Tuesday, February 18, 2014

A FUDGET - come in to my parlour-said the spider, opening his fly


SUSPENDED ANIMATION A 'fudget' was presented. Ripley's "Believe It Or Not" series seems tame compared to this. A freebie to the rogue automotive industry. A false impression that the fiscal is on the path to recovery- by suppressing expenditure and inflating income.

As we wait for the elections, the stock markets, which always has its own mind, is struggling.

None of us have any doubts that there is a marked slowdown in the economy. There is consensus on this, and everyone safely presumes a ride back to growth sooner rather than later. No one has any basis for prognosis and there are vague references to what is very wrongly and loosely labelled as ‘green shoots’.

On the ground, the slowdown is palpable. Talk to businessmen or a look at the job market confirms this. From automobiles to soaps, the consumer is cautious. Banks are sitting on a huge pile of problem loans and are trying their desperate best to keep it hidden from scrutiny. It is possible that if prudent norms were followed on write-offs, many banks will not have any net worth left.

However, the ‘experts’ are saying that the ‘worst’ is over. With stock markets at all time highs, is this the ‘worst’? The problem is that we do not know where we are at the present moment! High quality stocks are very expensive and the valuation of poor quality or those with dubious management or businesses are not very cheap either. So, assuming that the ‘worst’ is over for the markets, is there any significant upside left in the markets?

What growth the world is witnessing, seems to be more of productivity gains and efficiency improvements rather than growth along with more jobs.

Business can be divided in to two groups- One that is dependent mainly on government policies and spending- infrastructure, capital goods etc. After a change in government, a new government has to have strong economic policy that gives thrust to development expenditure. Given the precarious finances, whichever government comes, this looks very difficult. There is simply no money. And if someone says that public private participation will be the engine it would be very tough to visualise. With so much emphasis on transparency and public scrutiny, the enthusiasm for these kinds of projects is going to be low. We saw environmental clearances, corruption and other things holding up government policy formulation and implementation. If a third front government comes, do you think this will get any better? And if UPA or BJP manage to come to power, the problems would be higher- boycotting parliament, creating policy paralysis, uber-socialism is going to take away the revenues for populist schemes.

The second set of business (FMCG, Consumer durables, pharmaceuticals, etc) are driven by consumer spend and retail credit expansion. There could also be some impact on this by the freebies thrown at people by populist moves like NREGA etc. This sector is the one keeping economic growth in positive territory for the last few years. There is a distinct possibility that the lack of new jobs can threaten this story.

Political uncertainties have not stopped the flow of funds in to this market. So, in a sense, the surge of liquidity in to our markets has been very benevolent. In such a situation, global economic trends would tend to cast their shadow far deeper than they normally would. This is because our markets are more dependent on global money flows rather than any serious domestic investor moneys.

So, again, it is a question of wait and watch. If you are a serious investor, pray that the political uncertainty gives room to pessimism. And we also have to hope that the good quality stocks crack. The market is so finely strung that any minor disappointments from results can cause deep price swings.

It is time to keep the shopping list handy and start praying for negative impact news flow on the markets which are tightly strung now. The sectors to keep an eye out for would be limited to the consumer spending domestic group. And IT majors, if they correct seriously. I do not sense ‘investment opportunities’ any other place.

It is true that the broad indices have had a total pull back from 2008. However, the number of stocks participating has been far lower. Quality has become expensive, since 2008. The rest have become merely a trading opportunity. Thus, a long term investor has to bide his time. He could end up holding cash for long periods in time, should markets continue to be like this.

Corporate results have begun to show some tiredness. Most corporate are uncertain about the future. Even in the US, whilst the last quarter has been an exceedingly good one, the guidance on the future is not very hot. Thus, the markets are stuck in a groove. We are stuck In a trading range, for some time to come. The election results could give some push to the market. Till then, it is sensible to hang in there and use any serious rallies or pull back.

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