Yes you are right PESSIMISM. It is amazing the kind of scepticism that thrives all around today. Most people are not willing to believe that a recovery is on and that the macroeconomic scenario in India is much better than it was ever over the last many years. There are several reasons for this, however the main reasons are to do with the fact that the optimism of the past did not play out the way people thought it should and now the majority thinks that there is going to be no recovery. The actual picture is likely to play out much differently.
First let’s briefly touch on the Global Scenario. Now as far as India is concerned the only thing that we are interested is that there should not be any sort of crisis anywhere i.e. Sovereign Debt, China Hard landing, Commodity crash driven etc. The second thing that we do not want is that there should not be any abrupt withdrawal of liquidity. Now none of these things are likely. The global liquidity squeeze that was created due to continuously falling commodity prices has also stabilized.The US FED is likely to hike slowly, the ECB is still printing more and more, the Japanese are likely to print more and this will ensure that liquidity is ample over the next 2-3 years. The China hard landing theory also has taken a backseat with the economy transforming slowly. That is not to say that the humungous Debt burden in China will not have an impact, however the impact will be more spread out and is unlikely to create a shock for the global economy. The other fact is that growth recovery will be slow in the Western Economies and China will continue to slow. This will keep inflationary pressure from global factors benign from the Indian standpoint.
Now specific to India most analysts are ignoring clear-cut signs of recovery which are there for everyone to see. There are several data points that indicate the same. The PMI data is looking up; the Core Industries growth data for February showed broad based growth with very strong growth in Electricity, Cement, Fertilizers, and Coal Production etc. Other data points like fuel consumption, Air Traffic etc have been strong for months now.
The big problem that was faced in general was due to the commodity crash where the entire supply chain got impacted due to continuously falling prices. This phenomenon causes losses to the producers, distributors as well as retailers. This leads to destocking at all levels as the general belief is that prices will keep on falling and holding inventory will lead to more losses. As commodities stabilize and there is some uptick in prices the reverse will play out i.e. the entire chain will start making more money, there will be restocking in the expectation that prices might rise more and inventory losses which hit profits last year are likely to reverse this year. This by itself could have a positive swing impact of 5% on earnings of corporate India.
The thrust areas of the government have started seeing a significant revival in the investment cycle. This includes Roads and Highways, Railways, Power Transmission & Distribution etc. More action is expected on the ports and irrigation sectors this year and going forward. The initial thrust generated due to the infrastructure investments will start flowing into better capacity utilization across industries and will lead to a revival in corporate investment cycle with a lag of 12-18 months.
Consumption suffered a lot over the last 3-4 years due to several factors. The biggest factor was high inflation which led to negative real rates and thus ate into the savings of people. This combined with a slowing economy and jobless growth led to a further slowdown in consumption demand. On top of that we have had two years of below par monsoons which has hit rural demand. Several factors are now playing out which will lead to a revival in consumption. This includes low inflation, low interest rates and thus borrowing rates, the 7th Pay commission implementation and the rural thrust of the government this year. In case we get a normal monsoon, which is the current indication then we could see a very strong revival in consumer demand over the next 6-12 months. Job creation is still lagging, however as the economy picks up hopefully we will also see a more rapid pickup in job creation.
The other factor that is holding recovery back is the state of the balance sheet of banks which have been hit by huge NPA’s. The good part is that the cleanup has started in good earnest and should play out over the next few quarters. The hitch is that if the economy does not recover we could see prolonged pain continue. However lower inflation and bond yields will be extremely beneficial, especially for many PSU Banks who have loaded on to Government bonds over the last two years.
Most analysts say that we cannot see recovery. Well that is how recoveries happen. If analysts and economists could see booms and bust cycles then we wouldn’t have them and markets would move in a steady, low volatile, straight line manner. Always remember
“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” Sir John Templeton
We are somewhere in the pessimism/scepticism cycle right now.
MARKETS
Markets are more or less playing out the way I thought they should except for the sudden drop of February which took me by surprise. However markets tend to surprise us all the time. On the upside there is always an overshooting and on the downside an undershooting. However we seem to building a strong base for a durable growth and earnings recovery in India. Over the last 4 years earnings have disappointed with the actual earnings turning out to be much worse than forecast at the beginning of the year. However this is set to change in 2016-17. A combination of sales recovery, operating leverage, lower interest costs as well as stable costs will lead to a strong earnings recovery going forward which will surprise most. While you will hear Fed fears, Yuan fears, crude oil fears etc etc the recovery will keep on gaining steam. Macroeconomic wise we are the strongest in a decade. Our external debt is down, forex reserves are up, CAD is at extremely low levels, Fiscal Deficit is coming down and structural reforms are underway. There are opportunities across Large Caps and Mid caps today with much greater value in the broader markets. So are we in a Bull Market, yes we are though the noises you will hear are more like pullback rally, dead cat bounce etc etc. I am bullish for sure.
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