India Outlook: More Pain Ahead

IIP for the month of October 2008 was negative (.4%).   This is the first negative reading in fifteen years!  The lagged affect of high interest rates and tight monetary policy is showing up in official data.

“The situation is much graver than expected,” said Suresh Tendulkar, chairman of the Prime Minister’s Economic Advisory Council. Economists and analysts polled by ET ahead of the data had forecast industrial production growth in October to range between 2.3% and 3%.

Lagged affects work both ways...the effect of recent monetary easing and lower interest rates will take time to work their way through the system.  Unfortunately, recent monetary policy changes have been directed to manage the contagion from global events and ease the panic situation which existed in Indian money markets in October when call rates spiked to 21%.

There has been no action on the growth front...we are just waiting for the fall-out of global events...monetary policy is still too tight fighting an inflation which is faint even in the rear view mirror.  Fiscal stimulus has been an anemic .6% of GDP...and there are confusing signals from authorities about the way forward.

Analysts around the world continue to downgrade the growth projections for India...while the Government continues to forecast a 7%+ growth for this fiscal and the 2009-2010 fiscal...

Morgan Stanley :

cuts its forecast for 2009-2010 to 5.3%....its growth projection for second half of 2008-2009 is 6.2%.

“The bear market is likely to continue in 2009, the Sensex could move in a wide range in the coming 12 months, though our view is that the market is biased for flat-to-downside rather than upside. Our probability weighted Sensex outcome for December 2009 is 8,559,” said the Morgan Stanley research report.

I have been projecting Sensex 8500 and Nifty 2500 levels as fair value -Lee.

Credit Suisse’s Asia strategy report says the Indian economy would grow between 5 and 6 per cent and that corporate earnings growth would be negative in FY09, and flat in FY10.

I have been projecting -10% in FY09 and flat in 2010FY- Lee.

So what do I think about the Indian equity markets...well, they are saying that the tickets are going fast and you will miss the party..I will pass...My view is:

Thank you The Big Picture.

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Global: Central Banks Pushing on a String

Policy makers are trying everything to stabilize the global financial system and thaw credit markets. But the US economy and other world economies are in bad shape. The central bank efforts are not translating into credit availability for the broad economy. They are pushing on a string. The reasons for not lending are:

• Rising credit card defaults
• Rising unemployment
• Rising foreclosures
• Rising bankruptcies
• Massive overcapacity
  

Here are some charts to illustrate the current situation:

The chart at left shows the efforts of the US central bank to inflate the monetary base; however, the multiplier is falling just as fast. While the FED balance sheet has exploded, the rise in bank reserves is not flowing into the broader economy.
We need to monitor the multiplier for some time to see if there is turn upwards in the near future. Until then the news is not good for equity markets, and says loud and clear: Stay defensive, opportunities lie in the future.







Volatility indices continue at record levels..reflecting high forward looking risk. Despite massive intervention by all Central Banks, Growth outlook is bleak.

The rise of the USD and Yen reflect flight to quality and forced redemptions. For the emerging market economies this is trouble as the currency losses and lack off credit availbility will becoming reinforcing. While Asia has learned lessons from the 1997 currency crises, it seems Eastern Europe is the new batch of students. For emerging market equities,this chart says "stay defensive, opportunities will come in the future".



Despite the massaging of NAV's for month end purposes, and the rise of global equities in the final days of October 2008 be warned that panic has returned full force. All asset classes from equities to commodities are falling. Growth outlook globally is bleak; knock-on effects on employment and consumer spending are just developing. Brief rallies, no matter how powerful, cannot overcome the underlying economy and investor sentiment. We are likely to test the recent lows and have a period of despondency and depression in markets.
This is not good news for equities: Stay defensive and wait for better opportunities.

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