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Essence of the Week
Feb 12, 2018 | Source: AxisDirect
Global markets have been struck by the possibility that the US and other major economies may well be into a serious expansionary phase. According to the NBER (National Bureau of Economic Research), an institution that is in-charge of recording business cycles, the previous trough in the US economy was June 2009. We are about 8.5 years from the point today. This could very well be the end of cheap money as global central banks begin to withdraw their extraordinary stimulus. An immediate assessment of this move is that risk free interest rates harden, prompting the equity market to consider re-pricing assets under higher hurdle rates.
In the Indian market context, risk free rates have jumped, but for a different reason. Not because of sharper underlying growth, but due to inflation and fiscal crowding out concerns. But, same impact on equity markets.
Fortunately, the RBI took a measured approach in assessing the future outcome of growth & inflation risks. It’s guidance of “the nascent recovery needs to be carefully nurtured” showed that the central bank is not preparing for rate hikes and will decide based on inflation outcome. A long pause is still on the table, in our view.
The antidote for equity valuations under a rising interest rate scenario is improvement in earnings momentum. There are some signs of this happening, although we approach these results with caution owing to sequential momentum helped by post-GST inventory rebuilding and low base effect caused by demonetization last year.
Due to a busy calendar of elections in India, macro benefits are limited. They could worsen at the margin, but not deteriorate terribly. Micro-plays and bottom-up ideas are most likely to pay off.
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Essence of the Week