zero interest rates and higher commodity prices for over a decade.
The consensus however has yet not emerged on the extent disruption
such rate rise will cause in the short to midterm. Many emerging markets,
especially those driven by commodity boom, have accumulated debt in billions of
USD debt that needs to be repaid at some point in time. The rise in their
accumulated debt consequent to USD appreciation, along with higher debt
servicing cost and lower commodity realization, will force dilution of huge USD
reserves accumulated over years. Consequently the world will face tighter
liquidity, demand contraction, asset price erosion and strengthening of
deflationary pressures. These effects may however be mitigated materially if
the "Lift" is accompanied by material liquidity infusion by US Fed
(QE4!), ECB, BoJ and PoBC.
Second, where there is little agreement - how it will impact the
US global corporations that drive a large part of their revenue from emerging
markets, and the consequential impact on the US local job market.
Insofar as India is concerned, in my view, Fed rate hike would be
relatively smaller part of the problem. The direct impact may be limited to the
companies with unhedged exposure to USD debt. The impact on trade account may
also not be materially disruptive.
The market disruption could be caused by tighter liquidity and
consequent acceleration in FPI outflows.
A 2008 like panic selloff (not likely) will certainly be an
opportunity here.
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