Global cues : supportive monetary dynamics to prevent economic collapse
2014 had its twists and turns across political, economic and monetary factors; but all taken, it has its own comfort and fears ahead on way forward! There is relief from geo-political tensions, as economic worries have diluted political risks. The focus is on revival of the economy and averting financial crisis than aspiration for political (or military) dominant position. The monetary conditions remained in favour with overdose of Quantitative Easing at Zero (or Negative) Interest Rate Policy regime. There was more than enough liquidity flow across markets, thus extending more than adequate support to risk-on equity and corporate credit asset markets (not excluding sovereign Gilt assets). The major relief is from sharp value erosion in commodity assets and worry from significant appreciation of US Dollar against global currencies. Economic fundamentals of developed economies continue to stay under pressure, causing demand compression (for goods, services and employment), thus squeezing supply capacity and lack of economic opportunities for fresh (and incremental) investments. The relief however is from the US economy, which is showing signs of turnaround. Most of the global (and external) cues in play will stay relevant through 2015. The risks to watch are from shift to rate-hike cycle by the FED, extent of USD strength against global currencies and sustainability of cheap valuation in commodity assets. At this stage, risks from geo-political tensions and demand-push inflation may be kept out of the radar. All taken, there are cues to expect pleasant surprises from external sector with low probability of emergence of unpleasant shocks to destabilise the global financial markets.
Impact on emerging markets : risks from extent of external liquidity appetite
There are fears on availability of external liquidity appetite for EM financial markets; many relive the fears of 1997-2000 financial crisis. The risks revolve around unwind of all-time high valuation in equity assets, interest rate pressure on Gilts & corporate assets, exchange rate pressure and repayment (and/or refinance) capability of foreign currency debt against currency devaluation. At this point of time (into 2015), do not see major risk from liquidity when UK/Euro zones, Japan and China are expected to stay in extended ultra-dovish monetary policy stance, while FED may not be in favour to trigger financial crisis on emerging markets when developed economies are in economic struggle. The benefit of doubt is valid to delay the liquidity risk into 2016 or beyond!
India : safe-haven for global investors
Indian economy looks different since mid 2014. It is believed by most that this decade (2015-2025) is for India to emerge as the fastest growing economy (ahead of China), thus bridging the top-line GDP capacity gap with the leaders. Growth confidence (and resultant economic and financial valuation upgrade) on India is considered as given. The lack of optimism is on the bottom-line arising from fiscal consolidation (and prudence), export of domestic capital to fund current account deficit and inefficient PSU contribution. Inflation worries stay diluted and dynamics seen ready for shift to growth supportive monetary stance when structural long-term risks on growth is resolved to RBI's comfort zone.
Limited risk from political factors:
Political dynamics are relatively better than what it was in 2013 with majority political mandate and decisive leadership under Narendra Modi, who has also shaken up the bureaucracy and administrative engines from slumber to hyperactive mode. The earlier concerns from policy paralysis, regulatory irritants and administrative bottlenecks are no more relevant, despite risk from lack of majority in the upper house. Taking comfort from BJP gaining ground in many states, this risk from political factor can be safely assumed as short term.
Macroeconomic fundamentals in scale up mode:
The macroeconomic fundamentals have turned good and seen poised for significant improvement going forward with target zone for GDP growth at 5.5-7.5%, CPI inflation at 4-6%, current and fiscal deficit at 2-4%. The trending (and expectation) is seen to be favourable. The Modi mantras of development of skills at good speed and scale, financial inclusion & inclusive growth and replacement of red tape with red carpet, and with good & effective governance sets up the bullish momentum for the way forward. The infrastructure agenda to build economic and social well-being through scale up in manufacturing and agriculture sectors is great to execute the Make-in-India and Make-for-India vision with the twin objective to create domestic demand and boost exports through feeding external demand. The story theme is great to boost India macroeconomic fundamentals; what we need is the strategic script, tactical actionables and ground-level execution. The hope (and confidence) on Narendra Modi is the risk mitigant at this stage. What about the luck factor? Modi is lucky to get strong tailwind support forces from external sector through sharp reversal in commodity prices and availability of liberal dose of external liquidity. While the liberal dose may turn to adequate, there is no major risk for complete unwind of the luck factors. The risk on currency may be seen as blessing in disguise to support exports (and inflows) and stay deterrent to excess consumption of imported essential and non-essential items. All taken, it is safe to assume that there are no major economic risks in play in 2015 and beyond.
Favourable monetary conditions that could go better:
The monetary cues stay in support despite RBI reluctance for rate-cut and shift of operating policy rate from higher to lower end of LAF corridor. Despite this stance, system liquidity is adequate and cost of funds is affordable; issues are from availability of bankable investment opportunities and resultant credit-risk aversion by investors and lenders. It can be assumed that the worst is behind and investor/lender sentiment is seen good for shift in appetite from low risk/low reward to high risk/high reward asset/credit products in 2015 and beyond. The global investor (and lender) community is also in wait-and-watch mode for value-buy opportunities, seen in favour to replace FII dependency with FDI flows.
Good to stay in optimism in 2015:
All taken (from combined impact from external and domestic factors), India is poised (and positioned) for re-rating by global rating agencies with 1 or 2 upgrades in 2015-2017 period. If this period goes as per expectation, then it would be golden era into 2019-2024 to cheer up financial markets for new high's year after year!
What is the outlook on Global and India financial markets in 2015? In next update!
There is nothing against to stay in doubt and good time to be in cheer retaining the hope and optimism to keep the euphoric and exuberance sentiment intact!
Wish you all a great and profitable 2015.
Moses Harding
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