D. K. Aggarwal is CMD, SMC Investments and Advisors Limited
The global economy is certainly seeing a revival, but the pace of recovery is uneven and patchy in the sense that if one observes closely the deviations in the pace of growth are high among the developed nations and emerging nations.
In Europe the grave situation as a result of debt crisis seems to be improving after lot of liquidity injections given by the combined efforts of IMF and European central bank. The situation of a mild recession though in the region cannot be ruled out.
If one sees the US one can say that the economy has responded well and is recovering as per expectations after the two rounds of quantitative easing programs. The unemployment situation, Retail Sales, housing market, manufacturing activity and capacity utilization rates, corporate balance sheet is much better than it was at the times of crisis. The under-current in the US economy is still very much intact and the testimony to the same is the statement of the Federal Reserve that another round of quantitative easing program may not be required.
Besides, the continuation of accommodative stance would continue to help the developed economies in regaining the economic glory. As regard to stock markets, US markets are constantly outperforming all other major markets giving optimism about the economic recovery.
The situation in the emerging markets is not that bright and is a consequence of relentless easing by these developed nations which led lot of money going in the financial assets and commodities creating an inflationary environment. The mathematical equation does not always results in Zero in the real world. It is a world where everyone is adopting self centric policies to ensure their respective growth and no synchronization in policy framework between the countries is seen.
The Chinese economy is already seeing soft landing as a result of tight policy measures and fall in demand locally and globally. The ill effects of restriction on the property markets by the authorities to curb the price rise can be seen. Some of the anecdotal evidences suggest that the situation may become alarming if growth pace in the economy declines at a faster pace as that would lead to lot of bad loans in the banking sector. In the last few months we have seen that the authorities in China have taken some measures like easing in Reserve Ratio Requirement to address the liquidity issues.
In India per se the economic momentum is surely dipping and that reflects lack of government efforts on the key issues like subsidies, FDI reforms, delay in project clearances and of course RBI efforts of controlling inflation in the last two years. To add to this the instability in the domestic currency and growing current account deficits further added to the nervousness among the various stake holders.
The year 2012 is expected to be the year of consolidation and we would see each and every country trying to ensure that the recovery does not derail in any given situation. Emerging nations like India and China have already given the signals that they would like to grow at a moderate pace so that inflation risks do not crop up at a faster pace in an event of higher demand.
In the present conditions, I think equity markets ride would be interesting at least for the long term investors for the rest of the year especially in the emerging economies.
The thirst and urge of owning equities of emerging nations would always be there among the foreign institutional investors. It’s just that the climate and conditions at present have not ripened well for the foreign investors to eat the cake. It is the passage of time that would heal the recovery and the confidence among the investors. In immediate context, the GAAR provisions are proving the dampener for the market sentiments. However, my strong sense is that later half of financial 2012 will see lot of actions as there would be more clarity to the FII’s on the fiscal deficit situation, inflation concern and government’s will to introduce second round of reforms. If all these things happen, then we can see Nifty touching the level of 6000 to 6200 by the end of the current financial year.