Market outlook better but roadblocks still ahead
The ECB, Fed and Bank of Japan in that order have together improved equity market sentiments globally by announcing bond purchases. ECB (European Central Bank) has given itself unlimited powers to buy bonds of countries of Italy and Spain, countries that are reeling under the weight of excessive sovereign debt. The Fed (US Federal Reserve) has announced that it will buy USD 40 billion of MBS (Mortgage Backed Securities) every month until the unemployment rate in the US comes off from levels of 8%. Bank of Japan has raised its bond purchase amount for the year by USD 126 billion as the country faces the threat of a slowdown on the back of weakening exports and a strong currency. All the three central banks are maintaining policy rates at record lows and have pledged to keep rates at lows for a long period to come. .
Expectations of monetary easing by China are high as the Chinese economy is showing visible signs of sharp slowdown. Manufacturing has contracted for eleven straight months while export growth for August was just 1%. China GDP is expected to drop to levels of 7.5% from 9.2% levels seen in 2011. China is still maintaining a tight grip on property market as a speculative bubble threatened to burst. China’s central bank the PBOC (People’s Bank of China) is expected to cut policy rates as well as ease reserve ratio requirements for banks in order to boost domestic consumption to revive a slowing economy.
Indian government did the right moves and made the right noises to boost sentiments that were affected by a host of negatives. The government raised fuel prices to curb a rising subsidy bill and maintained a budgeted borrowing schedule that threatened to go up due to a weakening economy and rising subsidy bill. The government also eased limits on FDI (Foreign Direct Investment) in retail and aviation, and this easing of limits had a brief political threat as a key ally withdrew support to the coalition government. The government held its ground on so called reforms and markets cheered the governments step to correct an economy that was visibly weakening. Indian equities, bonds and currency rallied on the back of governments reformist actions Table 1.
The global central bank actions coupled with reformist actions of the Indian government has raised sentiments in the markets. Outlook for the market is positive and Indian equities, bonds and currency is expected to maintain a positive trend going forward. However the going will not be smooth as there are still roadblocks ahead, both on the global front and the domestic front.
On the global front the sovereign debt crisis in Europe is very much out there as economies from Italy to Spain slow down drastically leaving them vulnerable to rising bond yields. US economy grew by just 1.3% for second quarter 2012 against expectations of 1.7% growth underlying the weakness in the economy. Economies from Brazil to Australia are slowing in the face of a global growth slowdown. Central bank actions will not lift growth unless the economies correct quickly.
Indian economy will grow at levels of 5.5% to 6% despite government forecasts of 6.7% growth. RBI is likely to ease policy rates but not in a big bang manner as inflation is still hovering at 7.5% levels, much above the central banks comfort zone. Global economic weakness is showing on domestic exports, which are down in the fist five months of fiscal 2012-13. Markets will have to override real economy weakness for more rallies.