I am writing after a few weeks as there was not much to write about as most things were moving as per expectations. I just thought that I would get together all thoughts as per the data and developments that we see around us and try to look at things going forward.

The biggest development over the last few weeks has been the big rate cut and promise of more by Raghuram Rajan. This has clearly put a floor on the downside of the markets as well as given a huge impetus to the economy. The economic impetus has happened in two ways, firstly the sentiments have changed for the better all of a sudden and secondly the trajectory of interest rates has conclusively shifted downwards. The other big number in the Indian context was the Industrial Production number which showed a massive beat versus expectations. Now most people still think that nothing is happening in the economy. However the reality is that at the top of an upcycle and the start of uptick in the downcycle this is the view that is prevalent. There are several data points to support the economic data points:

-Fuel consumption in the month of September has jumped up by 14% with a massive 20% jump in Diesel consumption. Even after taking into account higher diesel demand for power generation it is a huge jump.
-Indirect tax collections have kept pace at a high rate showing an increase in volumes and value of sales. Now a 35% increase in Indirect taxes has to be seen in the context of low product prices and a Wholesale Price Inflation of -4.5%. Even taking into account the increased taxes on motor fuels the tax data indicates growth.
– The September trade data shows a 12% growth in volume of imports if we exclude fuel and gold imports. This indicates higher domestic demand
– I have been on the road for quite some time over the last few days. The number of MultiAxle trucks carrying industrial goods and Capital Goods have increased massively. We should see this in the toll collection data of some of the road operators as they declare results over the next few days.
-Lastly most companies are now seeing some uptick in demand. Although one should not rely much on company management commentary as they tend to be most bearish when the time is to buy and most bullish when time is to sell.

Overall stage is set for a strong recovery going into the year 2016. The only weak point is external demand i.e. exports where we will see continued challenges for some more time.

Global developments created the last leg of the correction in India. As I have pointed out over the last many days the global panic seems to have peaked out now and from here on till the end of the year we should see decent markets. The next round of volatility could come around the December meeting of the US Federal Reserve where the bets of a rate hike have been reducing with time.

The fear around China and Chinese data continues to spook market participants who want to track markets on a daily basis. However this is futile in my view as the reality that China will continue to slow over the next few months and years is a something that is a given. I believe that slowly markets will get used to it and stop reacting on it.

The other big event that seems to be playing out is in the currency and bullion markets where the US Dollar seems to have peaked out for now and looks to be positioning to give up 5-10% from the current levels.

us dollar index weekly

This is also likely to mark the end of the huge outflows from Emerging Markets where investors have pulled out nearly $ 60 billion since the beginning of this year. I expect flows to reverse strongly in the year 2016.

Market participants continue to be wary with the general commentary being cantered around where will the markets top out rather than the fact that the markets in all probability have already bottomed out and now positioned for a strong upside till the end of 2016. The markets waited for all brokerage strategists to downgrade their Index targets before it started to move up and that is the nature of the beast.

In conclusion I believe that that fear factor has played out in the markets. Both the economy and markets have bottomed out and are looking at a significant upside. I expect markets to rally 25%+ from the current levels till the end of 2016. This will be driven by strong government finances, economic recovery as well as earnings recovery. Domestic funds flow into Equities continues to be strong and will remain strong for the foreseeable future. Global funds flow should reverse in 2016 despite the pressures of outflows from Oil country Sovereign Wealth Funds. Indian bonds are also set to rally significantly with an initial target of 7.2% till March 2016 and 6.8-7% by the end of 2016.

When everyone is talking of risks, it’s time to make returns.

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