I turned sceptical on the markets around 6-8 weeks back as the USD rally started in a big way and it became apparent that the Global Growth scenario wasn’t looking as good as it seemed in the middle of the year. Since then most global markets have corrected by 10-15% from the top. The US markets have held on relatively well with a fall of just 8% from the top and now trade around 5% below their top as economic data continued to be strong out the the US.
The normal assumption that plays out is that the linkages between financial markets tend to be extremely high in the short run while the long run performance depends on relative Economic Growth as well as future prospects and earnings. The Indian markets in that sense have held on very well despite poor economic growth numbers and a relatively subdued start to the earnings season for the 2nd quarter.
The two big reasons are
Rapidly falling inflation – Inflation has come down sharply over the last two months largely driven by the crash in global commodity prices and a lower food price spike relative to previous years during the July-October time period. Given the global growth outlook this scenario might hold out and help RBI in its inflation fight over the next few months. Supply side measures on the domestic side are still awaited.
Economic growth in the domestic economy has slowed very sharply and this by itself has created a disinflationary cycle. However we actually need faster growth and low inflation. RBI also seems to be watching out for how inflation behaves as the economy revives and might not cut rates in the very short run.
Growing strength of the Central Govt – The Modi Government has started taking aggressive decisions to revive in the economy over the last few days. Diesel deregulation was aided by the nearly $ 30 fall in crude prices from the peak. Measures have also been taken over the last two days on getting the Coal segment on track. The State Govt elections have also strengthened the hands of the Government.
However a greater economic revival will require industrial activity to pick up and Infrastructural projects to get going. Most industrialists are of the view that without the change in the Land Acquisition Law it might be difficult in the short run. Economic growth has slowed very rapidly with growth likely to be 4.5-5% for the first 3 quarters of this year.
The Global growth outlook is also moderating which puts pressure on commodity producers as well as exporters. Export oriented companies have done very well in the stock markets over the last one year. However this might not hold in the next six months. Now the further upmove in the markets has to be driven by Capital Goods and Financial sector stocks.
Without writing too much my view at this stage is that the longer term outlook for India is becoming Brighter and Brighter. However I still believe that it is difficult to escape global linkages in the short run. I turned negative on the markets around the 7900 Nifty level. After several ups and downs we are at the still level. As a BULL I would like the markets to do well but given my past experience I would be naive to believe that India can be a standout market in the entire world. This has never happened in the past.
In my view the Global Stock Market correction is still not over. One more round of correction is still likely. Lets see how it plays out.
As people say “There is always a first time”. I personally wouldn’t bet on it though.