Friday, 23 March 2012

Dark clouds on the economic horizon

Let me make a confession. The last few years I have not read a single pre-budget article nor watched any pre-budget shows on TV. I have shied away from these as I have seen that the budget has been hyped up by the TRP/ratings hungry media into something which it is not. So, inevitably the budget disappoints and after a couple of days people forget about it completely.

This time looking at the macro economic scenario after the budget, I see two dark clouds on the horizon. The first is the huge market borrowing planned by the central government to the tune of 5.8 lakh crore. The second is the rupee depreciation.

The net impact of the huge government borrowing would mean that the interest rate is unlikely to come down in the near term. Even if it does, it will not be more than 0.5% to maximum of 1.0%. It will also make corporate borrowing more difficult and may push more and more companies towards ECB (external commercial borrowing). Both of this is likely to be a major dampener for corporate earnings growth.

FII net inflows into India in 2012 has been $7.16 billion as per SEBI. To put that in perspective, the FII net outflow in 2011 was $358 million. However, in the euphoria of such large doses of FII liquidity, an important point is being missed. The fact is that even with this huge inflow, the rupee has not appreciated at all. In fact, it continues to hover around the Rs 50 mark with respect to the US dollar. This means if the FII inflows weaken, the rupee can take another dive towards the 55-57 to the dollar mark.

Macro economic forecasting is a fool's endeavour and I engage only to amuse myself :-) Sometimes, though it can give some insights into the headwinds and tailwinds of the economy. At this time, I am a little bit more skeptical than six months back on the immediate economic future. I think I will have to relook at those stocks which have high FCCB/ECB borrowings and maybe shed some weight there. Good buying opportunities may be there in export oriented companies.

2 comments:

  1. Hi Abhishek,

    You are correct to a large extent. The large govt borrowing program will put pressure on interest rates. However, any recovery in the tax collections will provide relief to the govt and coupled with current tight liquidity, may encourage fast track reduction of interest rates. It's not a great time to be into debt heavy company but the negative seem factored into the price. some of these could grow their profits multifold with 2% reduction in interest rate.

    ReplyDelete
    Replies
    1. I agree and that is the beauty of being leveraged. When the market turns in our favour, gains can be outsized.

      Delete

Learning from Security Analysis - Part 1

I have started re-reading Security Analysis, 6th edition, (also will add on things from the 5th ed). I have been putting it on the backburn...