BridgeMonte

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Alpha Edge May, 2016 - So near.. yet so far

After a spectacular run in Feb & Mar 2016 markets took a breather and ended flattish for the current month. There were few triggers that resulted in the run up of the markets in the last 2 or 3 months viz. a good budget, average to above average monsoon outlook and dovish stance of US fed in its recent policy meet. The recent run has been very good for the markets globally with India participating a tad behind the rest due to its premium valuations and a muted corporate profit expectation. Indian markets correlation to EM’s have been amongst the highest in recent times and this in turn depends on global liquidity which case is likely in the shorter term. We believe that the overhang of global volatility will continue to haunt the markets along with lack of triggers going forward to push it further. Unless, the earning cycle is seen to be turning.

Globally, the US dovish stance on interest rate hikes was cheered by the markets even if it dint give any strong signs on its next move in June. The latter part of the month we saw BoJ (Bank of Japan) maintaining a status quo on its stimulus that took markets off guard as the expectations were built for a rate cut. This pushed Yen higher, a move that makes things more difficult for BoJ as a stronger yen not export friendly. We believe that there is a growing uncertainty with respect to the effectiveness of the central bank policies across the world which have tried hard to revive the global demand since the 2008 crisis. The current policies are also not able to generate economic activity acceleration evident by the velocity of money in circulation. A further move downwards of interest rates in to the negative territory isn’t going to help much other than killing banks profitability. We believe since the central bankers are running out of options, its time that the baton now be passed on to fiscal policies of Governments, in order to revive growth.    

Back home we witnessed some excitement thanks to few high frequency indicators improving like the IIP, improvement in auto numbers specially commercial vehicles, increase in consumption of petroleum products, indicating some kind of nascent recovery underway. However it is important to see the trend of such indicators over a period, especially IIP that has been quite uneven on Month on Month basis. We have seen marked improvement in the public expenditure lately thanks to the pro-reform government at the center, however India needs certain big ticket reforms like the GST, bankruptcy law etc. which has been stuck under the policy log jams at Rajya Sabha. While India may have the best prospects today among emerging economies, it is likely to achieve only sub-optimal results unless some of these problems are resolved. Another important factor that could push the growth further is a good monsoon that helps rural demand, which in turn has a multiplier effect to other parts of the economy.

As far as the earnings are concerned, we have seen a mixed bag until now and believe that current quarter we may see some improvements from the previous quarter. However the current consensus EPS forecast for FY17 seems to be a tad high despite receding trend of further downgrades. Considering that we are trading at a premium to other EM’s, it could lead to a re-rating of valuations in the event of a risk off event. Even though we believe India to be on a structural path of growth, we are cautious about the markets given the premium valuations and the overhang of uncertainty in the global economy that will guide the markets in the short term.

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Alpha Edge April

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