Spanish flu again

Bond yields are spiking up again. The biggest risk to risk-on trade which started in the beginning of the year is the coming back of eurozone crisis. Apart from higher bond yields in Spain & Portugal, market is also worried about out election outcome in France which could probably bring in the leftist Hollande in power undermining the very fragile fiscal pact between euro area countries. The Dutch government is split with the leadership finding it diffficult to push austerity measures within the colaition members

ECB has so far desisted from making fresh intervention in the bond market. However, the cries for another round of bond buying are getting stronger every day. US treasury secretary Geithner has already suggested ECB to get active in the market again. The macroeconomic data coming out of europe continues to disappoint with spain entering a recesssion in Q2 this year. Also, european manafacturing PMI continues to drop and shows no sign of settling down.


The stability of the global financial markets depends upon how quickly ECB intervenes.........

Looking beyond the budget

The rally which started in the beginning of the year has paused due to lack of positive trigger from the monetary policy. Although the core inflation continues to come down, Rbi has decided against the rate cut as of now. We expect RBI to initiate the first rate cut in its April policy and we expect a 75- 100 bps rate cut for the entire year.

The Budget, as usual, turned out to be a non-event for the market. Going forward the market will look forward to global cues and Q4FY12 results season for direction. We continue to maintain our positive view on Indian equity on the back monetary easing, global flows and a bounce back in GDP growth.

There are enough beaten down stocks in the midcap space which have the
potential to deliver returns superior to broader markets.

Game Changer: America's self-sufficiency in energy

America has done it again. While several experts continue to write about the coming decline of the American era,America has achieved a feat which very few emerging economies can hope to achieve: Energy Independence. With massive reserves of Natural gas and Shale gas, America will soon become a net exporter of gas. Ever since the oil shock of 1973, America has a declared goal to move towards energy independence which it is very very close to achieving. This means that America will become more aggressive in its policy towards Gulf and middle east states since it does not have anything to loose. Any escalation of conflict in Iran could lead to sharp rise in crude oil prices delivering massive economic shock to emerging economies like China and India while keeping America largely unaffected. India would be worst hit since its strategic oil reserves can meet only 15 days of demand in case of a supply disruption. hence India is trying very hard to strengthen its relationship with Iran. High crude oil price continue to be the biggest threat to Indian equity markets this year

The year of Central bankers

Super Mario has succeeded in calming the Global asset markets. By Undertaking to provide unlimited, very cheap liquidity to european banks, Mario Draghi has made sure there is enough appetite for junk euro government paper. This takes care of short term liquidity concerns for the euro area. US macro data provides further evidence to the fact that Ben bernanke has again turned around the US economy with several green shoots of recovery visible on the horizon.


In India, If Subbrao cuts CRR on 24th, i won't be surprised if there is a 5-10% further upmove...............he holds all the cards. In the absence of a functioning fiscal policy, the responsibility of reviving the economy and therefore the equity markets, lies completely with him

2012: The year of new Normals

We witnessed the second worst year for sensex since 1980. India also turned out to be the 2nd worst performing country in Asia Pacific Emerging markets in 2011s. This was a year when the resilience of the Indian economy got challenged by both internal and external factors.
However, bulk of the pain was self-inflicted. Correction in markets in the last quarter was more due to India Specific Issues like lack of policy measures, corruption and monetary tightening. GDP growth continues to come down. In foreign investors mind there was concerns about the mid-term direction this country is taking with increasing subsidies and populist measures.

We believe that going forward markets will reconcile to the fact that trend growth rate is coming down, and could settle at 6.5-7%. This could be the new normal for growth and is by global standards, not a bad number at all. We expect inflation would come down this year and could average around 7% leading to nominal growth of 13-14%. That would lead to corporate earnings growth of 15%.
Rupee has weakened significantly this wear and we expect 50 to be the new normal. Exporters will benefit big time from this rupee weakness.

We expect growth to bottom out in Q1 CY12 at 6%. Corporate earnings should also bottom out around this time. We expect RBI is to start easing monetary policy with a potential repo/rate action on 24th January itself. Going by history, equity markets bottom out around the time when interest rates peak out. We expect markets to bottom out in the Q1 itself.

Globally, things not as bad as perceived in August. In US, there is no double-dip. In Europe, Endgame will require ECB coming into play which we believe will happen sooner than later.
We Expect equity Market Returns of 20-25% backed by 10-15% earnings growth and a P/E rerating from 12 to 14-15 once growth bounces to 7%.