The equity and debt markets have found some stability at the
current levels. This is after the extreme bout of volatility witnessed in the
months of January and February.
The general global macro consensus is that China is slowing
down, along with Europe and Japan. The US is showing some sprouts of economic
revival but the Fed cannot formulate policy in isolation and will have to keep
tab of the global economic scenario.
After the global financial crisis of 2008-09, most governments
in the world eased up on liquidity hoping that this would lead to a revival in
the investment as well as consumer credit cycles. What happened instead is most
of this money landed in the hands of speculators and financial firms chasing
high-returns (on the quick).
China launched a massive fiscal expansion program in the
wake of the Financial Crisis. This meant that credit was easy and the world’s
largest exporter went in to over-drive in trying to corner the global market
for goods and commodities. Other G20 countries also created conditions for a
global credit glut thereby creating a massive rally in commodities (including
Oil and Gold). Speculators also bought in to this frenzy creating an even larger
commodity bubble.
What we are witnessing now is that the world has finally
realized not enough people are buying these goods and commodities. So, even at
super-low interest rates, many firms around the world are struggling to repay
their debts because of ‘lack of demand’.
This is difficult terrain for the global economy to navigate
and we expect that in the absence of any other ideas monetary and fiscal
expansion will continue. This means that debt will continue to remain cheap. However,
this time money may not pour in to commodities. We believe that some of this
money will make its way in to ‘emerging markets’.
In this context it is good the Government has decided to
focus on macro-economic stability in this year’s budget. This allows us to
attract global capital. We will (over-all) be beneficiaries of the commodity
bear market. This has created room for India to be extremely attractive to
foreign capital.
India’s primary concern is that we are capital starved.
Coming on the back of a high interest rate regime as well as the huge burden of
NPA’s, banks will find it difficult to bring down interest rates quickly. What
we could instead witness is an expansion of the corporate debt market with
significant foreign investor interest. The finance minister has already
indicated that he would like to focus and develop India’s corporate bond
market. This should be an interesting
space for investors in the coming years.
We also believe that there will be a slow-down (correction)
in the domestic business environment. This is on account of both global and
local factors. Credit (at present) is hard to come by for Indian businesses.
The global slow-down will also affect demand. While over-all regulation and
governance has improved, credit- growth is still low indicating a lack of business
and consumer confidence. Government spending on infrastructure has been
increased. We expect that it will take at least a few years for the ‘trickle-down’
effect of these initiatives to come to fruition.
A stable macro-economic environment also creates room for
the RBI to reduce rates. This could create a major fillip for the economy. The
debt markets will be the most interesting to watch and will give us good long-term
asset allocation indicators.
The equity market is currently trading at 18.85 time trail.
This is slightly higher than its long term averages. The market (Sensex) has
rebounded quite smartly from 23,000 to about 25,000 today. For our long-term
asset allocation we will continue to remain under-allocated to equities.
The 10 year G-Sec has had a tremendous rally post the budget
(benefitting from the finance minister’s commitment to rein in the fiscal
deficit and the over-all budget’s commitment to macro-economic stability). From
8% in February, yields are now close to 7.5%. Duration plays would have
benefitted from the rise in prices of bonds. The macro-economic environment has
also created conditions for a slight over-allocation to bonds. We recommend
this strategy for our investors.
