"We must not always talk
in the market-place of what happens to us in the forest."
—Nathaniel Hawthorne (American,
1804-1864)
Word for the day
Fortnight (n)
The space of fourteen nights
and days.
(Source: Dictionary.com)
Malice towards none
Should PM Modi support Shashi Tharoor's Bill to abolish Sec 377 IPC to send
a strong signal to the burgeoning fringes on his side of the political
spectrum.
First random thought this morning
Sometimes it feels that history is refuge of losers. Those who are
unable to move forward, look back and try to camouflage their failures with the
luster of their history. And if their history is also not illustrious, they
would flagrantly manufacture one which they could pretend proud about.
Successful live in present and think about future.
Investment Strategy 2016 - 4: Global growth and flows
The consensus at this point in time appears to be favoring a
modest pickup in global economic growth during 2016. Most sell side economists
are building in a stable US economy sustaining the growth momentum and
improving Euro zone economy.
Japan managing to stay out of recession and peripheral Europe
benefitting from core Eurozone growth are incidental assumptions. Most
economists see China and other major emerging markets continuing to slowdown.
The consensus has factored in ~1% rise in Fed rates during the course of 2016.
The global growth is mostly expected to be uneven and skewed in
favor of the developed world.
I find it hard to agree fully with these mostly sunny days
forecast, primarily for the following three reasons:
(a) Most of these forecast
strongly support marginal rise in inflation (primarily on base effect) and
completely ignore the possibility of acceleration in deflationary pressures. I
do not see how feeble European and already plateauing US growth will absorb the
commodity glut that may actually worsen as the cost of carry rises with
stronger USD, higher interest rates and even higher margin requirements as risk
rises.
The lyrical 2% inflation, 3% real growth, 4% normalized Federal
funds and 5% unemployment sounds too good to my ears. Even if as the end result
these targets are achieved, the journey may not be smooth and safe.
(b) Assuming "no hard
landing" in China is ok, given the strong reserves and controlled economy,
but underestimating the extent CNY devaluation could be perilous to any
investment strategy.
(c) Most forecast have
deftly avoided the probability of Lehman moment reoccurring. Given the expected
USD strength, precipitous fall in commodity prices (and currencies) and likely
rise cost of capital to me it is more likely than ever in past 6years.
With most central bankers now predictable and fast running out of
arrows in their quivers, the bears may not be tamed as easily as these were in
summer of 2009.
Therefore, I would like to built in my strategy (a) highly
volatile and unpredictable global economic conditions; (b) probability of a
global credit and liquidity condition; (c) pick up in global demand only from
2H2016; (d) material rise in global risk premium and lower flows to EMs; and
(e) geopolitical strife triggered by economic considerations.
Specifically to India, I feel FPI flows could be lower and
volatile. FDI flows may however remain buoyant due to further opening of economy.
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