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31st March 2014 |
Top down is looking upShiv Puri
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- The simultaneous combination of a stabilizing macro outlook, a business cycle upturn and political change has happened in 1984, 1989, 1999 and 2004. Each time the market moved up significantly (>100%) over the next three years.
- CPI inflation has come down from 10% to 7% and declining further. The fiscal deficit has reduced from nearly 6% of GDP to a little over 4% in one year. This was done mainly through a steady reduction in fuel subsidies – remarkable in an election year!
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Our reasons for a continued positive outlook in the markets are as follows:
- The simultaneous combination of a stabilizing macro outlook, a business cycle upturn and political change has happened in 1984, 1989, 1999 and 2004. Each time the market moved up significantly (>100%) over the next three years.
- The macro improvement is evident. CPI inflation has come down from 10% to 7% and declining further. The fiscal deficit has reduced from nearly 6% of GDP to a little over 4% in one year. This was done mainly through a steady reduction in fuel subsidies – remarkable in an election year! The current account deficit has declined from 4.7% of GDP to 2.0%. As a result, the rupee has recently stabilized at 60 to the dollar after declining to 69 in the middle of last year.
- The business cycle turn is evident in increased new job hires across sectors, increasing core IIP numbers and a sharp pick up in the pace of infrastructure project approvals. The market concern last year of systemic risk to the banking sector due to rising NPAs proved excessive. All of this will help business sentiment.
- Political change is likely by middle of May with a BJP led government at the center and Mr. Modi as the PM. His stated goal is to accelerate reforms and boost economic activity. He has a track record to back it up. Based on our proprietary meeting with his economic team in Delhi last month, we learnt that their targeted spend on infrastructure over the next five years is $1 trillion! In the event that Mr. Modi becomes the next PM, economic growth is going be significantly higher than any analysts’ growth forecasts.
- Interest rates have peaked and the cost of capital is edging lower despite no headline rate cuts. Also, it may not be right to assume that rising interest rates in the US will automatically correspond to rates rising in India. India has already raised rates by 500 bps over the last four years largely due to self-inflicted reasons. Since the middle of last year, the yield on US 10 year has moved from 1.5% to 2.7% while the yield on India 10 year has declined from 9.5% to 8.6%.
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