Transcript of the Podcast
Hi This is your editor Arjun Parthasarathy speaking. The Friday podcast is a new feature for the followers of Investors are Idiots.com. The brief podcast will select one topic for analysis and will be released every Friday.
This week’s topic is on “Diesel price hikes and Fed QE3 impact on your investments?”.
The reaction to the Rs 5 diesel price hike and the QE3 or third round of quantative easing announcement by the US Federal Reserve (Fed) has been predictable. Financial markets have embraced the much needed hike with gains of 1.8% in the Sensex and Nifty, six basis points fall in ten year government bond yields and a 1.5% gain in the Indian Rupee against the US Dollar. Markets are cheering the hike, though the hike is not going to do anything great for the fiscal deficit as the gross under recovery in selling fuel at below costs is estimated at Rs 167,000 in 2012-13 against Rs 138,500 crores for 2011-12. The reason the market is cheering the hike is that it sees in the hike the first steps of tough economic decisions that is required to pull the economy back from dumps. GDP growth for fiscal 2012-13 is expected to fall sharply from levels of 6.5% growth seen in 2011-12, which was against an 8.4% growth seen in fiscal 2010-11.
The fuel price hike will also give RBI room to cut interest rates as it sees that the government is recognizing the fact that it needs to set its fiscal deficit in order. Fiscal deficit, budgeted at 5.1% of GDP for 2012-13 was expected to go up to over 5.5% of GDP before the fuel price hike. Government bond yields that sets the barometer for interest rates in the economy has been hovering at levels of 8.20% to 8.30% on the ten year bond on worries of higher government borrowing. Government bond yields will fall on the fact that the government may not have to increase its borrowing for this fiscal and on the fact that RBI will cut policy rates in its policy review on the 17th of September 2012. RBI will cut rates by at least 50bps as there are enough indications on economic weakness, from weak IIP (Index of Industrial Production growth was at -0.1% for Apr-July 2012) growth numbers to falling exports (negative for the Apr-Aug 2012 period).
The Fed has signalled that it will buy USD 40 billion of MBS or mortgage backed securities for as long as the unemployment rate, which is currently at 8.1% in the US, comes down. The bond purchase is open ended, there is no time frame attached to the bond purchase. The Fed is maintaining it’s close to zero percent policy rates into the year 2015. The Fed’s actions are expected to boost US economic growth. Immediate reaction by markets on the QE3 was to pull down the USD and take up gold, commodity and equity prices.
In the longer run, the fact that the US economy will do better than many economies in the world will make markets anticipate earlier than expected rate increases by the Fed and this will lead to a broad USD rally. (Read US yield curve is positive for equities published by us on the 23rd of August 2012)
As far as your investments go, stay invested or invest in equities and short term or long term mark to market fixed income products for good gains.
We at Investors are Idiots.com have been saying all along, for over a year now, to be positive on equities and bonds. Our recommendations in the selecting stocks for the future series and in the fixed income investing series are all coming out to be right on track. Subscribe to the No-Nonsense pack offer that for Rs15,000 per annum gives you access to all the content required for you to make sound and right investment decisions.
Thank you for listening in. Have a good weekend.