Crystal gazing the evolving trends in the financial markets:counter perspective
At the outset it makes us feel delighted to connect with all of you i.e. our patrons by means of this news letter. It’s a humble way of expressing our sincere gratitude to all of you for all the love and affection you have bestowed on us and stood by our side during good as well as not so good times. We do believe that being analytical and thriving on knowledge driven arguments is part of our age old Indian ecosystem, it is in continuance of this tradition that we intend to share our view point on financial markets on an evolving basis. We hope this communication to be a two way process as that’s the only way to make it more meaningful and worthwhile.
In this inaugural edition it is critical to explain what this newsletter stands for and what it doesn’t. It’s our firm belief that sustainable growth can only be achieved if the foundation is engraved with pillars of Knowledge and it is savoured best while disseminated in a selfless manner. Through this newsletter we intend to establish an open platform for knowledge sharing with prime emphasis on financial markets and that’s why perhaps we couldn’t think of a more apt name than “GyanSutras” for the newsletter. We certainly don’t intend to position this newsletter as a platform for predicting short term price targets for asset classes of interest or a corner for market grapevine circulation or to be taken as the ranting of few frivolous souls.
In today’s news letter we intend to bring two key themes to the fore that are currently acting as the prime concerns for the investing community. The first theme pertains to the manner in which US financial markets are poised at this juncture and second one looks at the manner in which Indian equity markets have gathered momentum over the past few months while exhibiting remarkable resilience.
Euphoria in US financial markets: Misplaced Optimism?
Given that in an integrated financial landscape the developments in the evolved markets do have a critical bearing on emerging ones, we ought to discuss the current state of US financial markets. There is a saying in the financial world; seeds for the next crisis are sown when the regulators are trying to tackle the one at hand presently. As all of us are aware, way back in mid of 2008 the US Federal Reserve got on with the “quantitative easing” act to placate the fear psychosis prevailing across asset classes in the US following the sub-prime mortgage crisis. Albeit, what should have been a much needed short term liquidity support measure ended up as a source of surfeit and excessive easy money for financial behemoths. An unforeseen and extended beyond the need monetary bailout of this scale by US Federal Reserve while on one hand obviated the need for a rigorous and painful (though certainly healthy in the longer run) organic economic recovery and at the same time make the US economy look healthier on regulator provided crutches.
As of today financial economists with a non-market lineage have their fair share of doubts about the sustainability of this money supply led economic growth and burgeoning bottom lines of listed companies in US riding on the back of almost zero cost of debt (most of them are heavily leveraged). Janet Yellen (current governor of US Fed) has been passed a batonperhaps too hot to handle by Ben Bernanke (outgoing governor of US Fed) as she will have to bear the twin wrath of pulling the plug on the “quantitative easing” while at the same time getting on with interest rate hardening cycle in the next 6 to 9 months. The resilience of buoyant DJIA (Dow Jones Industrial Average) / S&P 500 / NASDAQ will be interesting to watch when the markets are hit with the above mentioned twin swords.
An even more worrisome and deeply engrossing factor will be the performance of the sub-prime retail borrowers who have gone overboard with borrowing spree given the easy creditconditions, with the interest rates likely to turn northwards in US sooner than later their debt servicing capability might be bit suspect. More interestingly the tendency of commoners in developed markets to live beyond their means is no secret to us and there is an implicit correlation between the level of consumer led growth for American companies and the access to easy credit during the times such as the ones prevailing now, though this correlation goes for a toss when the credit tightening begins to come into play and hence the credit default chain reaction!!
From a risk return perspective the risks far outweigh the potential future returns in the markets such as US at the moment, it is no wonder that the retail investors are being made to buy into this rally (the typical age old distribution pattern) in the US equity markets and that’s where it makes immense sense for the big boys to create an aura of misplaced optimism. As the trend goes, as long as the easy liquidity conditions prevail the asset price bubble will keep expanding albeit not for too long. A case in point could be the dipping volumes on which the index stocks in US are touching new highs, for a seasoned player it’s a stranglehold being laid around and naive retail souls being made to fall prey to it. It would be of interest for all of us to see whether an economy on ventilator can really turn around without going through the elongated rigours in a classical economic transformation......
We the Indians: running ahead of reality?
Off late, it has become fashionable among academia to have elaborate brainstorming sessions over the still sleepy animal called India. Though there is some factual supporting that augurs well for India story however and unfortunately so bulk of it is more of hype at the moment and that’s where we need to act in a rational manner. In a way, the presence of structural inefficiencies in our macroeconomic setup leave us with an immense value unlocking opportunity however the federal government led healing touch on this front is still a much needed prerequisite.
The vulnerabilities of hot money (FII) flows is no brainer for emerging markets like India, however what baffles us is in spite of being aware of such raw facts regulators have kept their “eyes wide shut”. In terms of price elasticity of flows, for an avid reader it might be of interest to gauge the free float market capitalization ratio between let’s say DJIA vis-a-visBSE Sensex (much appreciate if some of you can get back to me on that, let me tell you it’s a staggering figure) and perhaps that explains how come a group of godforsaken FIIs can take Indian markets for a ride with less than a cumulative net inflow / outflow of USD 1 Billion on a day.
It leaves us with us two interesting ponderables, how much reflective of reality such movements are in essence vis-a-visthe role of domestic behemoths like LIC in terms of immunizing us against such topsy-turviness of Indian equity indices.
Getting back to how the Indian financial markets are poised currently and the key triggers going forward. If the headline inflation figures at the consumer and wholesale level continue their softening bias, we should expect the benchmark RBI repo rates to start softening by perhaps mid of calendar year 2015 or perhaps even earlier. Given the high levels of benchmark prime lending rates across banks, the softening bias will certainly augur well for the stretched corporate balance sheets and bottom lines in India and somewhere help in justifying the current P/E rerating. The twist in the tale and a potential show spoiler could be how the US markets react to sequence of interest rate hikes and resultant investor sentimenti.e. the events happening around the same time in US. All said and done any kind of unwinding in US markets will have its global repercussions and India too won’t be immune to it.
While most believe that the stocks in India at the moment have run far ahead of current earnings and the justifiable P/Es, if the Q2 and Q3 earnings don’t live up to the widely envisaged estimates we may have lot to introspect. History of markets is proof of the fact that every new bull era has a new set of winners though ironically as human beings hopingagainst the hope we tend to bet on the yesteryear winners, that’s where perhaps caution needs to be exercised.
Few ponderables for our upcoming newsletters:
Is there a currency play underlying the low interest rate regimes in Euro zone and USA?
A new low for S&P 500 VIX, how wise is it to shy away from leading indicators?
What’s driving the US 10 year Treasury note lower and lower? Trap for overseas investors?
Is Gold the safe refuge for immunization, Gold ETFs versus physical holdings?
FIIs and index management strategies, the games people play!
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