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How Can You Benefit from a Possible US Rate Hike?

Dec 14, 2015

In this issue:
» India in a sweet spot on commodity sell-off
» Hotel occupancy levels could rise in 2016
» ...and more!
0:00
Radhika Pandit, Managing Editor of ValuePro

It is once again that time when the Fed will meet to decide interest rates. It is widely expected that the Fed will increase rates by 0.25%. Expectations for the Fed to raise rates is nothing new. They have been doing the rounds for a while now. And so far the Fed has taken the easy way out and maintained status quo.

Will it be different this time? It all depends on whether there are clear signs that the US economy is recovering. But more importantly, if the Fed does choose to raise rates, can the US economy stomach it? Or will the Fed be compelled to revert back to zero rates?

As reported in the Wall Street Journal, more than half of the 65 economists surveyed were of the opinion that that the fed rates will be back to zero within the next five years. One argument is that no central bank in the developed world that has raised rates since the 2008-09 global crisis has been able to hang on to them.

The Fed for its part has kept the interest rate near zero for seven years and has not raised them for nearly a decade. So one could say that whatever recovery we have seen in the US economy, however anemic, has largely been the result of loose monetary policies.

So there is every chance that the economy may not be able to handle a rate hike for a longer period. Moreover, these easy money policies have driven asset prices to unsustainable levels. And a rate hike could end up being a pin pricking the asset bubble. We could have the global financial crisis play out once again.

So the Fed is in a quandary. On the one hand, loose monetary policies have given a very tepid push to growth. And on the other hand, firm money policies could very well thwart this recovery. So, overall, it looks like a lose-lose situation and explains why the US central bank has been dilly-dallying.

The problem is that central bank policies, overall, have distorted the global financial system so much that it is difficult to take a call on how long these will be sustainable.

What does this all mean for India? Since the global crisis, a lot of foreign money has found its way into India in search of better yields. The problem is that, in the last couple of years, the Indian economy has been struggling too. Although the scenario is expected to improve going forward as key reforms begin to deliver results, near-term pressures are likely to exist.

Moreover, it is widely expected that interest rates in India could head downwards as inflation has eased. If that is the case and the Fed also raises rates, then the differential between the two rates will narrow and foreign money could leave Indian shores.

This could lead to a correction in Indian stock markets. We are not too worried though. No one, including the US Fed, is sure whether rates in the US should be raised or not. We follow a more bottoms up approach to stock picking. Accordingly, we have a list of stocks that tick all the parameters for a good business model, healthy financials, and sound management. The only thing not working for us is valuations.

So if the Fed raises rates, and the prices of Indian stocks start falling, there is every chance that valuations of many of them will begin to look reasonable. And our chances of recommending them will only increase. We welcome a fall in the Indian stock markets. Do you?

Do you think that the Fed will raise rates this time? How will it impact your equity investing decisions? Let us know your comments or share your views in the Equitymaster Club.

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03:03 Chart of the day

As the global economy reels under slowdown, commodity prices have been on a downtrend. Apart from crude, price of gold, metal, iron ore, and coal has declined since 2014. Even agri-commodities such as rice wheat, cotton and sugar have weakened in the past two years. However, lower commodity prices have been a blessing in disguise for India. India being a net importer of commodities, has managed to clock robust growth without stretching itself. Strong growth in gross domestic product (GDP) and comfortable deficit numbers bear testimony to its present economic resilience.

However other developing countries, that are huge commodity exporters, have been adversely impacted by the meltdown. Firstly, their growth has come under pressure due to falling realizations. Countries such as Brazil and Russia have been witnessing falling growth in the past one year. As a result, their current account deficit (CAD) as a % of GDP has risen sharply. In case of Brazil, the fiscal deficit has shot up to 9.3% of its GDP at the end of September 2015 quarter.

But as India reaps the windfall gain from low commodity prices, it needs to expedite revival of the investment climate in the country to ensure sustainable economic growth in future. Therefore the government needs to focus on higher public spending and bringing the stalled economic reforms process back on track.

India in a sweet spot on commodity sell-off

4:01

As India remains better off than most of the emerging economies, the fortunes of its hotel industry have been on the mend. Hotel occupancy in 2015 crossed 60% for the first time in the last five years, as per a report by HVS Global Hospitality Services. Hotel chains such as Indian Hotels and The Leela have seen healthy growth in occupancy levels in the last one year.

The report goes on to add that the proposed supply pipeline of new rooms has contracted from 1.14 lakh units in FY08 to 0.56 lakh units in FY15. Therefore, improving occupancy levels amidst a dip in new room additions bodes well for the industry, going ahead. Moreover, government initiatives such as Make in India, Digital India and extension of the electronic visa facility to more countries will further drive business and leisure travel and spur growth in hotel occupancy levels in 2016.

4:45

Indian equity markets had a volatile trading session today. While the early morning session saw the indices languish in the red, buying activity intensified in the later hours and pushed them above the dotted line. At the time of writing, BSE Sensex was trading higher by 25 points and NSE-Nifty was trading up by 6 points. Mid cap and small cap stocks also notched gains and were trading marginally higher each. While metals and IT stocks found favour, losses were largely seen in auto and banking stocks.

4:55 Today's investment mantra

"No wise pilot, no matter how great his talent and experience, fails to use his checklist." - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Madhu Gupta (Research Analyst).

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