Can Indian stock markets survive these risks in 2015? - The 5 Minute WrapUp by Equitymaster
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Can Indian stock markets survive these risks in 2015?

Dec 23, 2014

In this issue:
» How have global stock markets performed in 2014?
» CLSA is bullish on India for 2015
» Freddie Mac & Fannie Mae have not learnt any lessons!
» ...and more!

We are almost at the end of 2014 and it has been quite an eventful year not just for global stock markets but for Indian markets as well.

As far as global events are concerned, geopolitical tensions in the Middle East, the Russia-Ukraine conflict, the dramatic drop in oil prices, slowdown in China and the US Fed halting its bond buying programme grabbed headlines.

Given that the global economy was still grappling with sluggish growth even in 2014, how does the outlook look in 2015?

As per an article in Moneynews, noted economist Nouriel Roubini has listed 5 biggest risks for the global economy in 2015. Let us take a look briefly at each of them.

The first is a possible crash in the Eurozone. It is a well documented fact that this region has been ailing for quite some time now. Most of the southern European countries such as Greece, Spain, Portugal and Italy continue to remain indebted and unemployment has also soared. So with the possibility of deflation lurking in the air, it poses a real and significant risk for global markets. In fact it could mean some of these economies looking for a bailout.

The second risk is the deteriorating fundamentals in Japan. Already having suffered two lost decades, Japan appears nowhere close to displaying any meaningful recovery. The current Prime Minister Mr Shinzo Abe unleashed some radical measures which included massive amounts of money printing. Dubbed as 'Abenomics', these policies have clearly not worked and the country has once again slipped into recession. The money printing machines in Japan may therefore continue to work overtime in 2015 as well.

Prolonged slowdown in China is the third significant threat. Indeed, the dragon nation has largely grown in the past on the back of an export driven model. As demand in the West has tapered down, China has suffered as well. Meanwhile, indiscriminate lending practices by banks and money flowing into property markets have fuelled the formation of bubbles and a possible crisis if these burst. That the slowdown in China is serious is amply evident from the considerable fall in commodity prices given that it is a major importer of commodities. This then is bound to have repercussions on overall global growth.

The fourth is the risk of geopolitical tensions particularly if the situation in Russia and the Middle East gets out of control.

The last risk that Roubini has cited is the threat of a rise in the US dollar. This is ironic given that the US economy has not really recovered either but has seen its currency rise largely because other developed countries are in a worse state. A rising dollar could have adverse implications for emerging countries as their respective currencies would depreciate putting pressure on trade balances.

What does all of this mean for India? In a highly integrated global economy, India is bound to feel the impact of any major global risk. Assuming that the West continues to deflate and keep on the printing presses, foreign money is likely to make its way into India in search of higher yields. In that sense, India will remain susceptible to foreign money flows.

For India, the major test in 2015 will be the effectiveness of the Modi government to get things moving on the ground. As soon as GDP improves and the positive benefits of reforms start reflecting in the earnings of India Inc, the Indian stock markets will be insulated to some extent from volatile foreign flows. One need look no further than the FY09-FY11 period to get proof of the fact. The crux really is the revival of the Indian economy because India can still bank on the domestic consumption story unlike China, which is still struggling to make this transition.

So will the Modi government be upto to the task of turning things around? One will have to wait and see.

Do you think that global risks will significantly impact Indian stock markets in 2015? Let us know your comments or share your views in the Equitymaster Club.

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While 2015 will continue to see challenges for the global economy, CLSA remains bullish on India in light of this. What will drive growth for India is the Modi government pursuing and implementing further reforms. This coupled with the fact that slowdown in GDP could be bottoming out has made the case for India stronger. India would also continue to find relief with respect to its trade deficit as oil prices remain benign. However, CLSA also opines that while oil prices could fall to US$ 50 a barrel, as soon as supply cuts start, prices could settle at an average of US$ 70 a barrel for 2015.

One interesting development will be the policies of the US Fed. There have been growing voices that the Fed is most likely to raise interest rates in 2015. Christopher Wood, MD of CLSA, thinks otherwise. He maintains that slow growth in the US is likely to spill into 2015 as well prompting the US Fed to stick to its dovish stance. Basically, he does not rule out the possibility of QE4. We cannot help but agree with him on this. The Fed outlook has continued to remain hazy with respect to raising rates. Assuming that it does do so, it is highly possible that it will go back to its quantitative easing ways as soon as the US economy falters again. And once again this will be another reason for foreign money to make a beeline for Indian shores for better asset classes.

  Chart of the day
As 2014 draws to a close, we thought it would be interesting to review the performance of global stock markets. The year has certainly belonged to emerging markets. Apart from Denmark, the list of top ten performing markets is dominated by developing countries. The flood of liquidity unleashed by global central banks has certainly found its way to these markets. Surprisingly enough, the stock markets of Argentina and Venezuela, two nations in dire economic straits, are among the top three on the list! This clearly shows that stock market returns and the performance of the national economy have very little in common in the short term.

However, there is no surprise when it comes to the top market of 2014: China. After languishing for years, the Chinese markets have bounced back, largely in the latter half of the year, due to the policies of its central bank. The Indian market (BSE Sensex) occupies the fourth position on this list. Markets of other emerging economies to have done well this year, like Pakistan, Indonesia and Thailand, are also not in the best economic shape. Legendary investor Warren Buffett's words ring true: 'Be greedy when others are fearful'. Investors who brought into these markets last year are surely laughing all the way to the bank.

Top performing stock markets in 2014

While we have highlighted the major global risks above; it is interesting to note the policy makers in the world's biggest economy seem to have not a care in the world. How else can you explain the policy of the US government to officially endorse sub-prime mortgages? Yes you read that right. The US government sponsored mortgage agencies, Freddie Mac and Fannie Mae, have decided to guarantee 90% of loans made to high risk borrowers! It must be kept in mind that these two firms were at the center of the mess when the housing bubble burst a few years ago.

Disturbingly, they do not seem to have learnt any lessons from that debacle. With Freddie and Fannie taking the lead in providing sub-prime loan guarantees, private companies are bound to follow suit. This would lead to a similar situation seen before the global financial crisis of 2008. When interest rates rise in the US, the weak recovery in the housing market might get reversed. At that time, it will be anyone's guess whether or not these loans will be repaid. If not, we could see a repeat of the 2008 housing bust in the US. Only this time, the US government will be unable to blame Wall Street for its own stupidity.

In the meanwhile, after trading firm in the morning session today, profit booking at higher levels took its toll pushing the Indian indices into the red in the afternoon. At the time of writing, the BSE-Sensex was trading lower by about 200 points or 0.7%. Stocks across the board were trading weak with those from the metal, oil and gas and IT spaces leading the losses. Mid and smallcap stocks were under pressure as well with their representative indices trading lower by about 1% each. As for markets in Asia, they ended the day on a mixed note; while European indices were trading firm at the time of writing.

Today's investing mantra
"Wide diversification is only required when investors do not understand what they are doing."- Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit.

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1 Responses to "Can Indian stock markets survive these risks in 2015?"


Dec 23, 2014

The low crude price is a real blessing for India dependent for over 75 to 80% of its need on imports. We need to create enough storage and create a Fuel Security (like Food Security) to take care of atleast six months to one year requirements. This will enable Indian economy to remain stable and in the event of any flare-up in intl.price for reasons beyond our control will act as a solid cushion.Procurement should be done in a regulated manner to achieve an average price of around U.S.dollar 45-50 per barrel.It is now time for hard bargain. Yes a Housing Price Crash must happen as the prices have become highly exorbitant and the Builders are squeezing the needy. Would not be surprised if the price crash by over 30 to 50%. This will create lot of demands and the industry will still thrive. All bottlenecks must be ironed out for the Builders if they agree to reduce the prices by 40 to 50%. FSI for Suburbs must be raised to around 4. No FSI increase should be allowed in Metropolitan Main City area to enable population to shift outskirts. Indian Stock Market should reasonably do well giving an average 15% return in next 2-3 years in large cap and 20-30% in midcaps.

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