Rising risk of a Hard Landing

Indian markets made a new 30 months high on the back of strong global cues. A relief rally seems to be playing out globally as a result of positive news coming out Europe and China. The best Q1 results so far have come out from the Financials space. Midcap private sector banks like IndusInd and Yes have delivered a growth in excess of 40% in the Net interest income. Leap of faith would expect the performance to be maintained in the next few quarters. While larger PSU banks like PNB grapple with poor asset quality, smaller PSU banks continue to shine. Allahabad bank came up with Net interest income growth of 35% and continues to be the top pick in the space. Despite an adverse interest rate scenario, the annual credit growth number should exceed RBI forecast of 20% and an overweight on the Banking & Financials would continue to be maintained

Inflation continues to be out of control. Leap of faith believes that the government’s calculations on inflation front have gone horribly wrong. Inflation might continue to be in the 9-10% range for next several months, belying all claims made by the government that it would come down to 6%. If that happens, RBI will be forced to slam the brakes hard with the risk of a hard landing increasing by the day. Inflation is no longer a supply side issue with demand leaping ahead with a strong bounce back in economic activity. The fact that all capacity expansion plans had been put on hold due to recession in last few years is adding to the problem.

RBI will come up with the credit policy on Tuesday, 27^th. The consensus expectation is of a 25% basis point hike in both repo and reverse repo rates. Leap of faith believes that a higher 50 bps rate hike would be in order with maybe a reduced interest rate corridor. It seems Finance Ministry’s money raising compulsions have been holding RBI’s hand so far. However, the time has come for RBI to bite the bullet and increase the rates to the pre crisis level.

Stock markets across the world showed some strength this week. The Shanghai composite market has rallied almost 10% from its recent lows. The market seems to be indicating that the recent tightening initiatives by the Chinese government are almost over. With the government having been successful in slowing down the GDP growth last quarter, there should be no further tightening in near future. Leap of faith believes the rally in Chinese markets in good news for all emerging markets. As fund managers of Emerging market and BRIC funds start allocating money back to China, some part of that is bound to come to India too which might result in further upside in Indian markets.

The European markets also bounce back. The trigger was the supposedly ‘positive’ stress test results for European banks. It is very clear to everybody that these results were a sham and provide no comfort to investors looking for any definitive evidence of improvement in Euro area macroeconomic scenario. However, from tactical perspective, it has given some breathing time to the regulators in Europe to deal with the gigantic problems, which could lead European markets still higher in the short term.

The Result picture looks encouraging in US with Ford coming up with good numbers and Apple delivering a stunning 61% growth in revenues. While the robust sales of iphone, ipad, and ford cars indicate a robust consumer demand, the low advertising revenue for yahoo search engines indicates the still low business confidence in US. The remark of Fed chief Ben Bernanke that US economy prospects remain ‘unusually uncertain’ also added to the nervousness about the health of US economy. Leap of faith believes that these comments have laid the ground work for another stimulus package from Obama administration which should be coming very soon. While that would be positively received by the stock markets, questions about long term health of developed market economies still remain unanswered.