DECOUPLING & MARKET OUTLOOK

I had written a piece on decoupling a couple of weeks back. Too may people are asking me today, where is the decoupling. It is those people who did not go through my argument properly.

First and foremost is the fact that in panic and euphoria all markets are linked and as such if the US markets fall 4% no market will remain unscathed. This was also true when the Indian markets were shooting up during the first half of this year when the outlook for the economy as well as earnings growth was not very great in India.

• Low and controlled inflation which will be driven by extremely low commodity prices. For example crude prices have corrected by nearly 60% over the last one year thus giving a push of nearly Rs 400,000 Crores via savings on crude imports on a full 12 month run rate basis. Companies are reporting record margins despite poor capacity utilization. As growth picks up the Operating Leverage will come into play and inflation is unlikely to come back soon. Even on food prices moderate MSP increases and small steps towards improving productivity and wastage will help in the short run. Over the long run further supply side measures will be required.

• Strong Government Finances which are reflected in recent numbers that have shown Indirect Taxes increase by 39% in July. This combined with reduced subsidies will aid government finances, help them push capital expenditure and reduce crowding out from the markets and help bring down interest rates.

• Improved investments which are reflected in much greater enquiries with companies, better execution as well as a revival in due to just pent up demand as we are seeing in the Commercial Vehicle segment where sales are growing at nearly 25% right now. Various Public sector units are also pushing for greater investments as their cash flows improve. For example railways will save hugely with the way diesel prices have come down. That accompanied by reduced leakages will boost Capital Expenditure. Similarly Oil PSU’s are seeing huge improvement in cash flows which will go into investments.

• PSU Banks recapitalization combined with promises of greater autonomy and less interference can drive not only a huge value creation cycle in these banks but also provide much needed growth capital in the Economy.

• Large funds flow into equity are likely to continue from domestic investors driven by lower interest rates on fixed income, non performance of gold as an investment and a likely stagnation in the performance of Real Estate.

Besides this the bogey of Yuan Depreciation has to be understood by people properly. Since the end of the last boom in 2007 the Yuan has appreciated by 20% and the Rupee has depreciated by 60% against the US Dollar. Even now when the Yuan has fallen 3% the INR has fallen 5%. This noise should be totally ignored.

The other big noise to ignore is that of the hike in rates by the US FED. As the FED hikes rates, whenever it does we will see a huge capital flow into growth assets as this move will be driven by confidence in economic recovery. The FED fears are similar

Decoupling will play out over a period of time and it will play out for sure. Decoupling is not for traders but investors.

Markets are likely to find a panic bottom soon. In all probability it will be this week. This is a market correction it is not a collapse. Economic outlook continues to improve in India, Europe and the US. China has its own issues and growth should slow down continuously for the next decade. I believe that 7800-8000 levels are great levels to buy in India. The panic will soon subside and markets will recover. Many global markets and commodities are now as oversold as they have ever been. Global funds flows always create situations where markets either correct more than they should or go up more. This happens in Euphoria and Despair as we see today. This shall also pass.