Challenging times but hopes of recovery after 2014 polls

August 31, 2012

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

These are possibly the most challenging times for India because, simply put, every goal post seems to be oscillating.

The United States is gradually moving back to oil and energy self-reliance. Oil-led inflation in the U.S. may no longer be a threat.

The labour arbitrage with China, originally seen as an antidote to inflation will not remain relevant. The U.S. clearly looks to provide local jobs which can only happen in the manufacturing sector.

What this means is a shift in jobs, debt surpluses, trade flows and most importantly growth moving from China to the U.S. over the next two years. The most significant fallout will be withdrawal of quantitative easing as the U.S. economy recovers. The good news for India may be the possible drop in oil prices.

The immediate challenge, however, is decommissioning the euro pressure cooker.

A crisis emerges every couple of months. We had the French and Greece elections last quarter. Now you have Bundesbank Chancellor Weidmann’s comments against further support; “putting them on drugs” he says.

This quarter, everyone is awaiting with bated breath the outcome of the EU Summit on Oct. 18 and 19.

On the domestic front, politics has been reduced to a single agenda; that of keeping the other coalition out of power. That’s the “issue” which decides on support. Today, every move is directed at keeping the ruling party from reaping the electoral dividends of its rural initiatives by forcing them into economic failure.

Unfortunately, every political party, irrespective of the coalition, is onto this because they need to retain their political identity to stay in power in the 2014 elections. Which is why it’s difficult to know who is accountable for CAG’s audit reports.

Inflation, fiscal deficit, balance of payments and local debt continue to fester. Like it or not, India’s credit rating is under threat. Then we have the threats to credit and cash flows if the worst fears about the euro zone play out.

However, as of now, the market seems entirely divorced from India’s macro-economic fundamentals.

One thing is for sure, FIIs will continue to prop up valuations to compensate for rupee depreciation.

The events discussed above and the end-of-year selling around November or December need to be watched closely.

I continue to believe that the Indian economy should recover in the year after the 2014 elections. Any serious market correction would be a point of entry to make up for earlier lost opportunities.

I would keep my SIPs going as per my risk-based asset allocations and saving plans and park lump sums in conservative short-term debt mutual funds to ensure I have the liquidity to catch the market if and when it corrects.

In the meanwhile, the FII casino will continue to provide us cheap trading thrills and most likely remain range-bound.

(The article above is not intended to be a financial advisory. Readers must seek specific advice from experts before making investment decisions.)

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