Over the last few days as the corrections unfolded in the equity markets globally the predictors of doom came out and started talking about the reversal of the US Dollar Carry trade and that the USD was likely to bounce back sharply over the next few weeks and months which will lead to a huge fall in equities and commodities.
My view on the same is that carry trades when they start, do not end so fast. We are just six to seven months into this carry trade and my guess is that given the state of the US Economy and the fact that there is a huge repair required in the balance sheets of financial institutions, the US Government and the US Consumer we are unlikely to see a reversal of the easy liquidity scenario in the US for a long time. Moreover as I wrote in one of my earlier blogs “Bull in the world of two carry trades” we are today in a world where short term interest rates are likely to remain low both in the US and Japan over the next few months and maybe years and as such there is the potential of money flowing through both the currencies. Since both currencies will typically move in opposite direction relative to other world currencies investors who can make the right calls on when to switch currencies can actually make huge returns by investing in equities and commodities.
Moreover if one analyses the history of Yen carry trade, typically such trades go on for years (with obvious short term reversals in between). As such there does not seem to be much logic of talking about an end to carry trades today.
If one logically also analyses the options before investors today, specifically in the Indian context (which is also valid in the global context)
-fixed income in any form is unlikely to make inflation beating returns for investors,
-real estate on the commercial side is on huge oversupply and on the residential side prices are still not where one can look to make strong returns in the near term,
-gold is something that i like however i expect the Indian rupee to keep on appreciating and thus will take away a large part of the upmove in gold prices,
-commodities look good selectively however given the state of a large part of the global economy we are unlikely to see a big upmove from where we already are.
In this context equity stands out as an asset class which is likely to outperform over the next two years atleast. And given the extremely low short term rates in most large economies there is likely to be a huge influx of money into high growth developing economies.
Indian Economic Recovery
The most positive feature of the current results season has been the extremely positive performance by the Indian Financial sector and the fact that the capital adequacy of the banking sector is almost at all time highs and NPA’s on an overall basis have come down for most banks. This in a scenario of extremely strong liquidity will lead to a fall in credit costs for consumers and corporates over the next few months. In a previous article “Do not believe the banks when they say interest rates will go up” I had clearly pointed out that bankers who are talking about interest rates moving up over the next few months and not lending are out of sync with reality. We have seen over the last few weeks almost a rate war starting on the home loan front where one of the private banks has reduced rates to 7.5%. Lot of banks have also reduced auto loan rates very significantly with rates for some of the larger cars coming down to as low as 5% and or most others down to 8%.
The order booking of most capital good and construction companies are seeing a very good momentum and Automobile sales have hit the high gear with most companies reporting more than 15-20% growth for October. Numbers will be good for the next six months due to a low base effect of last year. Similarly Cement sector growth continues to be over 12%, steel companies output is growing more than 20% etc. Higher gas production by reliance and start of production of Crude Oil by Cairn is leading to a high growth in Oil & Gas production. Electricity production is also picking up and likely to move up further next year. The services sector is also seeing a pick up of momentum mainly due to higher government spending. Sectors like construction, banking, aviation, tourism, banking and finance, transportation, trade, real estate etc. are also likely to see a sharp pick up which will lead to a pick up in momentum on the services side of the economy( 60% plus of the Indian economy). Consumer spending has also picked up sharply with most consumer durable and non durable companies reporting strong growth numbers.
The only negative is poor farm sector growth in the Kharif crop which should lead to the overall agricultural growth being a negative of around 6% for current year. However this will lead to a low base for next year and we have seen several times in the past that the year following a bad drought is typically a 8-10% agricultural growth year. Industrial production growth is likely to average around 8-10% next year and services sector growth rate should also be around 8-9%. Taking into account all these factors I believe that next year should be a 8-9% growth rate for the Indian economy.
This combined with strong inflow of foreign flows into India and the fact that economic recovery is likely to be rapid sharp corrections due to global events should be only used as buying opportunities in India.
Successful Investing is anticipating the anticipation of others – John Maynard Keynes