More “Bad News” in Store than “Good News” – Vinit Tulsyan’s Views http://vinittulsyan.blogspot.com/
My views on the economy and the markets through articles “The worse is not over yet??????????????? Yet to be seen!!!!!!!!!!!!!!!!!!!!!!!!!! (PART – 1)” sent on 24th October 2008 (a day market participants will find it hard to forget) and “Things will get worse before they get better: - Continuation to Part I sent on 26th October 2008 emphasized on the fact that the unprecedented problem the world is facing is deeply rooted and is far from over and will have far daunting impact on everything with which the word called “INVESTMENT” is related, i.e., COMMODITIES, CURRENCIES, EQUITIES etc. In my view, the Indian equity market, in the wake of less news flows, with anticipation of more of bad news flows rather than good ones on domestic front will move largely on the back of 1) moves seen by global equity markets, and 2) global news flow. As of now at-least for next 3 to 4 months hardly any action is anticipated on fiscal policy front by the govt., which is the need of the time to infuse confidence and stimulate economy though even action on fiscal policy front is largely restrained by widening deficits on both the fronts, i.e., Fiscal and Revenue. The fiscal policy action is unanticipated largely due to announcement of election dates (expected in next couple of days); thus the elections code of conduct coming into picture. My views of good and bad news suggests that there are more of bad times in store for next couple of months than good times. In my view, there is only one source of good news which can be expected in next few months, which is from RBI, on rates front and currency front. Though there are many bad news which are in store. The expected good news: But I have my doubts over the good news flow · With inflation under the RBI comfort zone level, the probability of rate cuts have increased drastically, and adding fuel to this speculation was the reported Q3 GDP number at 5.3%. But the question is whether is it really feasible for the RBI to go ahead with the rate cuts or to reduce the statutory requirements, reply to which I find it tough to answer with the pendulum tilting more towards “NO” than “YES” at-least in next few weeks. The confidence stems from the fact, that reducing rates or statutory requirements will further sent bond prices soaring; subsequently bring the already down bond yields at record level and then getting stuck in a vicious cycle of having enough liquidity in the system but the liquidity not getting translated into credit flow, which is the need of the situation. (later part of this mail discusses in detail about this issue) o The larger question remains that have we seen worst of GDP growth with this headline number, or is there anything which more than meets the eye. The increasing bond prices, low yields; resulting in financial institutions realizing or expected to realize, unexpected gains from investment in so called “SAFE HEAVEN INSTRUMENTS”, i.e., Govt. Securities, have only worsened the situation not with respect to having enough liquidity in the system but with respect to credit flow in the system. · With forex reserves now at ~250 BN US$, down significantly from the peak (though we still rank 5th in the world holding so much of foreign reserves with China and Japan ranked at No. 1 and 2 respectively), and widening deficits adding more pressure on the Indian Currency. Further putting pressure to Indian currency is the ratings outlook towards Indian Economy and Currency by global rating agencies, as one of them in last few days have downgraded Indian economic outlook on the back of widening deficits to negative with a threat to even further downgrade to junk category. The GOOD news as expected by market participants are that RBI will intervene and will try and bring Rupee back to 44-45 level, a level the apex body is more comfortable with rather than Rupee threatening to break even higher level (has already touched 51 per dollar). But the question is, whether RBI can really intervene and put a break on weakening currency. I can answer this question with some confidence (as could not do so in my previous question in previous paragraph). I do not think so, as with widening deficits, increasing pressures on borrowing front with already a fear of higher borrowing costs for the govt., and limited visibility on raising funds on other fronts and depleting foreign reserves leaves little room for RBI to come and sell dollar in the market to support Indian Rupee. So I believe the state is set for times not seen earlier, which rupee touching record levels against most of the currency, predominantly against USD, bringing in a big smile on exporters face though not as much on Importers face, despite having a net importer country. Though earlier (much before it became evident that our Fiscal Deficit in % terms would cross double digit figures), I was of this view that Indian Rupee (INR) would gain against most of the other currencies in the world, but the view I formed (refer my earlier articles) was based on India’s stable outlook despite worsening condition in the west and European markets and not so bad (manageable) fiscal and revenue deficit condition. But factors such as widening deficits (on both counts) on the back of govt. policies focused more towards luring voters in the wake of upcoming elections rather than stimulating economy in true sense; have led me wonder where would all these be funded from? In my view Printing currency does not seem to be an ideal policy at this moment as it will further deteriorate outside world outlook towards India, and Indian currency is not such a bargain, which could stand strong on the back of ratings downgrade (as evident recently) due to rising deficits; subsequently increasing chance of borrowing more money (not at a cost which the country enjoyed while having a stable outlook). I believe we were lucky enough or rather fortunate, when our headline inflation number went around 13%, and with all the cry of controlling inflation, little did people know, that this could turn out to be blessing in disguise (with respect to not getting trapped into a cycle better known as “DEFLATION”). As now the world fears deflation, I believe we would have been in similar situation as the rest of the world is now, if our inflation would not have went so high, or would have been in the comfort zone of Reserve Bank of India (RBI) of around 7% that point in time. With prices of every category forming part of WPI basket tanking and tanking drastically, our inflation (3.36%) now stands below the comfort zone of RBI, making it even more comfortable for the apex body (but only god knows why not comfortable enough for another series of rate cuts to make sure people get benefitted at the ground level). The Expected bad news: I have more conviction over these than good news The possibility of having a coalition govt. forming the 15th Lok-Sabha at the centre. And not only me but most of the market participants and political analysts including parties contesting elections are of the same views. And as and when the results starts coming in, and then realization by markets of having greater influence by regional small parties in govt. formation, the markets in my views will be extremely volatile in these times with a negative bias. With elections around the corner, and almost a surety about having a collation govt. getting formed after the general election, I believe whichever govt. comes to the power will have to make very tough decisions at-least in the first two years of their governance or within first two budgets. I do not see any possibilities of further stimulus from the current govt. (largely due to over-crying by opposition parties on the back of elections code of conduct coming into picture) or on petrol and diesel prices cut (thus neither helping in further bringing down the headline INFLATION number and reducing the possibility of a larger rate cut and a larger relaxation in statuary requirements on monetary fronts by RBI not helping in luring voters at the time of elections). I do not think Mr. Pranab Mukherjee, when presented the budget, made a statement that the tax rates (both direct and in-direct) have to come down, given the present economic scenario; raising hopes that he will announce something which the taxpaying class (both individuals and corporate) will cheer for; but ended the speech without announcing any measures. What I believe he meant was, elect us next time, we will cut the tax rates within both the categories, but in my views, given the harsh realities, this just looks impossible or just a statement rather then something which could be implemented. The fear I have is that in order the bring the govt.’s balance sheet in conjunction with the word “Emerging India”, and in order to find new avenues for reducing deficits, this could turn out to be the other way round. So what are the options will the new govt. be left with, as printing money and increasing taxes are out of question. The other option could be the once very famous word called “DISINVESTMENT”, but with increased chances of a coalition govt., with regional parties having larger influence over the single largest parties, the vested interest would start coming into picture, and the word called “DISINVESTMENT” would turn out to be “SELECTIVE DISINVESTMENT”. But the big question remains that will this selective disinvestment would be good enough to bridge this gap and coupled with the fact that with little chance of huge growth that the govt. has witnessed with respect to tax collections, where is this economy headed or will the economy continue to witness a regime which is coupled with lower consumption, leading to lower demand, leading to measures required by the govt. to boost economy, thus leading to a deficit economy at-least for next couple of years. On the backdrop of all these worsening scenario all around the globe, investments in the so called safe heaven (“Govt. Securities” at-least providing some inflation, sorry Deflation adjusted returns)is soaring, resulting in increased rather all time high bond prices. And with dramatically falling yields (providing some cushion to offsets losses against other investments especially equities) the stage is set for financial institutions holding these securities (leading to another problem of having enough liquidity in the system but the liquidity not necessarily getting translated into credit flow) to make a bargain, but again at a cost, and the cost is “PROLONGING” this situation of severity by holding liquidity; thus creating a blockade for credit expansion (the worry of major govt.’s and regulatory institutions around the world including our very own RBI). In one of my earlier articles (refer “The worse is not over yet??????????????? Yet to be seen!!!!!!!!!!!!!!!!!!!!!!!!!! (PART – 1)” sent on 24th October 2008 (a day market participants will find it hard to forget) and “Things will get worse before they get better: - Continuation to Part I sent on 26th October 2008) I wrote: “The pain, global equity markets are going through as of now (including Indian markets) are far less troublesome or less painful in comparison of the period we are going to have going ahead. The period ahead will be a painful prolonged period, wherein the volatility will be less in comparison, what it is today There will be a period after this huge sell off seen in equity market around the globe wherein, stocks will discount everything, such as a recessionary or depression scenario in developed market or a expected huge slowdown in emerging economies (both with respect to GDP, demand contraction and consumer spending). Though that time as I wrote in my previous mail is still away (refer The worse is not over yet??????? Yet to be seen!!!!!!!!!!!!!!!!! As on 24th October 2008) as the large macro bad figures have just started coming in and will take some time before the bad news from the macro front reaches its peak. Stock markets, commodities market will discount this a couple of months before the peak in flow of bad news, and that will be the time stocks will start showing some signs of improvement. The government on other had till this point in time were completely focused on or are focused on stabilizing the global main stream market, but later some point in time they have to realize as the large macro figures turn ugly, that this is the time for fiscal policy expansion rather than more action on monetary front. And due to the virtue or disguise of the lag effect on policies front, (as money is expanded in the economy with respect to higher spending by the govt., and couple with low interest rate that point in time) this will take in some more time before the CONFIDENCE starts building in, and there are signs of expansion with respect to retail credit growth, consumer spending, housing sales, job data, demand expansion, capacity expansion. This will be time when interest rates would be low (lower than already low Fed Fund rate of 1.5% currently) and take a journey upward, but this time is still away. A lot needs to be done before these starts materializing. Fortunately, things have been moving in a direction, which I thought would be good for the economies around the globe. Since my last mails, China and USA announced large stimulus packages focused on fiscal policy expansions (not claiming was the impact of my mail) as clearly the choice to take action on monetary fronts were extremely limited. The announced measures, will stimulate the economies in true sense, will help build confidence, help in increase jobs creation, consumer spending, demand expansion, capacity creation, credit growth but at an expense. And the expense is “Larger Deficits”, not as much for Chinese (as I believe they still have enough left in the store to make a break any other economy including the largest one by the virtue of having ~750 bn USD in forex reserves) but for United States. Though after a long time in US history, the budget document is seen as a document of extreme importance, and his promise of halving the deficit by the end of his first term by cutting expenditure which are not of prime importance and others which are unnecessary and changing the overall tax regime by taxing more to wealthy people, increasing the capital gains tax rates and by other measures, I believe bode well for the US and the world economy as the faster the recovery in US, the better it is for the world, but back in US, market participant still doubt his claim. To summarize my views specifically with respect to Indian Economy, there are more bad news flows, which I expect will come either on macro front or from the election side. And I have less conviction on the probability of the magnitude of good news by RBI on monetary and currency fronts, which may come or are expected by market participants. Next few months, at-least until elections are over, we will largely be dependent on global cues or news flows, which will move our market. I also expect the volatility to remain low (much lower then what was seen during 2nd quarter and beginning of third quarter), on the back of little domestic news flows, with a negative bias. I also expect the currency (INR) to remain within a range with a negative bias as I do expect RBI to intervene, but not intervene deeply, given the constraints it faces. On interest rate front, I expect interest rates to head southwards or remain largely at the present level again due to the fact that credit flow (to real consumers) are not up to the mark and further action by RBI on monetary front may will translate into lower interest rates but not necessarily entirely translate into a smooth credit flow in the system. The macro news will continue to be bad (not drastically terrible), as there would not be any involvement by the govt., at-least till elections, though the three stimulus announced earlier will start showing their effects, so we might not see an extreme dire situation on macro news front as we witnessed in last 9 months. Much will depend on the next govt. policies though looking at govt. balance sheet and P&L account, does not give much hope to any one of unprecedented steps being taken by the government due to harsh realities presented by the macro data. But our markets (at-least in near term) will more rely on the word, which catapulted Mr. Obama fortunes, i.e., HOPE. Thanking You, Warm Personal Regards, Vinit Tulsyanhttp://vinittulsyan.blogspot.com/ Check out the all-new Messenger 9.0! Go to http://in.messenger.yahoo.com/ --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. 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