The question that everyone is asking about 2015 - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The question that everyone is asking about 2015 

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In this issue:
» The US companies loading up on their own shares
» A new process for PSU divestments?
» Demand for bank loans slows to a crawl
» ...and more!


00:00
If there's one question about the macro economy that perhaps gets asked the most often the world over, it is - what will the central banks do next?

We know that answering such a question is fraught with danger. Situations within any economy are very fluid. Put this in the background of an ever changing global landscape, and any prediction about what a given central bank is going to do next has a very high chance of falling flat on its face.

Nonetheless, this remains a question that often arises in investors' minds. So as 2014 draws to a close, we shall hazard trying and giving you a glimpse of what you can expect from various central banks in 2015.

The biggest joker in the pack is the oil and other commodity exporting countries, some of which have seen major deterioration in their macroeconomic vitals towards the end of the year. Countries like Russia, Brazil, South Africa and Indonesia have seen their currencies crumble. In fact, Russia now faces the prospect of downgrading of its credit rating to junk, which may lead to a further flight of capital. So central banks in such countries are likely to remain caught in the conundrum of needing to decrease rates to avert a recession on the one hand, and having to increase rates to support the currency on the other.

The direction of policy making in countries like Europe and China seems clearer. Both these economies are seeing distinct signs of weakness. The consensus is that the European Central Bank (ECB) will move towards some form of quantitative easing next year. China too may move towards bringing down its interest rates.

As for the US, the country is indeed on a high after it saw its GDP grow at 5% YoY in the September quarter, which happens to be the strongest in a decade. So an exit from the abnormally low interest rate regime seems quite likely in 2015. As and when the US Fed actually announces a rate hike, the Indian stock market may very well see some volatility in the coming year.

Coming to India, with inflation down and the current account deficit situation more or less under control, 2015 may finally see the much awaited cut in interest rates by the RBI. Further, if commodity prices remain benign and there is acceleration in the pace of reforms by the government, the coming year might just end up being the year that kick starts the capex cycle. And the year that India finds itself in a sweet spot!

Do you think 2015 will see RBI cut rates and the capex cycle getting kick started? Let us know your comments or share your views in the Equitymaster Club.

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02:28   Chart of the day
Talking about macro-economic policies, the rise in share buybacks in the US in 2014 is just another indicator of how the US Fed's loose policies have only been creating excess money without lending any fillip to growth. Now, a share buyback is a sound policy when companies have a lot of cash on their books and want shareholders to benefit from this. Along with higher dividend payouts, share buyback is typically considered to be a healthy option as opposed to utilizing cash flows towards acquisitions and mergers that may provide no value going forward.

But looking at what we are seeing in the US, there is a darker side to the share buyback story. The rationale behind the US Fed's easy money policy was to spur growth and consumption. But for growth to take place, there has to be sufficient investment in capex and other productive purposes. This is hardly happening. The low interest rate regime of the Fed has led many corporations to take on higher debt levels, a significant part of which has gone towards financial engineering - for instance, towards buybacks - in recent times. In other words, rather than utilize the cash towards capex and investment, which can spur growth, it is being used towards share buybacks. This in turn only highlights that the cash for share buybacks has been the product of the Fed's easy money policies and not because of healthy business operations.

Do these buy backs indicate that US is on the mend?


03:29
The disinvestment programme has been an important one for both the erstwhile UPA government as well as the current Modi government for helping reduce India's widening fiscal deficit. Beset by a host of problems, the UPA government was not able to meet most of the targets it had set for itself in this regard. The Modi government, on the other hand, is looking to put in place a new process. As reported in the Business Standard, the new process will start with a multi-year rolling disinvestment list that will rely on cutting the time taken in regulatory processes. This is to ensure market bears do not bring down the share prices of PSUs up for divestment. Plans on the anvil also include introducing issues throughout the year as opposed to the practice of coming up with stake sales in the second half of the financial year.

The whole idea of this process appears to cut down the time taken by regulatory approvals. At present, once the disinvestment in any PSU becomes public knowledge, it takes around 3-4 months for the issue to finally hit the market. The government is looking to bring this down to 1 month and thereby discourage market participants from bringing the share prices of those PSUs down.

While the idea to cut down on time lines seems like a step in the right direction, whether these stake sales will be successful will all depend on the fundamental business strength of those PSUs and the valuations at which the stake sales are taking place. The price at which a particular PSU is trading at the time of divestment by itself will have no value. If the valuations are expensive or the business fundamentals poor, the smart investor will not touch these companies with a ten-foot pole.

04:15
While PSU divestments may get smoother, what seems to have gotten difficult in recent months is to be able to sell a bank loan. As per reports, the growth in demand for bank loans in the first 9 months of FY15 has fallen to its lowest since 1998! Credit growth during this period has slowed to a crawl, or just 2.68% to be more precise. This seems to be a grim reminder of just how low investments in capital expenditure and large projects have fallen to. So while sentiment has picked up, things on the ground have not quite.

But just like a coin has two sides, the flip side to this might just be that things are indeed bottoming out. And the fact that business sentiment has already picked up is indeed a very important sign. For only when business sentiment picks up do investments follow. So yes, while things may have been rough these past couple of years, the worst might just be behind us.

04:45
In the meanwhile, Indian Indices had a volatile trading session today as they hovered around the dotted line. At the time of writing, the BSE-Sensex was trading lower by about 42 points. While stocks from the FMCG and auto spaces were leading the losses, those from the metal and IT sectors found favour. Mid and smallcap stocks were under pressure as well with their representative indices trading flat. As for markets in Asia, most ended the day on a firm note; while European indices were trading mixed at the time of writing.

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

Equitymaster requests your view! Post a comment on "The question that everyone is asking about 2015". Click here!

2 Responses to "The question that everyone is asking about 2015"

chandran

Dec 27, 2014

RBI may cut rates .But the point is , with financial savings low , unlikely to pick up fast .Embedded inflation & growth oppurtinities taking time , 2015 may not be great year in term of stock valuation

Like 

rajesh sharma

Dec 26, 2014

in my openion, the rates of intrest will not come down more than 75 basis point.

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Equitymaster requests your view! Post a comment on "The question that everyone is asking about 2015". Click here!

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