Podcast 18th March 2016
Hi I am Arjun Parthasarathy speaking and this podcast is on “The worst looks to be over for Equity Markets this Year”
Equities have bounced back from lows seen this year with Sensex and Nifty up by over 6% from lows and global equities up by around 5% to 9% from lows. Equity markets had a bad start to the year 2016, plunging to one year low levels and in some markets, multi year low levels. Equities fell on the back of global growth worries, fall in oil prices and worries of China hard landing affecting corporate earnings growth.
The bounce back of equities from lows is on the back of recovery in oil prices, ECB monetary easing, Fed going slow on rate hikes and easing concerns over a China hard landing. The Sensex and Nifty also received a boost from Union Budget 2016-17 that stuck to fiscal deficit targets despite high claims on the expenditure front.
The question is whether equities can sustain its uptrend or will it go back to where it came from or even lower?
The worst period for equity markets look to be over for 2016. Why do I say that? Risks still remain in the form of global growth concerns, oil supply glut fears and China hard landing. However these risks are being negated by stability in the US economy as stated by the Fed in its policy meet on the 16th of March, extraordinary low interest rates globally with many Central Banks including the ECB and BOJ adopting negative interest rates, China looking to stabilize its economy and push for domestic demand led growth and lack of leverage in the markets as seen by banks preferring to park excess reserves with the Central Banks.
India is looking at a period where deleveraging of corporate balance sheets are taking place even as the corporate sector is becoming more efficient to survive tough market conditions. For example, many corporates are selling off non core assets and focusing on core businesses. Others are embracing the digital market for efficiency. As the corporate sector gains in productivity the return ratios will start ticking up leading to improved equity valuations.
RBI has lowered interest rates to four year lows and this will feed into the economy leading to rising consumer demand for goods and services. Banks that are suffering from bad loans will be cleaner this year as loans are sold off to Asset Restructuring Companies that are mushrooming in anticipation of windfall gains as they get cheap assets. These companies are better positioned than banks to get the most out of restructured assets. Banks will be able to improve credit growth as they clean up their balance sheets and get equity from the government for recapitalization.
All in all, while risks are there for equities, the positives will come to the fore this year leading to strong performance of markets.
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