a. Sensex/nifty mirrors the Dow /NASDAQ in terms of returns.
b. In a very long term since 1998 Sensex/ nifty have given much better returns then Dow /NASDAQ, of course, India is an emerging economy, interest rates, and inflation rates are very high.
c. In last eight years that is after 2008 financial crisis, Nifty/Sensex have always been on premium to Dow/Nasdaq.
d. Major changes in political scenarios with Modinomics and Trump economics
So what’s happening in the global markets?
If you recall after Mr. Modi became prime minister of India on May 14 at that time there was the global rally, expectations from new govt etc. etc and that all fizzle out in Dec- march ’16.
See charts above . This all is getting repeated in the United States. After a small hiccup, the US stocks are on fire after Trumps win. Why, because the business friendly environment, expectations etc. Resulting in the Dow hitting 20,000 first times in a century. Will the rally continue our view is yes because it’s the mirror image of what happened in India? So we can see a rally for coming months. But again our view is it will eventually fizzle out as Indian stock market rally did. Changes don’t come easy and fast but promises and stock market reflect the promises in the optimism.
If you see the protests against the Trump all over the USA is of a different kind. So trump will be under immense pressure to become a likable leader in doing that he may have to dilute his agenda. eg. Putting Mrs. Clinton behind bars etc.
Another of his views on immigrants is going to be a very negative effect. The USA is having some of the highest paid intelligent people emigrated from different parts of the world. Remember Brain Drain. It’s the land of opportunity. If you see it has contributed so much for the USA rising to the super power. The NASA engineers, the IT tycoons even Mark Zukurburg expressed his discomfort on this issue. Our view this one factor is going to affect USA and its economy very much. WHY????
After the great financial crisis of 2008, the cycle changed from boom, peak to trough. It was as severe as 1928 depression but with almost a decade of experience, economist knew that printing money is going to solve the problem so we had QE1, 2 and 3. Now there is a lot of money in the system and everyone is waiting for inflation. Why waiting for inflation because during inflationary times, to credit is the best thing. As the money loses value so do the debt. Example debt of 1 lacs in 1975 would be equivalent to a debt of 1 crore as of now. So when inflation comes everyone becomes happy, you can take more credit, the value rises, inflation rises and credit off taking takes place. Result in more transactions, more taxes, and bigger houses new stock market peaks. USA has been real beneficiary of immigrants as so many people join the workforce they need basic amenities, house, clothes, food, jobs etc so demand is always more than supply. Hence the direct result of immigration has resulted in maintaining the boom time for the USA for 30 years.
The Same logic is thought of in 2008. It got delayed with QE1, QE2, and QE3 and may be QE 4. And now money is in the system but people are saving as inflation is not there. If USA directly imports people (Immigration ) more demand less supply and USA will be in the same boom trajectory.Since 2008 was a big recession, it took almost 8 years to reach to normal levels. Now If the USA increases interest rates and inflation doesn’t come back because demand doesn’t and if now new Immigrants demands are going to be lower.
In 2008 everyone was buying homes may be one or two or three , some with ten homes and then cars s, two cars etc and all this lead to the economic boom. All this leads to a credit based society which eventually is a bubble. China is same. One problem is the duration of retail credit from 5 has been increased to 30 years. But what if you are in middle age, or retired you can’t take that long credit. Inflation will hit you so hard that you can lose all your money in five years.
But if the cycle is simple everyone understands it then what’s the problem?
There are multiple problems. One the QE1-3 has put so much money in the system withers it has to be sucked out or there are chances there will be hyperinflation. Second, if immigrants are not their there will be less demand for all the things. Third, the Trumpnomics is creating global trade problem which a can hurt world trade resulting in a global delay in recovery. Fourth China is still riding the credit boom and it could get pricked anytime. If CHINA USA trade war is there the USA will prick the bubble. Fifth, there is always a good way to revive a nation and i.e. is WAR. If that’s in the mind …!!!(WWII revived Germany). But the biggest problem is it takes decades for the full cycle. We are in deflation cycle for almost 8 years now.
So where do India Stand
If you see the first graph we mirror the USA markets. What has happened after trump won, we had demonetization and result are that DOW Jones hit all-time high and we are still short of that? Also, a lot of FII money has been pulled out. But Indian market still was supported by Domestic investors. So technically we can have up move of 15 to 30 % writ Dow Jones as we are lagging.
Hey, that’s a bold call 15 to 30% —
Yes, we have our budget in next few days precisely on 1st February. After demonetisation one thing has come out only poor people have suffered no one else so Govt is going to give some relief to poor India.
Second, its third budget and if it’s also not the good market is going to see it very negatively. Third elections, our view is BJP is realizing that it’s losing control over UP. All news is about SP and BJP is also not even a talking point. Even the news headlines show this
During Mr. Modi’s campaign Ram Mandir issue was held back but now it’s again cropped up. So we believe this budget is going to be something which will take the market by surprise on the upside.
There is going to be the relief to the poor man with tax sops and consumption is going to rule. Our top pick will be in consumption space.
More on Indian economy and our view on the budget in detail with some picks ,as we go to budget in next blog.
Shikhar Capital 