Stock Markets: Beyond Reality Check.

The markets the world over have divorced from reality. It is true about USA, Europe, and Japan; where Quantitative Easing [QE} in first and last named has created vast pools of liquidity with nothing ‘tangible’ to chase, and EU is trading on that path from this month. This is what JP Morgan has to say about India and Thailand among the so called ‘Emerging Markets’.

Indian equity markets are not vulnerable to earnings cuts: JPMorganThe brokerage said that the divergence between the market performance and corporate earnings could continue in the near termIt said that India’s December quarter earnings disappointment belies market rally and the GDP growth, adding that India and Thailand are suffering the worst EPS cuts in emerging market Asia.

In plain English it means that while companies’ earnings [EPS] are diving southwards, their stock valuations [PE Multiples] are soaring northwards. Then it helpfully adds a little dose of history:

The brokerage said that such divergence were seen for four quarters each over 2007-08…..

Wait a minute, that year looks ominously familiar. Wasn’t it the start of “Great Recession” and Financial Meltdown? That is when Federal Reserve started on the “Easy Money” policy of Zero or Near Zero Interest Rate policy[ZIRP] to make money CHEAP and QE to make money PLENTIFUL. This was supposed to Kickstart Growth and pull the global economy out of great recession. While Federal Reserve has taken a ‘momentary’ rest-pause; Japan [BOJ], EU [ECB] are headlong into their own monetary expansion to Kickstart the global economy. Aha! When Fed takes time off on the bench after much hard ‘kicking the can’ around with no visible change, BOJ and ECB have to step in.  With no or anaemic growth in the developed world, the Easy-Money is chasing, what JP Morgan has in effect said are ‘mirages’ in, the Emerging Markets [EM] and driving PE valuations into delusional realms. Finally, it adds a caveat even to this delusion.

It said that the key vulnerability to Indian equities remains any potential dislocation in global financial markets.

The global financial markets are staring helplessly into inevitable ‘dislocation’, because Central Bankers are clueless about what to do after QE has failed to produce any tangible results. But that should hardly deter them. Like the medieval physicians of Europe, they can do more ‘blood-letting’ when earlier blood-letting ‘inexplicably’ made the patient worse rather than better. Here is an update from the high priest of Financialization, Goldman Sachs.
What is the GLI: The Global Leading Indicator (GLI) is a Goldman Sachs proprietary indicator that is meant to provide an early signal of the global industrial cycle on a monthly basis. There is an Advanced reading for each month, released mid-month, followed by the Final reading, released on the first business day of the following month.

And what does the ‘proprietary indicator’ portend.

(GLI) final print for February affirms the global economy has entered a contraction with accelerating negative growth. Just six months after “expansion”, the Goldman Swirlogram has collapsed into “contraction” with monthly revisions notably ugly and 9 out of 10 components declining in February.

But does GLI as a predictor has good fit with Global Industrial Production [GIP]?
Isn’t Modi’s India a contrarion bright spot in an otherwise dismal world? That is what some market analysts seem to ‘wish’.

See Nifty @ 11500 by year-end; like IndusInd Bk: CK Narayan.

Mkt to rally regardless of Budget; +ve on cyclicals: Udayan

But, if wishes were horses!!
In sharp contrast to the buoyancy that is implicit in 1Q15’s manufacturing’s advance growth estimate (which is pegged at 10.6% oya!) under the new GDP series (which has been greeted with much skepticism) the manufacturing PMI declined for a second successive month and, in fact, dipped sharply by 1.7 points to 51.2 – the lowest in five months.
Both output and new orders fell very sharply (by 2.8 and 2.5 points respectively). The good news is that the sharp drop in new export orders last month was arrested and, in fact, new export orders ticked up slightly (from 54.9 to 55.1). What this reveals, however, is that the weakness in demand was mainly domestic. This is surprising given the purchasing power lift that should have been provided by lower food and oil prices. However, this has likely been more than offset by the slump that the rural economy finds itself in and the weakness in the capex cycle. As a consequence of all this, the new orders/inventory ratio ticked declined to an 8 month low of 1.02 from 1.08 in January. – JP Morgan. 
There was no increase in consumption because there was no increase in disposable income; while prices ‘fell’ the rural incomes fell too. But rural economy now forms less than 20% of India’s GDP and therefore rural slump cannot explain away fully or substantially the slump in demand. Unless, here, the talk is of subsistence-consumption because even now over 50% are still employed in agriculture. But that doesn’t seem to be the case because here the slump in demand is mentioned in the context of weakening industrial activity. On the other hand, the weakness in Capex Cycle has been a long term trend persisting for some years in India and therefore it is a misleading explanation for the slump in February demand. The core sector growth in January too is exhibiting this weakness.
While Crude and Natural Gas are actually in negative territory, except Fertilisers and REF-PDTS, rest have shown declining growth. That’s why Budget-2015’s emphasis on Infrastructure development was to be expected. But in the absence of recovery in global markets and increased volatility due to ensuing panic, dreams of attracting FDI into India’s infrastructure is likely to remain a pipe dream. Capital expenditure doesn’t gather pace when outlook is uncertain; isn’t it? Would domestic Capex materialise to bridge the gap? The January numbers do not inspire that confidence. But then union budget of 28 February couldn’t have informed January numbers. So, let us clutch at whatever straws that fly our way.
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