Bounce-back time

Sanjiv Chainani
Mr. Sanjiv Chainani is the Managing Director of Value Line Advisors Pvt Ltd.

The new financial year should start with a bang for Indian equities

India is a part of overall global economy and any material developments in the global landscape is bound to affect the country’s growth prospects. During past many years, as subprime crisis and European economic crisis took centre-stage, global economic scenario deteriorated and emerging economies too were adversely affected. The continuous flush of liquidity through expansionary policies adopted by the central banks of developed economies, coupled with low interest rates has helped the developed economies stabilise and move slowly towards recovery. The steady recovery of ailing economies and their under-ownership have resulted in strong rally in the global equity markets.

Global equity markets are trading at multiyear highs. Recently, Dow Jones Industrial Average (DJIA) hit all-time high, FTSE at five-year high, Nikkei at 4.5 year high, and European markets are also north bound, as the recently announced employment data and other macro indicators for the developed economies point towards steady recovery.

In the recent past, as the global markets are hitting all-time highs, Indian equity markets have underperformed the global peers and are still trading below their all-time highs. The Indian markets began their sell-off post announcement of Union Budget 2013-14. While the markets sold off, reacting negatively to the Budget, we believe the Budget for 2013-14 was about the fiscal prudence. It showed the government’s commitment towards tackling fiscal and current account deficit. The finance minister managed to bring down fiscal deficit to 5.2 per cent of the GDP over achieving its own revised estimate of 5.3 per cent. This was done by lowering spend on the planned expenditure. The finance minister has also guided for even lower fiscal deficit target of 4.8 per cent for the financial year 2014. He had recently said: “I had said red lines that have been drawn will not be breached under any circumstances”. This shows the government’s resolve towards fiscal consolidation roadmap. Despite the current year being the election year, the government has refrained from announcing populist measures which could have affected the government’s fiscal consolidation road map. Even the subsidies have been kept under control.

Looking at the government’s fiscal consolidation road map and steps announced to revive the growth, Moody’s upgraded India’s GDP growth target to 7 per cent for 2013-14. This is the first time in many years any global rating agency has upgraded India’s GDP growth target.

In the Budget, the finance minister has announced various measures for the ailing infrastructure and capital goods sector. He has announced an additional 15 per cent investment allowance for capex of over `100 crore in plants & machinery to revive corporate capex. It has announced 40 per cent increase in expenditure for road and transportation ministry and 26 per cent increase in expenditure for power ministry. This increase in government spending on the infrastructure sector, coupled with fiscal prudence will help in rapid recovery.

Among various asset classes, commodity prices have softened significantly. The government has increased import duties on making investments in gold unattractive. The fall in commodity prices have resulted in moderation of inflationary pressure in the Indian economy. The Wholesale Price Index (WPI) inflation is steadily on its downward trajectory and has fallen to a three-year-low of 6.62 per cent in January 2013. C. Rangarajan, chairman, PM’s Economic Advisory Council, feels WPI would further decline by March 2013. Even as inflation is still above the RBI’s comfort level, RBI is under tremendous pressure from the government, corporates and various industrial bodies to cut interest rates and spur investments as December quarter GDP growth fell to decade-low level of 4.5 per cent. It is right time for RBI to cut interest rates aggressively. While it is still premature to comment on monsoons, the preliminary indicators by the weather department suggests normal monsoons for the coming year. All these measures point towards revival of economic growth in the days to come.

Lastly, the current phase of under performance of Indian markets is just an aberration. Historically global indices like Dow Jones, FTSE and MSCI Asia Pacific Ex-Japan have shown positive correlation with NIFTY. As the global markets have been hitting the roof and there is ample liquidity with the foreign investors, it is just a matter of time before the Indian markets will take off. Whenever Indian markets pick up, it will outperform the global markets hitting all-time highs, as every sailing boat rises with the tide!

This article was originally published in Business India Magazine.
Write to us at news@valuelineadvisors.com

Disclaimer: The views expressed in this article are personal and the author is not responsible in any manner for the use which might be made of the above information. None of the contents make any recommendation to buy, sell or hold any security and should not be construed as offering investment advice.

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