THE MACRO CONUNDRUM

I had not written a blog article since the beginning of 2018 as the movement of the markets were more or less in line with my expectations of a Sell Off in February/March driven by global factors. The script played out exactly as expected. The only thing that came up separately was Mr. PNB which obviously was not predictable and as such has led to a scenario where India has underperformed global markets in the near term. As such where the average global market as on the weekend was up around 3% YTD we are down by around 3%.

Generally I give out my views on twitter in small pointers and as such did not see the need for writing in detail till now. However the commentary that has been going on recently in Media and Business Channels about “Deteriorating Macros” has prompted this article from my side as my humble opinion is that Macros in India are the strongest in the last 5 years and that supported by strong global growth sets the tone for a strong performance.

Just because Crude prices have rallied a bit does not mean “Poor Macros”. Neither does a small deterioration in the Fiscal Deficit or pick up in inflation indicate the same. The fact of the matter is that underlying trends in the economy are today very strong. IIP growth has been trending up, Construction activity has picked up, Cement consumption is moving up sharply, electricity consumption is picking up steam, Steel consumption is strong, Consumption demand from consumers is strong and on top of that there is a high probability of a pick up in rural demand which will add to aggregate demand and further aid economic growth. The other poor macro hypothesis  is a pick up in the Trade Deficit. This was bound to happen as the economy revived and the INR was noncompetitively placed due to the sharp appreciation of 2017. When you have high interest rates and an adverse currency obviously terms of trade are not favourable. A pick up in the global economy, reduction of interest rate differentials as well as a more competitive currency that we see today will boost export growth going forward. Recent import duty increases could also lead to some import substitution although it is not so easy for that to happen immediately.

The other big hypothesis that has gone around has been the uptick in global bond yields and how that will lead to a market sell off. This is most ridiculous. When the entire market is positioned on one side then the initial moves are always rapid as we have seen in the case of bonds globally. However as markets come to equilibrium this movement also slows down and that is something that we will see going forward. The average US FED Funds rate over the last 20 years has been 5.5% plus today it is 1.5% and as such talking of a tight monetary policy is way too premature. Policy rates will become restrictive above 3-3.5%% and that is something we might not see for the next two years atleast. Moreover the policy in Eurozone as well as Japan continues to be extremely accomodative.

Then comes Mr. RBI with its predictions of inflationary pressures which has been the same for the last 20 years. Whatever be the inflation they always believe that inflationary pressures might pick up. Obviously they might as commodity prices rally and the economy picks up steam. However if you ask a company about their preference of whether they want a 10% higher growth or 25 basis points lower rates anyone will take a higher growth rate. As such even if interest rates in India are hiked by 25 basis points over the next one year it hardly makes it a case of tight policy.

Now the facts are that all indicators are pointing towards a much higher economic growth over the next two years. If this outlook gets supported by a normal monsoon (which looks likely given the La Nina conditions and positive IOD) then we are looking towards a steady high growth scenario with subdued inflation which is the ideal scenario. Despite concerns that have come up recently on the ability and inclination of PSU Banks to lend more next year, which was expected post recapitalization it does not seem likely that credit flow will be restrictive as the private sector financiers are well geared up to meet any needs. The only sector which can actually get impacted will be the MSME sector where we could have some growth concerns if PSU Banks pull back.

The outlook for improved asset quality has not deteriorated post Nirav Modi scam. It remains the same as this is more a one off event. Stressed assets in steel, metals, cement, telecom etc are likely to get resolved under the NCLT process. We will also see resolutions in the power sector come through as demand picks up next year due to the pick up in industrial activity. Earnings growth outlook for next two years is at around 15-20% with an expected EPS for the NIFTY of around 600 for next year and 700 the following year.

In conclusion all I have to say is that do not be fooled by “MACRO CONCERNS”. There are no macro concerns infact there are macro tailwinds which might become stronger rather than weaker going forward. Take the bull market correction as it is and move on as there is lot of money still to be made. 

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