2014 looks trickier than 2013

2013 has been one of the most confounding years I have seen in the stock market. No trade has had a shelf life of more than a few months. Between March and May 2013, we saw banks as being ripe for a massive fall due to a variety of reasons. It happened with perhaps even greater intensity than we had imagined, with prices of many banks falling 50% in just a couple of months. And with similar ease, the fall in banks reversed almost overnight.

Likewise, the rupee was headed for levels beyond 70-80 against the greenback in August, at least going by Wall Street brokerage reports (who takes them seriously, except commerce minister Anand Sharma?). And now, we hear of reports that tell us that the rupee is going to touch 55.

For India, 2014 will be a tumultuous year politically. Contrary to what the stock market wants to believe, it is my belief that the most likely formation at the Centre will be a third front government with Congress support. That may not be to the market’s liking and it will be an absolute tragedy if the United Progressive Alliance (UPA) is voted out of power, since it has done for India in the past 10 years what few nations have managed to achieve: high economic growth with sharp lower national debt ratios. Bear in mind that this has been achieved in perhaps the most economically troubled times in the history of the world. It is beyond me why folks in the investment business simply rely on over-simplified, under-analysed perspectives. There are lots of things that can be done in a complex nation like India, but denigrating all that has been achieved by the UPA is being deliberately disingenuous.

Here is a comparison of the data under the National Democratic Alliance (NDA) and UPA governments: The NDA came to power with India’s debt/GDP at 72% in 1999. It left power with India’s debt/GDP soaring to 84% in 2004, while growth was a low 5.6% CAGR. This was the highest debt/GDP in the preceding 20 years and India was precariously close to a debt trap. Under the UPA government, India has grown markedly faster, at 7.7% CAGR, but even more importantly, has done so with the debt/GDP declining from 84% in 2004 to a mere 66% in 2013. This is truly high-quality growth, that is, high growth combined with declining indebtedness.  

India’s growth dynamics under the UPA, despite the recession, has no parallel across the world. India’s interest/budgetary receipts declined from 50%-plus under the NDA to a comfortable 30% under the UPA. It is this very headroom created in the Budget that has been used for poverty reduction programmes, adding 200 million people to the consumption basket.

The truth is that it helps to have economically literate folks running the country. Under the UPA, India’s economic fundamentals have improved immeasurably, on nearly every count. But the strange thing is that nobody looks at data anymore, be it economists or professional fund managers. 

Further, what the UPA has engineered very recently is again a very deft move: we now have a vastly more competitive currency, an improving GDP trend, a current account surplus and very low domestic and foreign indebtedness. Hence, a pretty low-risk economic balance sheet. But clearly, rating agencies also don’t look at data anymore; that is, if they ever did.

So, what we have now is a situation of moderate growth returning to India, but even more importantly, growth generated without the addition of debt. This is in sharp contrast to China’s recent growth uptick, which has again come out of increased lending by banks. But how will the stock market behave?

I, for one, believe that the Fed erred in calling for taper way too soon. The US’ economic fundamentals are still shaky, to say the least, and whatever growth is coming through has a large dose of the quantitative easing (QE) stimulus embedded in it. Hence, it is safe to assume that if the QE is withdrawn, economic growth in the US will slide by 50% or so. It is my view that the US will not start tapering anytime soon. It simply cannot afford to do so.

How will India’s markets behave in 2014? Elections, of course, will be a prime determinant of that. And contrary to the deep desire of local and foreign institutional investors to see a BJP-led government at the Centre, I believe that the most likely situation is a weakened UPA or a third front coalition with Congress support.

While I pay no attention to the stock market’s reaction to Indian politics (in 2004, markets fell about 10% when the BJP lost, and the same markets rose 20% when the UPA came back to power in 2009. Go figure), it is my belief that the market will view the above two formations negatively. 

I continue to remain bearish on the situation of global equities as I look at the global debt data and despair as to how the world can carry on this way: keep piling on debt, keep the current generation happy and leave the future generations to fend for themselves in a growth-less world.

The world has now hit a ceiling of its pump priming capacity. Global majors, from the US to China, are now leveraged to the hilt. How can the world grow without monetary and fiscal fuel? But, then again, how can an over-leveraged world keep supplying this expensive fuel?

Think again: the S&P 500 was around 1,600 in 1999. That level has barely cleared now, nearly 14 years later. This is after trillions of dollars of direct stimulus as well as zero interest rates. What does this tell you about the core strength of global markets?

Emerging markets still look the weakest of all global equity markets and their currencies are also weak (with the exception of India, which, thanks to a current account surplus, now has a reasonably stable currency). Given the challenges still ahead for global growth, as well as for India on the political front, I continue to remain circumspect about stock markets.

In any case, it’s always better to be circumspect about the markets than be a cowboy. Cowboys usually come to a lot of grief in the markets. The Indian retail investor understands this better than most.