Greece Endgame, economic numbers, results and the markets

The Greek story that has been dominating all economic headlines and impacting global stock, bond and currency markets over the last few months seems to be entering the end game with the downgrade of Greece to “Junk” status by S&P yesterday. I believe this might be the final straw which will get the Euro Zone to finally get things moving in order to stabilize that country or else risk the stability of the EURO and the entire zone. I have long held the view (sort of conspiracy theory) that the largest economy of the Euro Zone i.e. Germany deliberately has extended the entire crisis to keep the Euro weak as Germany is a hugely export dependant economy and in order to counter the Chinese control of its currency it has been in Germanys interest to keep the Euro weak in order to boost its entire export economy. Finally the government in Germany realizes that it can actually step in at any time to stem the crisis and it will only do that when they are convinced that the entire Euro zone can get destabilized. Also given the fact that more than 80% of the USD 280 odd billion of external debt of Greece is due to European banks this can have a far greater contagion effect. The markets were playing for a Junk rating to Greece which has now been achieved। As such now unless that country actually defaults the impact of that country on global markets should be limited. That is not to say that the entire issue of piling up of Sovereign debts and its future impact is not a reality; however that is something which will play out in some more distant future.

The other big concern has been the overheating risk of the Chinese economy and the ability of policy makers of that country to control the same. Although this is one risk which is difficult to call properly given the lack of credible data from that country, the fact remains that there seems to be a recognition today in that country that this is a real risk. I believe all of us need to be vigilant of what is happening in China as the risks of a policy mistake are increasing in that country. The growth rate of China needs to stabilize at a lower level and its currency needs to be adjusted higher at the earliest to reduce the risks to the global economy due to an overheating, followed by a crash।

On the other hand the economic numbers coming out of various countries in the emerging economics as well as the US is showing a strong recovery with the movement in most economic indicators being better than expectations. The corporate results coming out of American companies are turning out to be extremely positive. Similarly in India the growth numbers are positive and likely to sustain at the elevated levels for the foreseeable future. The growth of core industries at 7.2% for March 2010 which came out yesterday indicates that the Industrial Production number for March could be in the region of 15%. In terms of borrowing costs also lot of investors are trying to correlate what is happening to some of the PIGS countries to other emerging economies, which in my view is not the right thing to do. Some of the Indian banks which have raised USD bonds in the international markets over the last couple of months have been able to do it at rates finer than what was expected. Similarly we see a scenario today that a number of countries like Korea, India etc have an issue of controlling the appreciation of their currencies rather than worrying about any run on the currencies। I believe that investors are clearly able to distinguish today between the state of different economies.

Now coming to the ongoing results season in India which has in general been positive with most companies meeting or bettering expectations। Except for a few heavy weight companies that have disappointed, both the results as well as the outlook keep on improving. The most positive feature of the results has been that even for companies that have not met expectations their outlook for the next year has been very positive. The biggest supportive factor for the economy over the next one year will be the fact that most banks have ended the year with strong capital adequacy rations that are far in excess of regulatory requirements. Also the Net Non Performing Assets of most of these banks are well under control. This augurs well for credit growth over the next year where most banks have indicated a 20-25% growth in disbursals. Also despite monetary tightening the interest rates for consumers and corporates remain steady due to sufficient liquidity and strong forex flows. Given the fact that we have likely seen the peak of inflation and it should trend down over the next few months, the likelihood of any sharp up move in interest rates looks unlikely.

Financials, Automobile and Capital good stocks should outperform the markets going forward. Financials should gain due to improvement in credit demand as well as growth in various forms of fee incomes. Auto sector demand should remain strong due to improving income levels and easy credit availability. Capital goods that has been a laggard sector over the last 12 months mainly due to the fact that the up tick in the sector happens with a lag of 12 to 18 months after the cycle bottoming should now outperforming with improving implementation and good order book flow.

Overall the outlook of the markets continues to remain positive with the markets likely to rally by 7-10 % over the next few weeks.