The current fad in the markets is blaming the government for all problems. Will equities do well this year? The answer is no because the government has messed up on reforms. Will interest rates go down? No because the government has messed up its finances. Will the Rupee appreciate? No because the government policies have discouraged capital flows. Will inflation go down? No because the government is unable to increase supply. Will the monsoons be normal this year? No because the government has displeased the rain gods. Well the last one is just to add humor but the fact is that markets are blaming the government for its underperformance. Markets cannot go on blaming the government for all its woes, it has to take responsibility for its actions and look beyond finding a convenient scapegoat.
Indian markets have had a poor fiscal 2011-12. The Sensex and Nifty were down close to 10%, the Rupee was down by over 14% and ten year bond yields were higher by 60bps on a year on year basis as of end March 2012. It is true that government policies hurt markets with rising subsidy bill on the back of high oil prices (up 8% year on year) hurting its finances and taking up fiscal deficit for 2011-12 higher by 1.3% from budgeted levels. Lack of reforms has hurt capital flows with FII flows for fiscal 2011-12 at a three year low. India’s woes have been compounded by sovereign debt crisis in the Eurozone, inflation in China, political tensions in the Gulf States and a natural disaster in Japan.
The question is how long can the markets continue to blame the government? The Indian government at this point of time is not in a position to help markets. The government does not have political buy in for reforms, its finances are still strained and global economic uncertainty persists. Looking at the government for support will get the markets nowhere. Obviously markets always have a choice of staying pessimistic, but pessimism will not make money for everyone
Where can the markets look for direction?
The markets have to start working with the assumption that the government is an obstacle rather than an enabler. Once the government issue is clear, direction will be provided by other factors of global liquidity, global economic environment, RBI policy actions and corporate performance.
Global liquidity will not dry up even if there is no large scale liquidity infusion by central banks. The Fed has indicated that it will not need to go in for a third quantative easing program though it will keep policy accommodative till late 2014. The ECB has not put a full stop to its LTRO (Long Term Refinancing Operations) where it has lent over a Euro one trillion to banks. Bank of Japan and Bank of England are continuing to buy bonds to add liquidity.
The large economies of the US and Germany are doing well with US GDP growth forecast being revised upwards for the first quarter of 2012 while German unemployment is at twenty year lows. Japan is expected to post growth in 2012 as the economy comes out of the tsunami debacle of early 2011. US, Germany and Japan can partly negate lower growth expectations of China and India, which at 7.5% for this year is below trend levels.
RBI is expected to ease its policy stance in its policy review on the 17th of April 2012 and the easing of repo rates will prove beneficial to markets. RBI has a lot on its plate as tight liquidity conditions coupled with a large government-borrowing program are hampering policy transmission. However if the RBI continues to ease policy rates and lower rates start filtering into the economy, it will help boost both market and economic sentiments.
Corporates will show mixed performance as corporates undergoing stress due to debt or finding policies constrictive for business will struggle while corporates with strong balance sheets and strong businesses will do well. Markets will have to sift through fourth quarter 2011-12 corporate results and guidance for 2012-13 to identify the ones that will come out on top.