Money managers live in interesting times. Hardly one issue been tackled that another arises; and at times from unexpected places.
A few months ago, the predominant issue bothering the markets was monsoon, inflation, reforms pace etc. And today, the tidings of Greece are hitting at our shores. Its not that we are complaining. To be constantly challenged by the markets is a conscious choice you make as a professional money manager.
With respect to Greece, markets are witnessing volatility because they are concerned about the Greece creating a contagion effect. If Greece stays in Europe by asking concession on the austerity package or debt write-off, there will be similar request from other nations such as Spain, Portugal and Italy. If Greece moves out of Europe, then markets will doubt the EUs commitment to protect its unity and weak link. Withdrawal of confidence by the market on EUs commitment can create crisis situation for the weak links of EU. Either ways, Greece is an issue which cant be settled in a hurry. There are many twists and turns in Greece saga.
India is likely be impacted from the flight of safety to dollar assets. In consequence, we may see some volatility in the domestic equity, debt and the forex market. Having said that, since the last QE3 tantrum, RBI has increased its forex reserves to around US$ 355 bn. This provides a strong cushion for any spike in dollar demand.
Another concern is that this period is also overlapping with the impending US Fed rate hike. The market is anticipating a US Fed rate hike in its September meeting. However, this may still not be the winding down of the accommodative outlook (not stance) of the US central banker. The US economy has a low unemployment rate of 5.5%; but that does not completely account the under-employed and those who have pulled out of the job market (hidden unemployment).Thus, accounting for the under-employed and the hidden unemployed, the US unemployment rate may be around 7-9% range. On that premise, the upside for inflation and the rate hike remains limited.
At the home front, July monsoon would be an important period as far as agricultural and rural economy is concerned. Rainfall in June was 16% more than normal. The positive thing is that the early and copious monsoon in June has come during the sowing season. This has increased the soil moisture and has made water available, at a critical period. Therefore the possibility of harvest failure at large scale is low. Nevertheless, the government agencies are forecasting a below average rainfall in July. If that turns true, it may still impact agriculture output.
Monsoon session in parliament would be another indicator to watch. Important legislations like Land Acquisition Bill, Goods & Services Tax (GST) Bill, etc. are waiting to be passed. Their passage will provide support to the market and a boost to the real economy.
We have come to the end of June quarter and soon Indian corporates quarterly results will be out. Market is expecting 10% earnings growth in YoY basis. A strong guidance for the rest of FY16 will be supportive to the market. One of the key driver for future earnings growth is the interest rate cut which RBI has been effecting since Jan-15. Now its important that the benefit be passed on to borrowers which would help the future earnings to grow.
We are convinced that the short bumpy ride does not deter the long growth journey India has set out for.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.