I will start with an interesting poll result I came across (unrelated to the headline of the post) –
More than 60 percent of investors surveyed by Bloomberg on Jan. 19 said they viewed China as a bubble, and three in 10 said it posed the greatest downside risk. The quarterly poll interviewed a random sample of 873 Bloomberg subscribers.
The question is – with such a wide consensus on the subject is it a likely event?
The industrial production data that came out on Friday at 16.8% have far exceeded most expectations. Analyst expectations were in the range of 10-14%. There has been a broad based growth in the month of December and it is spread out across sectors and segments. Consumer durable growth that was going strong in the festival season continues to be strong with credit availability picking up on the retail side. The revival in capital goods is also a positive as this segment was showing a lag. As implementation picks up the capital goods growth number should keep on improving. The numbers for December combined with the strong pick up in imports as well as double digit positive growth in exports has now set the tone for a 15-20% average industrial growth numbers for the months of January to March 2010. The figures for January across most segments are very positive with a 12.7% growth in cement consumption, 12% plus growth in steel consumption, 32% growth in automobile sales etc.
The advance estimates of Rabi crop i.e. Winter crop is also very positive with record numbers expected for Wheat, strong production of rice as well as a pick up in pulses production. This will have two positive impacts for the economy, the first is that the growth numbers will be supported by a positive agricultural production growth and second is that inflation in food articles will come under control. Inflation in India running at 7.8% is largely contributed at this stage by primary articles inflation which is running at 16-17%, manufacturing sector inflation is still muted at around 3%. The good part is that policy makers i.e. the RBI is well aware of this and has clearly indicated that it is done for now in terms of monetary tightening and the next steps will only be in April which in my view will be in the form of repo and reverse repo hikes and it is unlikely that more liquidity will be sucked out of the system.
Services sector growth is picking up sharply with strong government spending, a pick up in most services industries like IT, retailing, construction, banking and financial services etc. As such services sector growth numbers should go back to the 9% range in Q4.
One of the best parts of the entire revival process is the strong growth in profitability of the SME’s and the revival in those industries as this will lead to employment picking up. Broad based recovery across segments and the fact that most companies held up on hiring as well as salary hikes last year will lead to both increased hiring as well as higher income levels for employees. Bonuses that totally went dry last year are coming back with a vengeance. As such the consumption story is looking very positive.
On the investment side the order bookings are becoming stronger and stalled projects across segments are getting revived. Financial closures of a large number of projects that had been held up last year are happening at a rapid pace setting the stage for the economy getting support from both the consumption and investment side next year.
Given the fact that demand had totally fallen off the cliff last year Jan to March quarter the base is also very supportive for a strong growth for the current quarter. As such my estimate is for a 10-10.5% GDP growth for the current quarter. This should take the full year growth number more near 8% vis a vis current estimates of 7.2%.
The advance estimates of Rabi crop i.e. Winter crop is also very positive with record numbers expected for Wheat, strong production of rice as well as a pick up in pulses production. This will have two positive impacts for the economy, the first is that the growth numbers will be supported by a positive agricultural production growth and second is that inflation in food articles will come under control. Inflation in India running at 7.8% is largely contributed at this stage by primary articles inflation which is running at 16-17%, manufacturing sector inflation is still muted at around 3%. The good part is that policy makers i.e. the RBI is well aware of this and has clearly indicated that it is done for now in terms of monetary tightening and the next steps will only be in April which in my view will be in the form of repo and reverse repo hikes and it is unlikely that more liquidity will be sucked out of the system.
Services sector growth is picking up sharply with strong government spending, a pick up in most services industries like IT, retailing, construction, banking and financial services etc. As such services sector growth numbers should go back to the 9% range in Q4.
One of the best parts of the entire revival process is the strong growth in profitability of the SME’s and the revival in those industries as this will lead to employment picking up. Broad based recovery across segments and the fact that most companies held up on hiring as well as salary hikes last year will lead to both increased hiring as well as higher income levels for employees. Bonuses that totally went dry last year are coming back with a vengeance. As such the consumption story is looking very positive.
On the investment side the order bookings are becoming stronger and stalled projects across segments are getting revived. Financial closures of a large number of projects that had been held up last year are happening at a rapid pace setting the stage for the economy getting support from both the consumption and investment side next year.
Given the fact that demand had totally fallen off the cliff last year Jan to March quarter the base is also very supportive for a strong growth for the current quarter. As such my estimate is for a 10-10.5% GDP growth for the current quarter. This should take the full year growth number more near 8% vis a vis current estimates of 7.2%.
Markets
Markets stabilized last week after a strong sell off driven by largely concerns on PIGS countries and whether there are likely to be sovereign defaults. Greece became the driver of global stock markets with total Greek debt outstanding being just around 2% of the entire EU and negligible vis a vis total debt outstanding globally. In my view these concerns are those which come up after every big move in a bull market.
It is ironic that the Euro that was considered to be more stable and better positioned last year vis a vis the USD is now facing questions of survival and whether the EU will break up given the vast differences in the EU economies. My own feeling is that the EU will go through this crisis eventually and that will make the union stronger over the next few years. Without a crisis it is very difficult to foresee the kind of problems that can arise. Given the fact that the current crisis is due to countries that combined together form a small part of the overall European economy this could be more of learning experience that will be helpful for the future.
China continues to tighten in baby steps and each such baby step creates tremors in global markets. The fact of the matter is that Chinese banks extended 19% of the years targeted credit expansion in one month itself. As such tightening is not an option but a necessity in that country. As I have said earlier I believe Chinese tightening is the biggest positive for equity markets as unless China tightens inflationary expectation in India cannot be controlled. The start of Chinese tightening has led to a commodity sell off and as it continues commodity prices should remain range bound.
Emerging market equity funds lost a huge USD 3 billion last week, thus confirming the fact that performance does not come due to money but money chases performance. In my view it is always positive to have a two way flow in order to control the frenzy that builds up after every sharp up move. As markets stabilize money flow is likely to come back to emerging markets.
It is ironic that the Euro that was considered to be more stable and better positioned last year vis a vis the USD is now facing questions of survival and whether the EU will break up given the vast differences in the EU economies. My own feeling is that the EU will go through this crisis eventually and that will make the union stronger over the next few years. Without a crisis it is very difficult to foresee the kind of problems that can arise. Given the fact that the current crisis is due to countries that combined together form a small part of the overall European economy this could be more of learning experience that will be helpful for the future.
China continues to tighten in baby steps and each such baby step creates tremors in global markets. The fact of the matter is that Chinese banks extended 19% of the years targeted credit expansion in one month itself. As such tightening is not an option but a necessity in that country. As I have said earlier I believe Chinese tightening is the biggest positive for equity markets as unless China tightens inflationary expectation in India cannot be controlled. The start of Chinese tightening has led to a commodity sell off and as it continues commodity prices should remain range bound.
Emerging market equity funds lost a huge USD 3 billion last week, thus confirming the fact that performance does not come due to money but money chases performance. In my view it is always positive to have a two way flow in order to control the frenzy that builds up after every sharp up move. As markets stabilize money flow is likely to come back to emerging markets.
On an overall basis markets seem to be constructively poised for a pre budget up move and we could have a 5% plus kind of up move prior to the budget.