Tuesday, December 17, 2013

Economic Recovery in US may Rattle Indian Markets

As this graph shows, Indian markets are closely related with FII inflows and potential of Indian market is not the only factor that decides these flows. Liquidity is one key factor and if Fed decides to taper the $85 billion that it is pumping into the system every month, liquidity is definitely going to be curtailed. Fed meeting concluding tomorrow may take a decision on it or may postpone it depending upon whether the US growth is strong enough and meeting the targets set by it. So, a decisive strong US growth may lead to tapering, and that may lead to flight of FII money from emerging markets – including India. Chances are low that Fed will decide to act in December, most economists expect it start tapering by Feb or March and that too in small measures. One needs to understand the US recovery to get an answer to the tapering issue. We are analyzing below the key indicators that show health of US economy.

Rise in lending

The most telling data point, is the use of this $85 billion monthly, where is it going? Though most of it is being kept by banks again with Fed to get 0.25% meager return; but an increasing part is being utilized for more productive purpose. As this graph clearly shows, the loans are increasing – and it is the most direct indicator of improving health of US economy. It has been rising at double digit rates for last two years. Banks are flush with money and the fact that there is a constant rise in lending strongly indicates banks are willing to lend and businesses are willing to borrow. It shows a rise in confidence and that is the underlying force that is slowly but steadily driving the US economy. Contrary to what you may read in papers, the Fed money is being utilized in an increasingly productive manner and it is definitely stimulating the economy.

Recovery in Housing Sector
Housing sector is one major pillar of US economy and though it is not at its usual top levels, it has staged a strong recovery and is constantly rising. Homebuilding seems to be holding up decently in the higher mortgage rate environment, probably due to the support of strong underlying fundamentals - thin inventories and steady household formation. In October, the housing starts reached highest since last four years and represented the fastest pace of new-home construction since July 2008.

Strong Auto Sales
Since 2009, the auto sales are on a constant rise. US car sales are now close to a six-year high as consumers grow more confident about an economic recovery. The industry has shifted into high gear with new-car buyers snapping up vehicles at a pace not seen since before the financial crisis.
Japan's carmakers Toyota, Honda and Nissan, as well as the US's Ford, General Motors and Chrysler have seen double-digit growth. The jobless rate has been going down, manufacturing and property prices have been picking up, interest rates are low, and slow-but-steady job growth are encouraging consumers to trade in cars and trucks that average about 11 years old, say auto makers, which are adding production capacity and overnight shifts to satisfy demand.

Rising retail sales – a reflection of confidence in recovery
Consumer spending is the core of US economy and as reflected by retail sales which account for about 30 percent of consumer spending, has been rising solidly, adding to signs of a strengthening economy that could draw the Federal Reserve closer to reducing the pace of monetary stimulus.
Spending is being supported by solid employment gains and steady income increases. Lower gasoline prices are also helping.


The most direct indicator of recovery – Industrial Production
Industrial production has now reached a new all-time high.

The contrast between the vitality of the U.S. economy and the ongoing struggles of the Eurozone economy is stark. As it is, all the evidence points to a substantial and ongoing recovery in the U.S. Things could be a lot better, but the pervasive negative sentiment regarding the health of the U.S. economy is way overdone.

Positive indications of industrial growth


 





Consistent rise in capital goods orders, crude oil production, and Baltic Dry Index, all reflect a recovery in industrial activities.
Back in July 2008, U.S. crude oil production was just over 5 million barrels per day. At that time, nobody would have predicted, even in their wildest dreams that crude production would increase by 60% (to 8 mbd) by the end of 2013. But it happened, technology playing a big role.
BDI is a proxy for increased trading activities – as shown by more demand for shipping of goods by sea routes. The Baltic Dry Index measures the cost of shipping bulk commodities in the Asia/Pacific region. It is a function of two major variables: the supply of shipping capacity and the demand for shipping capacity. Prices were depressed for most of the past several years because of a significant increase in shipping capacity. More recently they have rebounded rather strongly, presumably because economic activity is continuing to increase (e.g., Chinese demand for coal from Australia) while shipping capacity is relatively constrained. As such, this appears to be signaling a somewhat stronger global economy, which would in turn support a stronger U.S. and Eurozone outlook.
In 2003, natural gas prices on average reached their highest level ever relative to crude oil. Now natural gas prices have fallen by 75% relative to crude oil prices, thus conferring a unique advantage to U.S. industrial energy consumers, due to the difficulty of exporting the growing relative abundance of U.S. natural gas supplies. It happened due to fracking technology. In fact this Great American Energy Boom might qualify as the most important economic story of the past decade.

Improved Loan Repayments by Retail Consumers
This chart shows the average delinquency rate on credit cards and all consumer loans. Both of these indicators have fallen dramatically since the Great Recession, to the lowest level in over 20 years – showing better consumer financial position. Moreover, as of last October, the average 30+ day delinquency rate on credit cards issued by the top six issuers (Amex, B of A, Capital One, Chase, Citibank, and Discover) was a mere 1.9%. It's never been this low, and that is very good news for banks as well as households. Banks' profit margins are up, and households' financial health is greatly improved, thanks to deleveraging and more responsible risk-taking.

Unbelievably Risk-Averse Rally!
This chart shows the leverage of the household sector. Total liabilities as a % of assets have fallen by almost 25% in just over four years, taking household leverage back to levels last seen in the mid-1990s. In the past 70 years there has never been such a dramatic deleveraging of household balance sheets.





Conclusion:
US economic recovery appears slow but steady. But when the Fed will start tapering is uncertain.

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Monday, December 9, 2013

Public Mandate Strongly Favorable for Markets


Rout of congress in three states and strong show by BJP indicates 2014 may see BJP in center with clear majority. It indicates strong probability of a stable and pro business government at center – and market will definitely welcome it.
We have been repeatedly saying that the market is in uptrend and we expect Nifty to cross 7000 in 2014. There was one more positive news last week – the current account deficit fell sharply to 1.2 percent of GDP, in the July-September quarter of this fiscal. It was helped by decline in gold imports (due to rise in import duty) and turnaround in exports.
We reiterate that there are immense gains possible in long term investments if one picks up the right stocks now. 2014 is going to be a year of major transition for India, and we hope you do not remain on the sidelines missing this great opportunity. Stay tuned and do contact us to gain from the India’s growth story which is yet to unfold its full glory.

Risk Factors in Indian Equity

Though yesterday's election results are a big positive for markets as they indicate expectation of stability, there are still some major concerns -

1. Rupee Depreciation: It has helped exporters but one can not overlook India's imports, especially oil. Everyone has seen the drastic impact of Rupee's recent fall on equity markets.

2. Inflation: It is staying at a very high level and can spoil the growth of market. RBI has not given any signs to lower rates which is desparately needed by the industry. If inflation does not come down, it will be tough to lower rates and without that, industrial growth can not pickup.

3. Current Account Deficit: It has come down sharply to 1.2 percent of GDP, in the July-September quarter of this fiscal. It was helped by decline in gold imports (due to rise in import duty) and turnaround in exports. More subsidies will further deteriorate CAD. Another grave threat is in form of capital account outflow of Dollars in wake of a resurgent American economy. A revival there threatens to suck capital, and economic dynamism, out of many emerging-market economies.

4.  Oil Prices: India imports some 80% of its oil requirements and any big rise in crude oil price will destabilize our economy. India will be the largest source of oil demand growth in world after 2020, and by 2035 it will be the second largest oil importer after China.  Now oil is increasingly becoming more and more critical for our economy and rising tensions in gulf countries is a big threat.

As an investor, one must understand the importance of these issues and should be analyze whether these issues will block India's growth or not. Contact us to know the answers and invest without stress.

Sunday, December 1, 2013

Nifty may cross 7000 in 2014




















If Nifty remains above 6200, there are strong indications that it may cross 7000 in 2014. The major bullish factors in brief are –

  1. Nifty future gave a breakout in October above its previous monthly highs of 6162.95 (in Dec 2007) and 6162.55 (in Dec 2010). It is still above this level and if it does not go below it, it will make new highs in 2014.
  2. Nifty has broken upwards out of a rising triangle formation which is a clear bullish signal.
  3. After falling below the speed resistance lines (three blue lines) in Aug, the Nifty is again comfortably above the last of these support lines. It is bullish as long as this support is not broken.
  4. MACD has turned bullish again
  5. Trikaal Long Term Cycle Indicator has turned upwards indicating uptrend may be continued.
Next major Fibonacci level is 6938 which may be achieved in this rally by Mar 2014 if it continues. Downside probabilities are low but if Nifty falls below the last blue line support, it may go down upto 5700-5500. There are excellent investment opportunities that exist right now and one should not miss them. Even though trend is up, not all sectors are expected to perform well, one should be very cautious in selection of sectors and stocks.
Proper portfolio management can give 40-60% or even more return this year.