Thinking of End game & beyond
Printed From: The Equity Desk
Category: Economy, Markets and commodities
Forum Name: Indian Economy - Powering Ahead!
Forum Discription: Talk about various facets of the Indian economy, it could relate to GDP growth, inflation, fiscal deficit, disinvestments.Is India at the crux of becoming an economic SUPERPOWER?
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=3097
Printed Date: 04/May/2025 at 11:37pm
Topic: Thinking of End game & beyond
Posted By: Monkey
Subject: Thinking of End game & beyond
Date Posted: 04/Dec/2010 at 12:56pm
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I came across two articles recently discussing concern about At this point in time, problem due to current account deficit is considered as low probability event and, probably, got ignored. However, this got me thinking about how all this will end. It is not practically possible to predict the events but there is no harm to do mental exercise. Hence, here I go!! Indian consumption has been booming. A lot of this has been financed by bank credit. Earlier to year 2000, it was not usual to get loans from bank for any purpose other than buying house and that too at quite a high interest rates. Situation is changed now. People are happily taking loans from bank for buying house, car, and home furniture and also for a vacation. This has led to predictable multiplier effect on economy, thus resulted in high GDP growth and also improvement in corporate revenue growth and profitability. Stock market and property market has reflected this phenomenon. So far so good!! However, beyond a point, this growth is not sustainable and could lead to serious problems down the road. What are the signs that it is on unsustainable trajectory? One is rate of change in inflation and bank interest rates. Both have started to move higher which is not good sign. This reflects that there are bottlenecks in economy, most glaring is infrastructure. These bottlenecks need to be removed to improve the growth rate. Otherwise, it results in over heating being reflected in high inflation & interest rates. Second is balance of payment and how it is financed. In this case, our current account deficit is widening and is being financed by FII inflow. The FII inflows are short term in nature and can be quickly reversed unlike FDI flows. That is again not a good sign. When time comes, there could be capital flight out of In summary, a good portion of current growth is not productivity led but led by bank credit growth and indirectly financed by hot FII money. When this trend reverses, it will reverse corporate revenue growth & profitability improvements and result in P/E de-rating for Indian stock market. So, what is the end game? In the most likely scenario, current trend will continue for quite sometime and, like snowballing effect, becomes glaringly unsustainable. What will be the signs of end game approaching? High p/e ratio for the market, big time FII inflows & appreciating currency despite high inflation, interest rates and current account deficit. What will be trigger for trend reversal? Strong but late policy response (like some form of capital controls or trade barriers like high import duties) combined with attractive investment opportunities elsewhere (like developed countries equity market available at generational low P/E) could result in FII money leaving What will be implications? P/E de-rating of stock market (long term bear market), big time Rupee depreciation and even banking crisis possible. What action we, retail investors, can take? Sell domestic consumption theme, move to foreign currency deposits or stock market, buy stocks of companies earning foreign exchange. Time frame of this happening? No idea….I guess 2016, give or take a year or two. |
Replies:
Posted By: values
Date Posted: 06/Jan/2011 at 3:09pm
| Money...Those are good pointers to articles and nice analysis...how much can that be true and not, only time can tell.. but its surely something to keep in mind on these trends and take corrective actions when time comes... |
Posted By: aniljain
Date Posted: 06/Jan/2011 at 4:03pm
This sign are already seen in current scenario what next??????????
Appretiate your thought
 ------------- Investment is an art, not science |
Posted By: aniljain
Date Posted: 06/Jan/2011 at 4:46pm
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India’s current account deficit has risen to unprecedented levels and may rise further,” the report notes, adding that by FY2012 it may touch 4.3% of the GDP, higher than the level in 1991 when the country was facing a balance of payments crisis. The risk in a scenario of domestic demand-driven growth is that a surge in capital-chasing growth and yield could drive asset and commodity prices higher, causing the real effective exchange rate to appreciate. ------------- Investment is an art, not science |
Posted By: Monkey
Date Posted: 06/Jan/2011 at 6:09pm
I think we are miles away from end game. I think we are just getting started on the trend of sustained high inflation and interest rates slowly but surely moving up.
Think over the following: 1. Short term interest rates in US, Japan and Euro zone are close to zero and their central banks are unlikely to substantially increase these rates for foreseeable future. This allows big hedge funds and FIIs to borrow at near zero interest rates, leverage this money and play around the world in every asset class in line with whims, fancies and fashions of the day. This is trillions of dollars in hot money circulating around the world. A small dose of it coming to India acts like steroid shot for our markets. 2. All big economies are running high fiscal deficits, US for example is expected to run trillion dollar deficit per annum for quite some time. It is practically not possible to finance such deficits out of savings of rest of the world. Only way to finance these deficits is to print money which these central banks are doing anyway. Effect is high inflation. Since all these newly minted money are routed to developing markets, signs of high inflation are now appearing in developing markets. RBI increasing rates is not going to stop the trend due to factors mentioned above. If RBI wants to break the back of inflation on the face of above two factors then it needs to jack up short term rates prohibitively high, probably in the range of 15% to 20%. I do not think that is going to happen now in next few years. Therefore, our stock market will continue to get inflation jitters and, after getting a swift correction, will climb back higher. This is wall of worry phase. It looks scary but nothing much to scare about as long as RBI is behind the curve in company of other central banks. The real problem for the market will come when RBI will resolutely jack-up short term interest rates to prohibitively high levels. It will happen when inflation, particularly inflation in primary articles like food, will increase and stay high to an extent beyond tolerance of ordinary citizen. We will be able to anticipate RBI actions through election results where inflation will be one & only agenda and whoever is ruling party at center will be thrashed. I see very real possibility of food riots on the streets in many parts of the country. When this happens, RBI will take action. That will be the time to get out of stock market. I expect that by the time RBI is seriously on the job, market valuations will be in the once-in-a-generation bubble territory. My guess – we will see TTM P/E on Nifty touching 50 sometime in this decade on the back of hot money followed by ordinary citizen’s hard earned money in the market. Such high valuations combined with RBI’s tough stance on inflation (real and not lip service) combined with very high current account deficit will be the end for this bull and, most probably, the end for India story for FIIs. You know what to do if such scenario comes to pass. I seriously hope that above scenario does not happen. However, I see high probability of it happening. We can cry for our country but still we need to take appropriate actions to protect our own personal financial well being. I hope what I have written here helps, just in case!! |
Posted By: aniljain
Date Posted: 06/Jan/2011 at 6:40pm
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Plz Basantji can you help on next theme of investment which will protect our wealth and earn resonable return in 2011-2012 and kindly suggest comment on this thought presented by monkey. ------------- Investment is an art, not science |
Posted By: aniljain
Date Posted: 07/Jan/2011 at 11:14am
Soon or latter rbi reaction to current scnerio will decide the direction of trend. plz basantji give your valuable comment on this entire post. ------------- Investment is an art, not science |
Posted By: j2eeprofessiona
Date Posted: 08/Jan/2011 at 1:14pm
| the markets are discounting a 50 basis point hike... and therefore the reaction , plus this spiralling inflation is a real worry and it seems it now going out of goverment's control... |
Posted By: Monkey
Date Posted: 08/Jan/2011 at 5:46pm
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Inflation is worry but RBI is behind the curve. Government and central bank policies are highly inflationary. I recently read the news that NREGA payout will be linked to inflation. This means additional fiscal deficits. Government has no control on spending. RBI is monetising deficits to an extent that money supply is expanding at rate of 18% to 20% per annum since last few years. All this additional freshly printed money is chasing assets. Just look at real estate prices in Bombay or even today's auction prices of IPL players. System is flooded with liquidity. Policies of central banks and Governments abroad also do not help.
So, root cause of problem is not going to go away with 50 basis point increase in short rate. This is all smokes and mirrors to give impression to voting class that some action is being taken. Market will get scares like this from time to time but then will recover.
Market will be in for serious & lasting damage only if it is clear that ruling political class and RBI can not just get away with paying lip service. That will happen only after food riots through out the country. Sad but true!! Till that time buying on dip should be policy.
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Posted By: raj261178
Date Posted: 23/Jan/2011 at 10:55pm
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Nice analysis monkey. I feel the following cary-trade scenarios is getting executed now Developed world
Deflation -> Low interest rates -> still defaltion -> Money printing and buying back govt bonds -> Investment banks buy loads of money as credit ->
Devloping world
Investment banks Invests in developing world -> sice of Money comes as FDI and FII into India -> FDI and long term FII flows are gud whereas shortterm (HEdge fund) mometum FII money is bad -> Indian Currency appreciates and us dollar depreciates as FII need to buy indian rupees for us dollars to invest in stock or debt market or companies -> Indian GDP increases -> Inflation in india as money supply is high and rbi is behind the curve in increasing inteerst rates fearing growth to recede -> Commodities and inputs rise locally and globally -> Price rise in Commodity and rupee appreciation will compensate each other in short term ->
A) Inflation ( local cyclclas or global commodities)
Imports raise because of inflation and exports decreae because of rupee appreciation resulting in current account deficit -> Inflation surge again -> Interest rates increase -> corporate profits tank and fixed deposits raise to 13%-> FII outflows start to other developing country -> Balance of payments will become a problem for india
B) Developed economies limp back to normalcy
FII outflows start to developed world -> Balance of payments will become a problem for india
C) Inflation is controlled (local and global) or developed exonomy takes time to come back to normalcy or commodities
Imports are cheaper, crude being main contributor balance of payments is easier -> indian growth story intact -> fii inflowss ocme again fiercefully -> corporate profits grow in 20% -> stock market in upper circuit for another 5 years and we see teh return of 2003 to 2007 euphoria
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Posted By: mane.ramesh
Date Posted: 03/Mar/2011 at 4:46pm
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What buffett will reply to shankar sharma if ever they met? http://economictimes.indiatimes.com/articleshow/7600623.cms?prtpage=1 ------------- investment elephant blind |
Posted By: barla
Date Posted: 03/Mar/2011 at 5:11pm
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Keep saying market will fall. It will happen one day. He said markets will fall to 7000 and remain there for a long time.
I rememebr him crtising Buffett saying that he has no investment logic etc.
He was banned by SEBI also. i think that period is over now.
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Posted By: kmp_saij
Date Posted: 03/Mar/2011 at 8:35am
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Indian markets are set to go up..not enough -ve news to hold them back.. many compaies are available at attractive levels.... volatility also has increased can we say trend reversal is happening??.... ------------- Own whatever’s feared, shun whatever’s beloved. |
Posted By: barla
Date Posted: 03/Mar/2011 at 10:46am
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PE now is over 20. A 10% uptick and a 5% fall in EPS march end 2011 will see PE nearing 24, which would be at a record high (excluding Harshad Mehtas time).
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Posted By: kmp_saij
Date Posted: 03/Mar/2011 at 11:32am
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Sensex valuations may not be that much attractive but.. small/mid cap space you have lot of opportunities.....
And if India maintains 8-9% GDP growth then sensex deserves PE of 20 atleast sentimentally if not fundamentally....
------------- Own whatever’s feared, shun whatever’s beloved. |
Posted By: Monkey
Date Posted: 30/Sep/2011 at 3:35pm
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This is probably begining of a major shift in allocation of pension funds. We are talking big money here. In addition, consider the fact that norrmal funds are underweight emerging market. I read Mark Mobius saying that average allocation is 3% - 8% whereas market cap of emerging market is 35% of global market cap. I am more & more getting feel that a once in a life time equity bubble will emerge in India once dust is settled on current crisis.
http://www.bloomberg.com/news/2011-09-29/world-s-biggest-pension-fund-plans-to-start-investing-in-emerging-markets.html - http://www.bloomberg.com/news/2011-09-29/world-s-biggest-pension-fund-plans-to-start-investing-in-emerging-markets.html
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