Murky Waters - by Mr.Sathish Ramanathan

Mr.Sathish Ramanathan is Head-Equities, Sundaram Mutual Fund. He opines that the Indian Equity Markets is Murky. Hence the chance of quick revival is a distant dream. Experts of his views are:

• No One wants to take "Hard Decisions".
• Policy makers wish to look into "Soft Options".
• Combination of factors : Slow Project Approval, Weak Global Environment, High Inflation and Poor sentiment took toll on India's GDP Growth. It dropped to 5.3% in March 2012 Quarter, which is lowest in nine years.
• Despite correction in Global commodity price, depreciating rupee has put inflation pressure.

What resulted in Rupee Depreciation & Trade Deficit:

• It all started with high oil price. With India being Oil Hungry Nation (importing 78% of our oil needs), government regulated (rather-dictated) fuel price though was precived as populistic - backfired badly. India was selling Oil at price lower than its import price.This resulted in mounting fiscal deficit, along with few other factors like Coal import and Gold import mentioned below. As a result of mounting deficit, Indian currency started to fall against almost all currencies. 
• For instance, Power Plant came up faster than coal capacities could expand, resulting in record import of coal,
• Our diesel consumption is high due to high subsidies in diesel and shortage of power.
• Consumption has led to rupee depreciation : Looks confusing : Higher government spending on higher salaries and lower taxes have impacted in higher consumption. It was so unfortunate that majority of these consumption have been of imported items, resulting in rupee depreciation and hiking trade deficit.

On Consumption:

• Rising agri output and increased support price have further fuelled consumption.
• Real estae price, Higher Gold price and Increased income indicates that the new found richness have been channalized into consumption sectors like Cars, Mobiles and Homes.
• Record trade deficit indicates that India's consumption NEEDS to slow down on some sectors like consumption and simultaneously increase capital expenditure to debottleneck and create capacities.

On Infrastructure:

• Bank's have loaned One-Fifth of their loan book to infrastructure projects, which are typically of long gestation. Delay in these projects execution are likely to delay repayment and hence impact bank's profits.

On China's Slowdown:

• Global weakness was known and it was widely expected that China's exports would suffer.
• But domesting slowdown was not expected.
• A debt surge of US$ 1.7 Trillion for local government and $ 380billion investment in railways have resulted in strong capital expenditure demant to unprecendented levels.
• China is also experiencing the pains of rapid credit growth as India.

On Euro Zone:

• Post Lehman Crisis the epicentre of financial trouble has shifted to Euro Zone.
• Once talked to be an alternative currency to US Dollar, Euro is now being rattled.
• 5 countries among the 17 country which form part of the Euro Zone are in trouble.
• They are PIIGS : Portugal, Italy, Ireland, Greece and Spain.
• So far only Greece and Spain have surfaced.
• The total debt of Greece is US$ 236 Billion, Spain is US$ 1.16 Trillion, Portugal is US$ 286 Billion, Ireland is US$ 867 Billion and Itally is US$ 1.4 Trillion.
• Clearly the problem in Euro zone is bound to continue.
• And there has been concrens raised by countries like Finland which are not happy to pay for other nations debt and mismanagement. They have voiced their preference to break away from Euro Zone and Euro Currency if needed.
• In case of curency breakup, Germany will stand to lose the most, since its currency will appreciate pushing German Companies into recession.
• And also there is a liquidity crisis among European Banks with people pulling out money from Spanish and Greek Banks and putting into stronger German Banks. This trend is continuing and straining the banking system.

To sum up:

• It is hard to be cheerful these days.
• Dramatic Global Slowdown could actually help reduce the inflationary pressure.
• A dramatic fall in commodity price could ease the trade deficit and fiscal deficit.
• Since India is facing election by 2014, there is unlikely to be a thrust towards growth.
• Corporate earning have been marginally negative.
• Lact of corporate initiative to increase capacities due to weak gobal sentiments and domestic clearance issues implies that domestic capacities will not increase, even if required.
• The inevitable slowdowna nd grind downwards would be the long term outcome.
• On Invesment side, money continues to move away from equities.
• Within equties, money is moving from high leaverage companies to free cash flow companies.
• Investors needs to keep in mind : Quick rebound may not take place. They need to understand, appreciate and implement the merits of investing gradually .
• As corporate India reduces debt, improves efficiency and builds for next leg of growth, Investors should be ready to participate in these growth stories.