Thursday, October 5, 2017

What could cause a bear market - 3

"Appreciation is a wonderful thing: It makes what is excellent in others belong to us as well."
—Voltaire (French 1694-1778)
Word for the day
Atonement (n)
Reparation for a wrong or injury.
Malice towards none
Why no one from political class appears on TV discussions about Dera Sachha Sauda and Honeypreet, while it is a common knowledge that almost all political parties sought patronage of Dera, Baba and Baby.
First random thought this morning
Six days of drive through three states, three ATM withdrawals, five gas fillings, 15 meals and some shopping in strictly cash only markets — not even a single Rs2000 bill seen anywhere.
It's hard not to get suspicious.
The suspicion I get is that either RBI is systematically withdrawing Rs2000 bills from the system and introducing Rs500 and Rs200 bills instead; or all unaccounted money has been converted into pink notes and stored safely in some dark rooms.

What could cause a bear market - 3

Last week, I started a discussion regarding what could cause a bear market in Indian equities (see here and here). Taking the discussion forward, in my view the following could go wrong making case for a deep correction in equity valuations.
Please note I definitely do not intend to apply the Murphy's law here that "whatever can go wrong, will go wrong." I am initiating this discussion just to make sure that I am prepared for the worst, in the eventuality if things do begin to go the wrong way.
1.    Oil prices: FY15-FY16 GDP got a significant boost from the collapse in global crude prices. The growth accelerated despite poor consecutive monsoons. Since then the global crude prices have stabilized around USD50/bbl. The global consensus is that the oil prices may not fall much from the current levels and eventually stabilize in USD55-60/bbl range in 2019-2020. This forecast juxtaposed with medium term INR forecasts of Rs68-69/USD, and commitment of the government to keep fuel pricing completely market driven, would suggest we may see some adverse impact of oil on overall GDP growth.
2.    Twin deficit: In past four years, one of the remarkable improvement in Indian macro parameters has been in the current account deficit (CAD) and fiscal deficit (FD). The CAD improved from over 5% of GDP in FY13 to less than 2% of GDP in FY17. However, CAD has now bottomed out and likely to rise in FY18 and FY19. Though with over USD400bn in reserve and still strong capital flows, the financing is not seen as a problem.
The spiral effect of GST is expected to continue impacting GDP well early parts of FY19. This clouds the outlook for ambitious tax collection growth budgeted by the government.
The central government has so far walked a very tight rope on fiscal discipline. But some cracks are showing in the State fiscal gaps. As the private investment remains uncertain and consumption not showing much promise either, public consumption and investment would be needed to support the growth from collapsing closer to general elections in 2019. Recent cut in excise duty on fuel may be seen in this context.
As per advance estimates, the kharif crop this season could be 2 to 3% lower vs. last year. This may keep the stress in rural economy at elevated level, giving rise to demand for loan waivers from many other states, just before key elections.
3.    Rates: Irrespective of the slowdown in economic growth and slowest credit growth seen in many decades, there is little visibility of a sharp correction in lending rates and bond yields from the current levels.
Rise in global rates, further write downs on stressed assets as bankruptcy resolution picks up, likely rise in government borrowing, slowdown in portfolio flows, and upward risks in inflation outlook, and rise in demand for formal credit as informal markets dry up, may prevent any meaningful correction in rates from current levels....to continue tomorrow

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