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Last Updated : Dec 14, 2019 09:54 AM IST | Source: Moneycontrol.com

Moneycontrol Pro Weekender: Global cheer trumps local fears

A Santa rally is in the making due to events on the global stage. But the global cheers is not matched by similar optimism in India.

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Moneycontrol Pro

The events of the week gone by have set the stage for a global Santa rally.

For starters, the United States Federal Reserve signalled that rates will remain lower for longer. The projections show the Fed expects US inflation to remain at 2 percent even in 2022. Where is the need to raise rates then?

Analysts say that removes a source of uncertainty for the markets, although, with a stellar track record of central banks abjectly caving into market demands, it is hard to see how much extra comfort it provides.


Perhaps more importantly, the Fed stands ready to pump in half a trillion dollars into the US repo markets, to avoid any kind of seizure there. It is also worth noting that, for the first time since 2017, the Fed’s balance sheet has expanded year-on-year.

Almost half of the earlier shrinkage in its balance sheet has been unwound in the last three months. And the rise of global markets has closely mirrored balance sheet expansion in the US, European and Japanese central banks.

The European Central Bank followed the Fed, reassuring everyone that its policy rate will remain at the current zero percent or go even lower unless inflation picks up to near its 2 percent target. Since it projects inflation to rise from 1.1 percent in 2020 to 1.6 percent to 2022, it is crystal clear what it is trying to say.

The next bit of good news for the markets is the thumping victory of the Conservatives in the UK, which at the very least will end the paralysis on Brexit.

And the final boost comes from reports that the long-awaited so-called ‘Phase 1’ deal between the US and China has been struck and not only will the December 15 tariffs on Chinese goods not happen, but some tariffs may also be rolled back.

Rather strangely, at the time of writing this, there has been complete silence from Chinese media on the deal and we hope President Xi Jinping does not play the Grinch and steal Christmas while Trump is busy playing Santa. That Chinese stocks are up smartly is an encouraging sign.

But if the prospects of an improvement in the global economy, as a result of the trade deal, are added to the gush of liquidity from central banks, it brews a heady cocktail for the markets. Recall that the global composite Purchasing Managers Index (PMI) had shown an encouraging uptick last month.

Unfortunately, the global cheer is not matched by similar optimism in India. While inflation has been edging upwards due to higher food prices, core inflation continued to fall last month, especially rural core inflation, indicating stagflation and the persistence of weak demand.

The Index of Industrial Production (IIP) continues to shrink, although there is a question mark over how accurate it is, what with ‘Fragrances and oil essentials’ supposed to have contributed as much as 2.5 percentage points to IIP growth.

Of course, the government has been trying its best to kickstart growth and last week it expanded the partial guarantee aimed at providing liquidity to non-banking finance companies (NBFCs). It is probably an exercise in futility, though, as it is unclear why banks would want to buy BBB+ rated assets with a mere 10 percent guarantee.

The government also continues to smoothen what is arguably its flagship reform and last week it scrambled to ensure that assets of any company acquired through the bankruptcy process are not attached in any criminal proceedings.

That is the latest in a series of tweaks the government and the Supreme Court have been making to the bankruptcy code to ensure it remains on track and bank stocks have reacted positively.

The key question arising from these contrasting global and domestic trends is: With all the doom and gloom in the economy, is this the right time to invest?

The initial public offering (IPO) market has been a stellar performer and our team of independent research analysts figured out what Ujjivan investors, as well as those who missed the bus, should do now.

We are constantly on the watch for pockets of value, which are sometimes seen in the most unlikely places, as these infrastructure picks and this mining stock show. With the Indian economy continuing to be sluggish, we examine whether investors will be better off in mid-cap IT stocks.

The bond markets however have not so far echoed the bullishness in the equity markets, with the 10-year government bond yield backing up to levels it was in early July. The Reserve Bank of India’s pause is one factor, the other brings the S&P warning that it could downgrade India’s rating if growth fails to recover, which could tip the rating below investment grade.

Globally, there is a long way to go before growth rebounds. It is crucial that the trade deal rolls back some tariffs and we need to see whether Boris Johnson can pull off a smooth Brexit. And don’t forget that last week saw the biggest bond default by a state-owned Chinese company in the last two decades. But for now, at least there is a sliver of sunshine peeking through the clouds and the markets are celebrating that.

The week ahead will give us the Flash PMI data for the US, the Eurozone and Japan and it should tell us whether the slight upturn in the global economy seen in last month’s PMI is sustained.

Back home, the GST council meet is crucial, in view of widespread rumours that rates on some items could be raised, while the minutes of the monetary policy committee meeting will help us know why they did not cut rates.

Here’s hoping the party continues into the year-end.


Manas Chakravarty

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First Published on Dec 14, 2019 09:54 am
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