Quantitative Signals (not informational noises )for 2010: What 2009 has left for us?

‘India, in terms of stock market has been the best performer among the BRIC nations post March 2009. The markets recently have breached the key upside levels and are looking stable than others. The recovery in the first half of 2010 posted by the troubled economy of the US was laudable. However, it was marked by severe debt troubles of Europe which was seen and still remains seen as a major setback to swift global recovery hopes. Jitters in between like that of Dubai debt had also added to the woes.

 Now, as some disappointing reports and numbers flow from the leading US economy, many see it as losing the momentum of recovery. Some are even talking about the double-dip recession.  But none-the-less, the economy is performing better than what was expected before hand. Also, to counter the double dip recession, we would just see it as a recovery that has fallen a bit slow than the pace it had gathered, and probably it was too fast. Now, with the stresses in Eurozone expected to slowly get busted, we may have another phase of swift recovery in demand.

   Indian markets are trading around year to date high levels of popular indices. Also forthcoming quarterly results are not expected to throw many positive earning surprises. So, under these conditions global factors will play a major role in deciding whether we will break the trading range that we are in since October 2009. Let’s examine some of the key factors to see where this road may lead in the coming future.

US: Concerns and Hopes Linger

Consumer Price Index, a measure estimating the average price of consumer goods and services purchased by households, dipped for the third consecutive month in June. The US Government explains the reason to be lower costs of Gasoline, but concerns over US deflation remain a worry. The Central Bank interest rate is near to zero @ 0.25%.

The inflation rate in the United States was 1.10 percent in June of 2010.

Also, with some disappointing employment numbers recently, the US markets seem to approach the earnings season with some caution. However, Intel, world’s largest computer chip maker declared strong numbers, but it will take a while to get a clearer picture how earnings turn out to be this quarter. The most encouraging factor for the US would be the growth in topline and that is what remains to be seen. If there is a substantial growth in revenues rather than just the bottom line, it will signify growing consumer demand and not just cost cutting in place.

 Japan Expects a Slower Growth

In a key decision, the Policy Board of Bank of Japan stuck to its benchmark interest rate to about 0.1% and predicted that the world’s second largest economy’s growth would go down next fiscal as global economies try to wind back the stimulus and hence slowing demand. The economy also faces concerns on deflation. High Debt to GDP ratio has also been a major concern cause for the Japanese authorities.

Chinese Economy Slows in Second Quarter

Chinese economy slowed in the second quarter and the expectation for the next fiscal is on the same lines. The main reasons for the slowdown are the tightening of monetary policies of Beijing which have acted like a stimulus before creating demand.

Another reason for the slowdown is the comparison of higher base of year 2009. The better news is that the economy has expanded 10.30% over the last year in terms of GDP. The China Gross Domestic Product is currently worth USD 4,327 billion which is 6.98% of the world economy.

 India

India, in terms of stock market has been the best performer among the BRIC nations post March 2009. The markets recently have breached the key upside levels and are looking stable than others. Also, during the recession, the resilience shown by the Indian economy has been pretty impressive whose major contributory factor is the largely domestically driven economy.      

 Indian Stock Market: BSE Sensex from January 2008 to July 2010

 The lesser dependence on other economies, which are in trouble right now, is one of the key factors of this kind of performance that most major global investors have increased their equity allocation in India.

Though, higher inflation is a concern for the economy but when compared to other major markets like China, US and Europe, the problem looks miniscule.

Inflation: Major Concern to Address

But when the others are trying to cope with serious issues like unemployment, demand slowdown, backing stimulus, tightening policies and currency valuation issues, India has a comparably softer issue in hands to tackle.

Also, the result season, though at its initial phase, has seen some pretty good numbers declared especially by banks like the Axis Bank, HDFC Bank which is encouraging. There are expectations that the Q1 earnings may end up 16-17% for India.

The GDP growth rate too, has been very satisfying hovering around 8-8.5% and India aims for 8.5% GDP expansion in 2010-11. Though, IMF sees Indian GDP growth as high as 9.4% to 9.5%

The Indian GDP has shown Great Resilience in all Global Phases

The Union Budget 2010-11 has aimed to increase infrastructure spending and recently the deregulation on fuel prices. This gives the Government to cut back spending on subsidies and provide some economic reforms.

Indian Exports have also formed a significant part of economy, still managing the balance on dependence on other economies. The exports surged for the fifth straight month in June by over 30% to $17.75 billion which is also a good sign for the global economies.

But still we may not count this as great news. This is because primarily because his high percentage growth rate is on the back of a substantially lower base in 2009. Also, with China aiming to export less, Indian exports can be hampered. This is because of the fact that China’s decision to export less is due to its decision to produce less. This, in turn will hamper the Indian exports used as raw materials in Chinese manufacturing processes, esp. the metals like iron ores.

Indian IIP numbers expanded by 11.5% for the month of May 2010; A measure to determine changes in output for the industrial sector of the economy which includes manufacturing, mining and utilities.

Now, with the above arguments, India is defninitely among the nations that is clocking on one of the highest gdp expansions, that too with good visibility ahead. More importantly, it has no major ‘grim investment story’ related to it which depicts high stability when compared to China, US, Japan & Europe. Though, it has its own level of dependence on larger economies of west, but more than fundamentals, it is the sentiment and liquidity factors that get affected. Also, India has a robust financial system and a transparent market regulation system, marking a strong investment argument. At the same time our markets are trading at levels which does not make it very attractive for investments from valaution viewpoint. And as such whether we will remain in the trading range we are locked in since last 8-9 months for another few months or will see break out on the upside will be largely driven by how global markets behave in coming days. And if global market fall due to any macro issue, it certainly will provide good investment opportunities in Indian market.