ASIAN STOCK MARKETS PARTY WITH JAPANESE BAZOOKA

So, it is justified now, there is a definite co-relation between our cricket team and BSE Sensex. Both are on a winning spree. Our Sensex jumped 400 points closing at 24870 and our cricket team won T20 series in Australia. But Mr. Haruhiko Kuroda would be asking, didn’t I do something. Yeah actually, he hosted the party and we all enjoyed. Bank of Japan adopted negative interest rates joining ECB and other European countries to fight deflation.  Japanese banks will be charged a negative 0.1% in case they keep balances over and above the regulatory requirement with their central bank. In simple language, the Japanese central bank is following carrot and stick policy with its commercial banks, they have to lend aggressively and if excess cash is kept they will have to pay interest to Bank of Japan at 0.1%.  This seems to be the last resort for the Abe government to spur growth.    

The most amazing thing is that most central banks are following similar policies. But what they forget is that banks cannot bring about economic growth by increasing their loan book. The first and foremost ingredient for economic expansion is favorable investment climate and liquidity is just a part of it. Japanese economy which has been fighting deflation for decades now, requires structural reforms, but that is the difficult part, infusing liquidity is easy.    

May be next time ECB and Bank of Japan will give a joint statement with inflation target of 2%, interest rates pushed further into negative territory and of course increasing stimulus.  So the party goes on and on…… and Sensex goes beyond 27000 again and India wins the T20 World Cup, remember positive correlation.   

US FED MEET: TOO  PREDICTABLE AND BORING

Only someone naive would have expected an interest rate hike in US Fed meet on 27^th Jan. With declining oil prices, roiled stock markets and volatile currencies, US Fed was expected to do what it did yesterday, keeping rates unchanged. It was more of a wait and watch policy as followed by ECB few days ago. Central bankers all over the world are watching how crude prices are going to pan out in the next 2 months as both OPEC and non OPEC members are expected to come to a consensus for their own sustainability.  And of-course China slowdown and Yuan’s devaluation impacting global stock and currency markets was another vital factor for the US Fed to keep rates unchanged.

US Fed has also communicated that the future adjustments to the target rate for the federal rate funds or in simple words, future rate hikes would be dependent on economic conditions both domestic and global relative to its objectives of maximum employment and targeted inflation rate (2%).  US economy has been witnessing mixed signals with respect to its economy’s health. Labor conditions and household spending has improved but contraction in manufacturing sector and poor corporate earnings for the fourth quarter are presenting a different case altogether. Major impediment for the Federal Reserve is inflation which is still below 2% and is not expected to improve with falling crude prices.

US Fed rate is no more a top priority for international investors already flayed by declining crude prices and  volatile Chinese currency and stock markets. What Janet Yellen can actually do is call all OPEC and non OPEC members for ‘CHAI PE CHARCHA’ and coerce them to rediscover a new balanced oil regime and then she can go on with her interest rate hikes.    

WILLFUL  DEFAULTERS  STRESSING  INDIAN  BANKING  SECTOR

I think our RBI governor is the only one concerned about our stressed banking sector, the rest are just doing their jobs. Only if you really feel, you would react like that. What he meant was, if you default on your loan, you cannot spend lavishly. Loans given to companies are funds accumulated by banks from general public as deposits or borrowed from the market. But no one even at the highest level understands this concept. They only understand the concept of limited liability.

Do banks (especially PSU banks) have limited liability, can they say no to depositors after going bankrupt. What will the government do? Forced mergers or convenient bailout! PSU banks where the majority stakeholder is the government, cannot default but can definitely become sick and stressed. According to finance ministry, gross non performing assets of public sector banks increased by 25% to Rs. 3.4 lakh crore in September 2015 from Rs. 2.5 lakh crore in the same corresponding period previous year. These figures are large enough to loose sleep at least for the RBI.   

But we have this chalta hai attitude. With population of 1.3 billion people, 40% have no banking access. A major chunk of urban population has started living on credit cards and personal loans. With this cultural shift who is concerned about their actual bank balance. What they need is credit limit sanctioned by the bank. Though our government banks have realized their follies and tightened their credit appraisal system they need support from government not just capital infusion. It is understandable that the government has too much on its plate, they can at least do one thing, renew RBI governor Raghuram Rajan’s term in September. 

MARIO DRAGHI  V/S  RAGHURAM RAJAN

22^ND January was lucky not only for me but for the markets too. Stock markets all round the world jumped 2%. No prizes for guessing, ECB meet on 21^st concluded signaling monetary easing next March. That was what the markets understood. Mario Draghi did what Mr. Rajan is going to do in the coming RBI monetary policy, keep the rates unchanged. This is a simple wait and watch policy being adopted by most central banks with the backdrop of falling crude prices and china slowdown. In case crude prices touch $40 by March there would be some hope of stoking inflation in Euro area where current inflation rate stands at 0.2%. So everything depends on how oil prices pan out in the next 2 months.

The same conditions don’t apply to Raghuram Rajan, as he has to control inflation. But he needs to push growth and also make people understand why he cannot increase the inflation target or cut rates in every policy meet for the economy to expand. IMF has forecasted the world economy to grow by 3.4% in 2016 reducing its earlier estimate by 0.2%. According to George Soros, Oil, China slowdown and competitive devaluation are the major factors injecting deflation in the world economy. On top of that monetary easing would complicate matters.

Policy rates are expected to be unchanged in the sixth bimonthly RBI policy on 2^nd February and our governor has already toughened his stand by reiterating that our macro fundamentals are strong and rupee is stable compared to other emerging markets. Both central bankers have set the tone for their next monetary policy stance and it seems rather predictable. May be central bankers are trying to instill certainty in the present uncertain times.  

DON’T LET FEAR OVERTAKE  FUNDAMENTALS

I think there is some positive co-relation between BSE Sensex and our Indian cricket both are on a loosing spree. To increase the pain of Indian cricket fans, Mr. Maxwell retorted that our batsmen are selfish. Thank god he has no clue as to how our parliament functions and how many ‘critical things-to-do lists’ are pending with our politicians.  On Wednesday, 20^th Jan, by the time India was given a target of 349, our Sensex had already made a double dip of the same number. Though it recovered 200 points, it closed down by some 400 points for the day. But what went wrong, RIL gave good numbers and will keep doing that till oil keeps falling. Tata Elxsi and Axis bank reported 40% and 15% in net profit respectively for third quarter results. But all went in vain as tons of Dhawan and Kohli and equities ended 20 month low.

But was this just fear psychosis, if some sad new comes from Europe or some uncertain data from US and not to forget our immediate neighbor, China sneezes coughs or even hiccup’s, our indices tumble. And the next morning, pink papers show brokers and investors staring at falling indices instilling fear further into their mindset. Our benchmark indices only exhibit what is happening worldwide, to keep a check on our own domestic stocks, quarterly results need to be viewed which have started pouring in from second week of Jan. Every company will not perform like Rohit Sharma or Virat kohli. You have to give time to get results like what we saw yesterday in Dhawan’s innings. Like in cricket we say, form is temporary, class is permanent, Indian economy is just out of form, it has lot of class and we’ll see it in the coming quarters.  

IRANIAN OIL: BLESSING IN DISGUISE

Even though the oil supply has not started from Iran, prices have already started tumbling. Analysts have started predicting $10 as expected price in the near future. Some being more optimistic expect the future price of oil to be $ 40 this year. The second price tag sounds good for the world economy. But is it achievable with Iran worsening the oil gut. For the last two years, supply has been outstripping demand due to erratic weather conditions and weak economy all over the world. Countries with falling currencies, high deficits, and declining exports are intimidated by Iranian oil which may lead to further decline in oil prices. Two years ago, nobody would have expected oil to fall below $30. So is it possible to make future predictions on the basis of uncertain presumptions.

Oil exports from Iran are expected to delay the recovery in oil prices no more dictated by OPEC. But, it is highly possible that re-entry of Iran may fulfill OPEC’s agenda of driving shale producers out of business. If prices fall below $25, it will become ugly for oil producers especially the non OPEC members. This might lead to new consensus among the whole oil community leading to a new stable oil regime. As for India, falling oil prices would reduce the cost of our imports and also foreign inflows especially in our stock market. Exports have fallen by 14.75% YOY in December 2015 and trade deficit has widened to $11.66 bn compared to $9.8 bn in the previous month of November. Thus declining oil prices have become a re-balancing factor in our trade deficit but the Sensex will go up when the oil moves northwards. For informed investors, its best time to buy long term quality stocks at attractive valuations as only FUNDAMENTALS CREATE WEALTH. 

START UP INDIA CAN STAND UP NOW

At last the media got something new to report apart from oil and China slowdown. Being stuck in parliament was not helping the NDA government and thus the ‘Start Up Mission’ was a needed revitalizer both for the economy and the government. Though many would argue that venture capitalists flush with liquidity will not need tax breaks announced by the government, at least there is clarity in the government’s intention to encourage private entrepreneurship. Since the private corporate sector is tightly holding its purse strings, the government needs to create jobs for millions of Indians to fight this deadly recession. And what would be better than people working for themselves.  

Coming to the policy announcements, the start up fund has a corpus of Rs. 10,000 crore with a credit guarantee fund of Rs. 500 crore. Though the credit guarantee fund appears to be small, it is a good beginning. Tax holiday for startups can be availed for three years over a period of 5 years for schemes approved before 2019. In addition to this, startups will not be charged for capital gains tax for venture investments.  The most important is the exit feature which can be availed within 90 days subject to the passing of the bankruptcy bill. 80% rebate on patent registration and self certification compliance with no inspection for the first three years are the other important incentives. These reforms have made a good beginning for India in 2016 and thus should be backed up by passing bankruptcy bill in the coming session to complete the whole process. Encouraging risk taking ability and capability of the youth will go a long way for making India a manufacturing hub globally surpassing the expected 7 plus GDP growth and fulfilling the long lost – ‘India Shining’ agenda of the NDA government. 

OIL  SHREDS  GLOBAL  STOCK  MARKETS

Everyone from the top to the bottom-line of global economy is just talking about one thing and that is oil. Why? We need it, not only for pollution but for running everything. With global demand already weak and Iranian oil yet to hit markets, oil price is expected to touch $ 20 this year. But how can stock markets fall with the declining oil prices. There should be a negative co-relation between stock markets and oil not a positive one. Decline in oil prices enhance productivity and reduces price rise. But this is not happening; stock markets are actually falling hand in hand with oil prices. This positive correlation tends to be there because of liquidity provided by oil producing countries. Well, the reason has become very apparent. Declining oil prices reduce surpluses of oil producing countries which invest in sovereign wealth funds. These sovereign wealth funds and hedge funds are responsible for sudden gyrations in stock markets from US to Europe to Asia. Our own equity benchmarks fell 19 month low around 1.3% today. For the whole week, BSE Sensex lost 1.9% whereas Nifty 50 declined by 2.1%.

But, is this the only reason for positive correlation between stock indices and oil prices. Another significant rationale is high probability of US economy falling into another financial crisis similar to 2008 and this time caused by high debt of shale oil producers, funded by bankers and hedged in derivatives. If US economy becomes messier again, china slowdown will look like a flash in the pan. Thus the need of the hour is change in perception among oil producing countries. They need to understand that falling oil prices will drown their own economies. To keep them afloat, oil needs support. Though India is not a big exporting hub, we need both US and China to buzz and hum to keep our economy moving. And of course we need foreign surpluses of oil rich countries to be deployed in our infrastructure, energy and other strategically important sectors. Thus falling oil price is not a blessing but predicament in disguise which has to be managed and maneuvered for our economy which needs both oil and foreign capital like oxygen and water.   

INDIAN PRIVATE SECTOR: TAKE A LEAP OF FAITH

IIP for November 2015 arrived with third quarterly results. CPI for December last year came at 5.60%, still within the RBI target. IIP contracted at 3.2% as Diwali shutdowns occurred in November this year in contrast with October in the previous year. December numbers of IIP will give a better picture of the economy. Global events with Chinese economy as a major catalyst are the driving force for any domestic economy. Crude oil has fallen below $30 and is expected to touch $ 20 according to many analysts. There cannot be a better scenario for fuel importing country like India to bounce back with higher GDP. In the just released IIP numbers, manufacturing sector was the main drawback contracting by 4.4%. Manufacturing sector cannot be pumped up only by the government with restricted public investment as fiscal deficit target has to be met in the current fiscal. Thus the need of the hour is private sector initiative in all major industries creating a ripple effect across the whole economy. But the private sector is holding back with many companies hoarding high cash and marketable liquid assets. What are they waiting for? China to start galloping again, Brazil, Mexico and South Africa to get back to their original currency exchange rates, OPEC to cut production, or even US FED to roll back its interest rate hike. Are they waiting for all these perfect conditions with even GST, bankruptcy and land acquisition bills to be passed in the immediate parliament session? All of this seems highly impossible in the short run. If the domestic private sector does not take risk and move fast in this volatile climate which is going to stay for a pretty long time, foreign investors might take the required initiative and flourish benefiting the Indian population and their own respective domestic economies.

For Indian industry to move forward, private sector has to believe in the strong macro fundamentals and our financial infrastructure. Until and unless they don’t take a leap of faith, Indian economy will not prosper and catch with the biggest economies of the world. 

HOPE FLOATS:  THIRD QUARTER RESULTS OF INDIA INC

As the Chinese conundrum continues, our domestic indices are going through a roller coaster ride on daily basis. BSE Sensex fell 109 points or 0.44% and Nifty 50 declined by 0.49%. This volatility is going to stay. And do we need to fight it. No it has to be dealt with reason, knowledge and information. These are the three main pillars of stability in the present volatile financial scenario. As for the moment, for retail investors in India, global events not only provide opportunities but also lessons for improving their investment decisions. As for now, IIP and inflation data is going to be released later this week and most important, third quarter results have started from today.

Third quarterly results of FY16 will exhibit the so called benefit from declining oil and commodity prices and how much has been passed on to the consumers. Whether rural consumers have started loosening their purse strings or urban population has become the new growth engine especially for FMCG and auto companies. This quarter will let us understand, how much time do we still need to get these green shoots develop into shrubs. In other words has the private sector started spending and how much de-leveraging has been done by infrastructure and energy sector? Last but not the least, the banking sector, especially PSU banks will be scrutinized with respect to their stressed assets. Investors should get ready to identify fundamentally strong stocks to withstand volatility as only Fundamentals Create Wealth.  

BEGGAR THY NEIGHBOUR POLICY: SHORT TERM DOMINO EFFECT

China guided Yuan at a higher rate after its own stock market was roiled on Thursday. Though the stock market crash was partly attributed to circuit breakers placed on 4^th of Jan this year, Yuan’s devaluation with respect to dollar has made obvious things apparent to the global trading community. There can be two reasons as to why Yuan has been deprecating. One theory explains the need to devaluate and integrate it with global economy after Yuan has been included in the IMF's SDR basket. The other theory is that China is following ‘Beggar Thy Neighbor’ Policy which advocates devaluation as recourse for resuscitating flagging domestic economy.

Last year, RBI was accused for not helping Indian exports by devaluing rupee relatively to other currencies. RBI stood its ground against forced deprecation of Indian rupee and favoured market determined exchange rate. This recent Yuan event would have taught a lesson to our economists and bureaucrats alike. Depreciating currency is a short term fix to stimulate economic growth. Falling currency makes exports competitive or cheap and imports expensive for any economy. So even if China tries to boost its exports through devaluation, expensive imports would not be able to stimulate its slowing economy which is in dire need of fast track reforms. We hope China is not following the second theory and has thus fixed a higher peg against the dollar today. Even if it does, it will not be able to pursue it for long term. Being the second largest economy of the world, China is not expected to spread financial distress globally, rest only time will tell. 

UNCERTAINTY THE NEW GLOBAL FINANCIAL FORMULA

While the financial world was still panting over it’s stock market crash, China devalued its currency. To boost exports and fight excess production capacity, China is doing everything to prop up it’s slowing economy. US on the other hand is going to tighten its monetary policy in the current year to stimulate inflation and strengthen dollar further. Next, Europe, also going through the ‘green shoots’ phenomena like us, needs to spoon feed its economy for the next two years. Thus in such divergent economic scenarios, global financial markets are expected to be volatile. Every country is thinking about its currency and fencing its domestic market.

That time is not far, when every country would follow, ‘Beggar Thy Neighbour’ policy. India does stand out with un-manipulated currency and strong forex reserves. Thus when everyone is busy putting barricades in the name of free trade, we should at least protect our domestic industries whether it is steel, copper, iron ore, tyre to name a new. When it comes to currency management, RBI is well equipped to face any kind of volatility pressure on the rupee. Stock market daily movements indicate global uncertainty more than domestic economic performance and thus 1-2% movement of indices have become norm of the day. As for informed investors, volatility means opportunity as only Fundamentals Create Wealth. 

THE CHINESE CONTAGION

‘If China sneezes, rest of the world has cold’, this phrase is so horribly outdated. Chinese markets fell about 6% after its PMI came below 50 indicating contraction of economic activity in December 2015. As for India, BSE Sensex and Nifty 50 declined by almost 2%. There are obvious reasons why China is sneezing these days and decline of their domestic indices is just a side effect of the medicine administered by the Chinese authorities to the economy. To transform an export led economy to a domestic consumption powerhouse is not easy. In addition to that, the Chinese government is strengthening its financial sector & stock market regulations, cracking on corruption & shadow banking etc. And they also have the financial muscle to go through this detoxification process.

What about the rest of the world? Whether it is Europe, or Latin America, Africa, Middle East countries all financial markets tumbled. Not because of China. Chinese slowdown will only add to their specific domestic problems. The best example to explain this is through our own country. FDI & FII flows have declined for India due to slow reform process and slowing China & declining yuan will impact both our industry and currency competitiveness. And can we blame China for fall in our PMI (49.1) for December last year.  We cannot, but we can always fortify our economy by passing GST and other impending bills and attract foreign capital. China will definitely get its act together, as for us, let’s see what happens after 23^rd Feb in Parliament.

2016: YEAR  OF  KARMA FOR  INDIA

Past actions decide our future. I am not talking about any individual but a country of 1.25 crores. The year of 2016 will carry forward the actions of the past years especially the year that just went by. Not passing GST, land acquisition and Bankruptcy bills will make us play defensively in international arena. In the times of 20-20 cricket, time is money, the more we loose it, the more we will bat on the back foot. GST would increase GDP by about 1.5% by simplifying tax structure; land acquisition bill would give the required thrust for investment in infrastructure sector and stuck capital would be freed up for productive assets by passing bankruptcy bill.  Though things would still go on but passing of these legislations last year would have given us the requisite protective gear to face aggressive foreign players in our domestic financial markets.  

Mixed signals such as shrinking core sector and increasing car sales ask for harmonizing economic and legal structure of our economy by passing these impending bills. After eight months of this fiscal (2015-16), tax collections are buoyant with non tax revenues already above 78% of budgeted amount and total tax collections crossing 50%. Fiscal deficit position is also comfortable at 87% of the target without cutting capital spending which was 72.5% of the budgeted plan by November end last year. Forex reserves of $ 352 bn are large enough to cover 11 months imports. As Christine Largarde had said, judging by India’s cricket record, collective efforts of one billion working population can make India fly in the years to come. Thus what we need in 2016, is karma from our elite political class and making the pitch ready for the economic variables to perform without local systematic risk to take its toll and spoil India’s chances of being becoming an important player in the world economy.              

2015: THE YEAR BELONGED  TO RAGHURAM RAJAN

In his first speech as RBI governor, Mr. Raghuram Rajan had reassured that in the present times of global volatility, RBI would be a beacon of stability with transparency and predictability as its major pillars. RBI has always lived up to it and under him, also learnt to surprise the markets with its unpredictable policy actions. 2015 started with a surprise Sankranti gift of 25 basis points cut after fifth bi-monthly december policy in 2014. And then again in 4^th March 2015, another 25 basis cut with repo rate now at 7.5%.  This unpredictable feature quashed volatility in Indian rupee and strengthened it against spillover effects from offshore NDF market and with ample support from lower CAD and fiscal deficit, Indian rupee became one of the best performing currencies among emerging markets.  Though it hurt exports, India became a credible investment destination with a stable currency which couldn’t be messed up.

Reducing repo rate by 125 basis in the last twelve months and prodding banks to transmit this benefit to borrowers was a continuous battle for the governor as our PSU banks started reducing their base rates wholeheartedly only after 50 basis cut in the fourth bi monthly policy 2015. To solve this conundrum once and for all, marginal cost of funds would be adopted by banks to calculate their base rates. Though two universal banking licenses had already been given in 2014, licenses for small and payment banks a major milestone for his tenure were given in 2015, thus fulfilling his agenda of inclusive growth. Last but not the least his hawkish stance on inflation yielded results as CPI fell from 10% in 2013 to 3.78% in July 2015.

Moving on the same path shown by Mr. D Subbarao, Raghuram Rajan too maintained central bank’s independence as being a data driven institution rather than government motivated.  Government too has played its part, acknowledging his merit and accepting RBI’s demands by not curtailing its money market and public debt management functions.  But Mr. Rajan would also be credited with democratizing interest rate policy and reducing RBI’s autonomy. His term ends this November, just nine months to go, it would be hard for the government to find his replacement and the daily pink papers would again become so boring.