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News Analysis


31/12/2012
Many factors affecting Indian and global economy point to reversal of bearish phase in our opinion. Let us look at them one by one. EARNINGS EXPANSION: Indian financial market SENSEX of 19,445 at current PE of 17.53 appears fairly valued and absorbs all negative news and bottoming out of economic activities. Further, continued success of political leadership of Narendra Modi in Gujarat also plays a strong role in current NDA government’s stance for placing a better-than-expected budget in February 2013. It is expected that pro-business and pro-consumer budget in coming months lead to higher economic activities and better business earnings for many sectors of the economy. This eventually will lead to new highs for Sensex and Nifty in 2013. US FISCAL CLIFF: US fed in its continued policy of adding liquidity to US market has resulted in giving boom to commodities market for last few years. Despite economic doldrums, re-election of democratic candidate Barack Obama as US president represents US citizens’ continued faith in fiscal governance and democratic policies leading to US economic survival. US fiscal cliff as popularly known is characterized by two facts a) US government spending cuts and b) Increased taxes. Obama has proposed spending cuts along with new taxes by virtue of increased payroll taxes, income taxes on wealthy Americans earning $250,000 and above, inheritance taxes and so on while republican led Bush-proposed tax benefits expire. So, what’s the impact in terms of numbers? Spending cuts - $109 Billion and Tax increases - $536 Billion. August 2012 estimate of US Center on Budget and Policy Priorities indicates that economic downturn and legacy of Bush policies has driven record US deficit. At the same time, projected deficit of nearly $1 Trillion in 2013 will continue to reduce under current democratic policies until 2016 while improving US economy. Reviewing some of the bail-outs carried out by US government in the past decades (whether in Bull or Bear market), the impact of US fiscal cliff appears miniscule. Any sell-off reaction by Wall-street traders in absence or delay of reaching an agreement would be too premature and far-fetched. CURRENCY ARBITRAGE: As per SEBI, FII poured sizeable money (Rs.1,23,540 Cr.) in 2012 whereas retail investors have stayed away from Mutual Funds investment largely between 2011 and 2012 contributing to sagging performance of equity mutual funds. While US has tried to keep US$ strong against many global currencies, it has benefited FIIs in its capital flight to better performing economies of the world including India. At the rate hovering above 54 rupees to a US$, it certainly reminds us of repeat of December 2011 after which Nifty performed better than 25% returns. Mihir Sandesara – www.money-maker.co.in


Source : US Center on Budget and Policy Priorities