ECONOMIC WINTER UPDATE - NEW FISCAL HORIZONS

The Election is behind us and so is the Election speech from the Budget. The Union budget went as expected, the lack of funds kept the government from overshooting on their spending plans. So the growth stimulus is missing even as we are on a long term path of consolidating and improving the Macro environment. But the plans laid out are going to play out over a period of time and a lot of work is needed. But if you want to forestall the coming slow down that is going to get deeper you need to dig into the Fiscal Deficit. Monetary stimulus alone does not do it, especially where the banking sector is struggling with resolving the corporate debt problems. In fact corporate debt problems could only expand if the economy continues to slow down over a period of time. It was nice to see the India perma bull speak out on this too.

Despite this the Nifty is still within kissing distance of the all time highs. Still hanging on to the 9 month channel support near 11500. It has managed this feat as liquidity has pushed itself into the top 10 Nifty weight stocks. This is a function of asset allocation. But does this not also reflect the mood of investment managers taking a risk off stance. If they have to allocate money they do it here. This chart is a glaring reflection of this behaviour. Not mine but from the Twitter account @SmartSyncServ.

That these behavioural patterns have occurred in the past before major market peaks is also a red flag as it reflects the risk off view of Investment experts in their position. This is also seen in the pattern of FIIs

I do not need to list out the number of companies that have fallen on the sidelines. Furthermore it is true that the headlines are grabbed by the big debt defaults but there are many smaller ones boiling under the surface. In that environment we are asking banks to not only lower interest rates but help credit growth make a comeback. Credit growth that had bounced back to 14% is now slipping and at near 12% and falling monthly. As the government cracks down on the crisis it is resulting in actions that will further slowdown lending in the short term. Why. As you read the headline below, it has a direct impact on the sentiment of the line managers taking credit decisions. Fear of lending or taking decisions is a problem of mood and cannot be reversed by just lowering rates or adding reserves. 

But why do we need to lower rates or stimulate the economy? Like every trend that we see in India today, this one too is global, a global economic slowdown that his hitting every sector. This is seen most prominently in the Auto sector around the world today, where Auto sales have collapsed beyond repair. I heard some analysts on TV say tht this is cyclical v/s structural, whatever that means. If it means short term I doubt it. If Auto sales were predicated on ever expanding consumerism driven by cheap credit and a Auto Financing bubble then it has probably popped. Do not be surprised if Auto inventories pile up to levels unheard of since the Great depression. [chart courtesy hedgeye]