Thursday, June 13, 2013

Why 2014 Can Be Bullish For India - what should retail investors do?

When we look at the markets in India, it is typical to look at the benchmark Sensex, Nifty and take a gauge of what to anticipate next. What a lot of us miss out including mainstream media is that its the bond markets that drive the direction of a country's economy. Before coming to the India story just pause and think what happened in US and Europe since 2008???

US: Sub-prime default first triggers Credit Default Swaps in late 2007 and the same starts accelerating month on month in 2008 and ultimately the blow-up happens with Lehman Brothers followed by Bear Stearns, AIG, Fannie Mae, Freddie Mac and then DJIA collapses

Greece: There is a default on sovereign debt and then the stock markets plunged 90%

Portugal:There is a default on sovereign debt and then the stock markets plunged 80%

Now let us look at the other side when the subsequent recovery took place
US decides to keep interest rates near zero and starts the QE program.
BoE decides to revive its economy with 'Funding For Lending'
ECB decides to join the party with LTRO [and Germany had already bailed out PIIGS before that]

Markets used these signals from the bond markets and decided to follow suit.

Now coming to the India story, SnP keeps talking about downgrades etc but what is happening in the bond markets? In 2012, the benchmark 10 year RBI treasuries had a coupon of 8.15% whereas the 2023 RBI treasuries [released in 2013] are going at 7.15%

Bond yields and prices are inversely proportional i.e. higher the yield, lower the prices and vice versa. So for a trillion dollar economy like India, a 1% reduction on the sovereign debt is a clear signal from the bond markets that they are bullish on India. As stated above, the effects from the bond market to equities takes about 6 months to 1 year to fully materialize

[The 12k crores to 16k crores that are being booked out now in money markets that are being reported by mainstream media are IMHO profits being booked on earlier positions because Indian bonds are in reality rallying compared to 2011, 2012 etc]

With elections around the corner, investments by corporations will take a backseat because corporations want clarity in political scenario before stepping up the ante. Also it does not really matter whether we have UPA at the centre or NDA. Market makers just want clarity in political leadership.

To summarize, bond markets are an important pre-cursor and they are signaling a lot of optimism [not pesimism as reported by media].

2013 is uncertain for Indian equities because of a lot of headwinds [Rollar, Euro-zone crisis, political uncertainty and potential wars] However, the falls as and when they come will provide excellent buying opportunities and by end-2014, investments made during the falls of 2013 will end up paying very handsomely. As mentioned in the May outlook post, now one should cut long positions and hold on to cash. FD rates are likely to fall soon so allocation on this front should be increased.

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