sandip sabharwal
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Half a month into the New Year, what’s up? Posted: 17 Jan 2013 12:46 AM PST
The New Year has started off on a
positive note both locally and globally with most markets etching up moderate
gains since the beginning of the year.
In the global context the two
most important geographies from a sentiment point of view continue to be the Euro
zone and the US.
Key events in Euro zone have been the continued rally in peripheral bonds and
the strong bond issuances by countries like Spain
and Italy
at yields that are much below earlier levels. These two counties now have
raised nearly 10% of their total funding requirement for the year in the first
half of January itself. The more important thing is the participation of
foreigners in these auctions as the last 15 year bond auction of Italy that took
place a couple of days having a 60% foreign takeout. The other important
development in Euro zone was the ECB meeting and the surprising outcome where
the ECB did not cut the policy rates despite expectations for the same and his
belief that there will be some sort of recovery in Euro zone in the second half
of the year. Given the credibility that Draghi has built up since his statement
of “To do what it takes” this immediately led to a rally in the Euro. In midst
of the currency wars underway the broad non participation of EU in the entire
phenomenon should lead to a broad based strengthening of the Euro over the next
few weeks and months. From the EU perspective, the importance of attracting capital flows
to fund the huge bond offerings from various countries will continue to be a
more important factor rather than the stimulus created by a depreciating currency.
As was expected and as I pointed
out in my Annual Newsletter the Japanese Yen has fallen sharply given the
rhetoric around the same by the Japanese. The long term appreciating
trend of the Yen seems to have clearly reversed and the falling yen has created
a strong rally in the Japanese Equity markets. From a global perspective higher
Japanese stimulus and a falling Yen should again restart the dormant Yen carry
trade in a big way this year. However, whether it can lead to a 2% inflation
and a revival in the Japanese economy will need to be seen. Given Japanese
demographics and the per capita income levels, any major revival in economic
growth looks unlikely. Also it is important to analyze whether a higher
inflation is actually beneficial for them given the average age of the
population and the number of retired people.
The drama in the US
with regards to their self imposed Debt Ceiling continues and once again, in
all probability we will see a last minute deal. The trends in the US economy on
the other side seem to be of steady improvement despite the uncertainties
created by the last minute Fiscal Cliff deal and the wrangling on the Debt
Ceiling limit. This seems to show underlying strength in the economy. The
revival in the housing sector and also the pick up in home prices should
further add to positive sentiments going ahead. Overall things look positive
from a US
standpoint given the fact that despite increasing Debt to GDP the average cost
of Debt has been continuously falling and as such the burden of interest
payments should not grow much, if at all in the near term. What we need to see
is the extent of spending cuts implemented and the follow through drag on
economic growth. This should be clearer by the second quarter.
Domestic Scenario
The Indian markets started the
year on a positive note backed by strong foreign fund inflows which are already
touching Rs 10,000 Cr for the year. Further economically prudent decision
making by the government has aided sentiments. Talks of further action on
subsidies and the hike in railway passenger fares have been taken positively.
The continued assertion by the Finance Minister about meeting the Fiscal
Deficit target combined with lower expected borrowings created a strong rally
in the bond markets as I had pointed out in my Annual Newsletter. The rally has
got interrupted lately due to comments by the RBI governor about inflation
still being high (although inflation is now at a 3 year low). I really don’t
know where he gets his facts from as the economy has come to a standstill on
the interest rate sensitive sectors and manufacturing inflation has fallen to
4%. I do not think that we can have zero inflation in a country like India and as
such what they are targeting seems to be uncertain. The monetary policy stance
is not helping the economy in anyway except for keeping the growth rate far
below potential.
The postponement of GAAR by three
years is also a big positive which should lead to greater funds flow into the
country over the next year. Partial diesel deregulation announced today also is
a big positive. However its implementation will need to be seen.
Given positive moves by the
government on oil subsidies as well as other economic decisions the case for
RBI not coming out and supporting growth in a big way is just not there now. Let’s
hope they see sense.
Results season has started with a
bang with all IT companies reporting very strong results and some of the
Private Sector banks that have reported also reporting strong numbers with good
asset quality. As such the results season should be supportive of the markets.
Overall the outlook continues to be that of a 15-18% gain this year
with a positive bias if inflation falls faster than expected.
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