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Adit Jain – Reading the Leaves

Investment Outlook , Published Feb 18, 2020

3 min read

Adit Jain


The future of the economy lies in ensuring growth of credit to the industry as until this happens, investment and spending will lamentably remain weak.

Predicting financial markets is a near impossibility as variables and inputs remain innumerable and are consequently hard to crack. But broadly, markets react as much to domestic considerations as they do to external ones. Interest rates, demand and business profitability are the primary domestic factors that determine market sentiment. Global economic and trade considerations together with the monetary policies of the major central banks influence the disposition of investment funds that divert capital from and towards emerging markets.

India’s equity markets have had a volatile run over 2019, with stints of ups and downs. In the wake of the finance budget in 2019, they reacted despondently, as the government’s policy announcements lacked any element of persuasion to motivate new investment. Higher taxes on the rich resulted in further subdued investor sentiment. With an imminent economic slowdown driven mostly by collapsing consumer demand, markets began to suspect falling profitability and growth. Some industries, particularly automotive, fell into the worst recession in living memory. Then, the bonanza of huge corporation tax cuts revived sentiments since September.

The stimulus programme and interest rate reductions may have helped somewhat, but most analysts remain sceptical whether these considerations have the capacity to sustain a dramatic rise in 2020. Frankly, equity markets already seem overvalued with price-earning ratios being unreasonably high. The game, going forward, would therefore depend more on the perceptions of foreign institutional capital. Foreign investors have in recent months become net buyers on the assumption that the government will take steps to be more investor friendly, that the worst is perhaps over and consumer demand may begin to shift upwards.

The real problem hounding the economy is not liquidity, as may have been the case previously, but the desire of banks to actually lend. The growth in credit to industry remains cowed and is only marginally better to consumers. Credit is the lifeline of the economy and until this recovers, investment and spending will lamentably remain weak. Banks have justifiably become restrained after mounting bad loans and non-banking finance companies are stuck in the rut with damaged balance sheets, a consequence of over-exposure to the real-estate sector.

Abhay Soi

With an imminent economic slowdown driven mostly by collapsing consumer demand, markets began to suspect falling profitability and growth.

Reading the Leaves

Alternative asset classes such as gold and bonds also performed well during 2019. Gold, for instance, jumped by 30 percent – largely an outcome of global investor interest being directed to the yellow stuff by uncertainties caused by the trade war between America and China. Analysts believe that a trade deal, even a provisional and limited one, between the world’s largest economies would reverse the trend. Gold is viewed as a safe haven in volatile times. Corporate bond funds too performed reasonably well with returns averaging 6-8 percent, as capital was redirected from equities to fixed-income securities.

Reading the Leaves 2

A recent poll of fund managers places expectations for equity markets to rise between 10 percent and 15 percent in 2020. This is on the basic premise that the government, now genuinely nervous about economic performance, may present more supportive policies including fiscal ones in the annual finance budget. Be that as it may, downward pressures including the flow of credit remain and there may be new ones too – specifically petroleum, a consequence of rising tensions in the Gulf. An excessive jump in petroleum prices would affect India’s current account position, create inflation and undermine private consumption. In the final count, the risks for the economy remain somewhat weighed to the downside and consequently so for the markets.

About Adit Jain

Adit Jain is the Chairman & Editorial Director of IMA India, an economic & business research company established in 1994. He has advised companies on their India strategy, deposed as an expert witness at commercial litigations and given testimony at parliamentary proceedings.

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Investment Outlook 2020