Money managers live in interesting time. Hardly has one issue been offset and tackled then another arises; and at times from directions you couldn't expect.
Couple of months ago, the predominant issues besetting the market was monsoon, inflation, reforms pace etc. And today, the tidings from Greece are hitting at our shores. It's not that we are complaining. To be constantly challenged by the market is a conscious choice you make as a professional money manager.
With respect to Greece, markets across the globe are witnessing volatility because they are concerned about Greece creating a contagion effect. If Greece stays in the European Union by asking concessions 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 the EU, then doubts will be case on the EU’s commitment to protect its unity and weak link. Withdrawal of confidence by the market on EU's commitment can create crisis situation for the weak links of EU.
Either way, Greece is an issue which can't be settled in a hurry. There are many twists and turns in the Greece saga.
India will likely be impacted primarily from the flight of safety into dollarized assets. As a consequence, we may see some volatility in the domestic equity, debt and the forex market. Having said that, since the last QE3 tantrum, the Reserve Bank of India has increased its forex reserves to around $355 billion. This provides a strong cushion for any spike in dollar demand.
Another concern is that this period is also overlapping with the impending rate hike by the U.S. Federal Reserve– the market is anticipating one in its September meeting. However, this may still not be the winding down of the accommodative outlook (not stance) of the U.S. central banker. The U.S. economy has a low unemployment figure of 5.5%; but that does not completely account for 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 U.S unemployment rate may be around 7-9% range. On that premise, the upside for inflation and the rate hike remains limited.
On the home front, the July monsoon would be an important period as far as the 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 on a large scale is low.
Nevertheless, government agencies are forecasting a below average rainfall in July. If that turns out to be true, it may still impact agriculture output.
The monsoon session in parliament would be another indicator to watch. Important legislations such as the Land acquisition Bill, GST, etc are 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 the June quarter and soon the quarterly results of corporates will be out. The market is expecting 10% earnings growth on a YoY basis. A strong guidance for the rest of FY16 will be supportive to the market.
A key driver of future earnings growth is the interest rate cut which the RBI has effected since January 2015. Now it's important that the benefit be passed on to the borrower which would help future earnings grow.
We remain convinced that the short bumpy ride does not deter the long growth journey India has set out for.
