The developed and the emerging market economies are facing a scenario of slowing GDP growth coupled with ultra-loose monetary policies that is likely to continue for extended period of time. In this scenario, liquidity will chase returns and Indian equities are well positioned to take in more than its fair share of capital flows. RBI Governor Dr. Raghuram Rajan is of the belief that developed economies are in a period of sustained weak growth and while QEs pump in liquidity, the liquidity will not really pull up growth in the developed world but will flow to the developing world.
The Sensex and the Nifty have declined 0.85% and 0.66% respectively year to date in 2015. The GDP in India expanded 7.5% in the last quarter of fiscal 2014- 2015 over the same quarter of the previous year. The interest rate scenario is looking positive in India with three rate cuts in the calendar year 2015. The RBI cut the key repo rate by 25 bps to 7.25% in its June 2nd meeting stating that the move is appropriate given low capacity utilization, mixed indicators of recovery, and subdued investment and credit growth. Interest rates are expected to come down in the remaining part of the year as fears of a drought have subsided with higher than average monsoon for the month of June 2015.
Corporate earnings growth that had slowed down for the last two quarters (Q3FY15 and Q4FY15) would look to improve in comparison in the time to come. This would mean higher probability of the benchmark indices Nifty and Sensex delivering positive returns in the remaining part of the calendar year 2015. Any correction in the equity markets due to global factors such as exit of Greece or rise in interest rate for the US can give an opportunity for investors to take fresh positions with a minimum three year perspective.
The Dow Jones Industrial Average, the S&P 500 and the NASDAQ have given 0.64%, 2.09% and 7.51% returns respectively year to date in 2015. The tech heavy nature of the NASDAQ index has generated 5% to 6% more returns than the other two benchmark indices. The GDP in the United States expanded 2.9% in the first quarter of 2015 over the same quarter of the previous year. Real gross domestic product in the United States decreased at an annual rate of 0.2% in the first quarter of 2015, according to the estimate released by the Bureau of Economic Analysis. The benchmark interest rate in the United States was left unchanged at 0%- 0.25% on June 17th but Federal Reserve officials indicated the U.S. economy has been growing moderately after a winter contraction and is strong enough to support an interest rate increase in 2015. Higher interest rates, even from record lows can hurt business and consumer sentiments in the US if demand falters.
The Shanghai Composite Index has gained sharply by 21% year to date in 2015. The Chinese economy expanded 7% in the first quarter of 2015, down from a 7.3% increase seen in the previous three-month period. It is the lowest growth rate since the March quarter of 2009, due to a slowdown in manufacturing and property investment. China’s annual inflation rate was recorded at 1.2% in May of 2015, slowing from 1.5% increase seen in the previous month. The Peoples’ Bank of China has cut benchmark interest rates to a record low of 4.85% effective June 28th and lowered the amount of reserves certain banks are required to hold. It was the fourth time the central bank had cut interest rates since November 2014. The benchmark index has already started to correct with a decline of 21.54% from the peak levels reached in June 2015. The bubble in the stock market has started to deflate and may burst if global events leads to a risk aversion.
The DAX index of Germany and FTSE index of UK have given 12.84% and 1.39% respectively year to date in 2015. The GDP in Germany expanded 1.1% in the first quarter of 2015 over the same quarter of the previous year. The benchmark interest rate in the Eurozone is unchanged at record low of 0.05% since September 2014. Inflation in Germany increased 0.7% in May of 2015, up from a 0.5% increase seen in the previous month. It is the highest inflation figure since November 2014, due to higher cost of food and services and a slower decline in energy prices. The economic conditions continue to be favourable for the German economy but the broader issue of exit of Greece would have serious repercussions for the entire Eurozone. The side effects of exit of Greece would be only known once the inevitable happens for the Eurozone. Any further delay or bailout would only make the situation worse and more complicated than before for the member nations. The point to prove here is that even though Germany as an economy looks to benefit from cheap credit and show moderate growth in GDP, the Eurozone in totality would have to go through a tough time in the immediate and near future.
The Nikkei has given a return of 15.52% year to date in 2015. Japan’s economy advanced 1% in the first three months of 2015, which is a second quarter of expansion, following a recession last year. Inflation in Japan rose 0.5% year-on-year in May, following a 0.6% increase in April. The inflation slowed for the second straight month to the lowest level since June of 2013 as lower fuel prices weighed down the CPI. The benchmark interest rate in Japan has been kept unchanged at 0% since 2010. The Bank of Japan kept its pledge to increase the monetary base at an annual pace of about 80 trillion yen at its June 2015 meeting saying growth and inflation are both recovering. If economic growth and inflation are able to recover for the Japanese economy the stock market index of Nikkei would see a rise in the near future.
The Brazilian GDP shrank by 1.6% year-on-year in the first three months of 2015. It is the fourth consecutive contraction as domestic demand and investments struggle to gain traction. Russian GDP shrank 2.2% year-on-year in the first three months of 2015, worse than a 1.9% contraction previously reported, which was the first decline since the last quarter of 2009. Clearly the outlook for stock market indices in these economies looks gloomy in the current scenario even though the Russian MICEX index has given a return of 10.47% from year to date in 2015.
Benchmark indices in India are on a strong footing compared to most of the developed and emerging market economies in the World. Japan followed by the US look in a better position to deliver growth in their respective stock market indices but China, Russia, Brazil and the Eurozone would be struggling in the time to come. Three Cheers to India.