Lawrence Summers, the former US Treasury Secretary commented last week that once again Europe’s effort to contain its crises have fallen short. A global debate on austerity versus growth is finally showing signs of conclusion, with a clear indication that austerity in the face of depression has only made the latter worse. Unfortunately, despite the end of this debate in favour of growth, there seems little prospect of a near-term course correction, either in Europe or in the US. Complete conviction on Keynesian doctrine is absent and half-baked measures for liquidity enhancement are not yielding necessary results.
April was ugly for international markets. The UK officially slipped into a double-dip recession. US data showed weaker growth than hoped for and an apparent stalling in the improvement of the jobs picture. The euro zone crisis deepened as Standard & Poor’s downgraded Spain’s debt. Yet, stock markets survived relatively unscathed. The residual liquidity still available ensured markets held on in spite of negative news flows. However, it’s more than clear the anaemic growth seen in the past few months is now a thing of the past.
Asian markets, including China, have also seen significant deceleration, leading to concerns regarding overall world economic health. All these economic headwinds do not augur well for the Indian capital markets. During the first three months of the current calendar year, Indian capital markets remained buoyant on the back of continuous buying by FIIs. The trend got reversed in April. Apart from the global headwinds, domestic factors also contributed to this reversal. A deteriorating fiscal position, including increasing capital and current account deficits, have rung a warning bell for the Indian capital markets. A depreciating rupee, coupled with policy paralysis at the government level, have frustrated foreign investors. Though fundamentally not very significant, retrospective changes in taxation rules have worsened sentiments.
All the above negative macro factors, on top of worsening corporate performances on account of shrinking demand, high inflation and high cost of funds have led to deteriorating fundamentals in the market. It is extremely unlikely that the fundamentals will improve in the short term. It is also unlikely the global economic crisis will get over in the next three to six months. The overall capital market outlook for India in the next six months is, unfortunately, bearish. The expected good monsoon and fresh liquidity injection in the global markets will only arrest further downslide of the index. Positive triggers are, sadly, missing.
However, there will continue to remain pockets of outperformance and select sectors, like FMCG and pharmaceutical, which will outperform the markets. Valuation will continue to be clobbered by growth. Picking stocks that look cheap relative to their own fundamentals will not work in the short to medium term. Growth investing, involving looking for companies whose profits are growing even if they are expensive, will provide better returns.
The author is managing director & chief executive officer, Destimoney Securities
