It’s been a dream run for the world markets and specifically the Indian markets since the last seven months, especially post the Union Budget on 1st February 2017. India seems to have all the ingredients for a multi-year bull run since the elections of 2014 – whether it’s the strong leadership of Prime Minister Narendra Modi or the various policy measures taken up by the government from time to time, the excellent and unprecedented PR exercise internationally that possibly has projected India as the most favoured destination. The pushing through of GST Bill, which was in the works for more than a decade, could be the single biggest achievement of the government as it needed a lot of prodding and ‘buy in’ by the various stakeholders, most of them occupying the opposition benches. The ability of the Mr. Modi to take risks and travel in unchartered territory also seems to have worked well with the public at large. The demonetisation hardships were converted into an advantage by the ruling party shows that they have a PR solution for every adversity.
The global liquidity normally finds it way into the outperforming emerging markets and India seemed to be a like a ‘text book solution’ for absorbing a part of this. Interestingly the new found domestic liquidity which lately realized that there are hardly any other asset classes providing the returns the equity markets are, have started pouring in larger quantum into the hitherto forbidden asset class. The mutual funds have made it easier for the lower end of the pyramid to partake in the India growth story instead of parking their funds in chit funds, pyramid schemes and alike.
Markets generally discount the foreseeable future but at times react violently to unexpected current situation, just like when we witnessed those few weeks of turbulence during demonetisation. However, the big question is whether the smooth path ahead is a mirage or would there be huge bumps on the way. Having been in the markets for more than three decades, experienced a number of bull runs and longer periods of bear hug, I have trained myself to stand out of the crowd and ask questions which most of those ‘flowing with the tide’ might find uncomfortable. However, post the bull run, everyone starts drawing comparisons with previous bull runs which have blown out.
Our markets have been displaying irrational exuberance for a while since we are not in a position to absorb the huge liquidity flows. We are in a situation of a perfect virtuous cycle of story telling – liquidity flows – immediate gratification. The question is whether these liquidity flows can change the fundamentals of the economy and the corporates or whether it would lead to a bubble?
The Government has a strong mandate and seems to have utilized the franchise well through the various measures but three years has been long enough for execution of the various measures they have taken. Statistical data exhibiting achievements and a benign environment depends on how it is presented and explained – and there is always a possibility of Simpson’s Paradox. We are projecting high growth rates without the same being reflected in the employment generation, manufacturing growth nor Capex addition which has fallen to a 25 year low. Additionally, credit growth for Banks has fallen to a six decade low, not to mention the enormous NPA burden.
We were staring at farmer unrest across various states despite two good monsoons, which clearly displays gaping holes in the distribution structure. The unrest has been temporarily resolved resulting in a major burden on State Finances. The internal rift in Kashmir and West Bengal, in addition to geo-political issues with Pakistan and lately with China has been largely ignored by the markets, hoping for an amicable resolution.
GST introduction seems smooth as we are in the initial honeymoon phase where everybody is collecting GST. The issue will arise when one needs to upload and pay the GST collected to the government. The GST technology platform needs to work flawlessly, while the uploaded data needs to be reconciled for smooth set off by the those in the GST chain. One also needs to see whether there would be strain on liquidity in the interim. The reverse charge of GST is marginalizing the micro and small scale sector where margins were thin but collectively they are the biggest employers. With IT sector too under strain, I wonder whether India’s demographic advantage of young productive population could turn out to be a liability due to lack of opportunities.
I may sound pessimistic but the truth is that the risk reward at current levels is extremely skewed and even if a few of my fears play out, we could witness a deep correction. Every bull run seems to be a “different story this time” and most of the participants at the peak are normally those who are “wet behind the ears”. In the short term, we may be looking at possible blow out rally as Nifty crosses 10,000 but could end up gobbling a lot of hard earned money of gullible investors. It is important to get rich but more important to stay rich.
The author is an independent market analyst. Views are personal. He can be reached at @ambareeshbaliga
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.