Domestic indices face headwinds going forward. The broad equity market indices, the Nifty and the Sensex, closed positive month on month largely on the back of short covering by FII’s. FII’s bought over USD 500 million of equities in June, which took their net equity purchases for the calender year to date to USD 250 million. FII’s covered their shorts on equities largely on the back of hopes of Greek debt crisis being resolved. The Euro too, closed positive to the US Dollar reflecting the sentiment change.
July will see the first quarter earnings being released. Anecdotal evidence suggest that sectors such as Financial services, Infrastructure, Real Estate, Construction and Auto are likely to show muted growth. More important, the soundbytes coming from banks such as SBI and ICICI Bank and infratsructure players such as Thermax are not positive. Banks are lowering their credit growth targets on back of worries of higher NPA’S (Non Performing Assets) and on the back of lower demand for credit due to high rates of interest. Infrastructure players are seeing slowdown in projects due to high rates of interest and srticter bank lending norms. The auto sector which saw high double digit growth rates for the most of 2010-11 is seeing growth falter. Higher fuel prices, higer prices of vehicles and higher loan costs are hitting auto sales.
On the global front, there are many issues yet to be resolved. The Greek debt crisis which threatned to blow up, was contained at the last minute by a rescue package by the European Union (EU). Greece is imposing austerity measures to cut deficits, but the measures will impact growth and bring down government revenues leading to debt servicing issues. Ireland, Portugal, Spain, Italy and Belgium are all in a fiscal mess and if all of them impose austerity measures, Eurozone growth will come under threat.
China is in an inflation fighting mode with inflation as measured by the CPI (Consumer Price Index) trending at multi year levels of 5.5%. China’s central bank has raised policy rates and increased bank reserve ratios as a monetary policy measure to bring down inflation expectations. Chinese banks are slowing down lending on the directions of the government. China’s growth cooling off will have its impact on demand worldwide and also threaten industries that compete with China. China will flood the world with surplus products leading to price wars.
The US unemployment , which is ruling at 9% levels, is keeping the economy in check. Economic growth forecasts have been revised downwards. There is also the issue of raising the US debt limit, as US debt has reached its zenith. The US government has a tough task of reducing debt as well as trying to prop up a flagging economy.
In the near term, asset classes of equities and commodities will definitely see prices coming off on the back of slowing world economic growth as well as on the back of lower risk appetite amongst investors. Bond yields will benefit from falling growth and falling inflation expectations. In the longer run, as interest rates come off and economies stabilise, equities will come back into focus. Commodities will have a tough time and will take a longer time to recover.