Posts Tagged ‘Eurozone


Happy New Year..

Happy New Year to everyone. Hope 2012 brings in some sanity in equity markets after 2nd worst performing year in last two decades. Last year brought in lot of negatives from Euro zone countries and more so from our own government. India’s fiscal deficit for current financial year is all set to exceed its budgeted estimates of 4.6%. But 2011 has been such a bad year that 2012 might turn out to be positive year for equities. ECB might finally relent and buy european countries bonds in a big way. Expectations are also so low from Indian government that some action on reform front might act as signal and trigger decent rally.

One of the biggest positive that almost everyone is negative on markets and it always happens that market surprises everyone on opposite side. I remember in 2011 also lot of analysts used to say second half of the year should turn out to be better than first half. In fact, markets went into tailspin in second half. For 2012 also there are similar kind of predictions that 1st quarter will be bad and later part of year should be better. I made money in 2011 by selling OTM calls, but selective stocks and market in general has come down to such levels that I am little bit cautious on selling calls now.


Poor IIP figure..

Newspaper headline news across India yesterday were about decline in India’s Industrial Output (IIP). October decline in IIP is the first contraction since June 2009. Capital goods, Mining and Manufacturing output declined from last year. Capital goods decline at 25.5 percent was the most dramatic. IIP figures have been erratic and most of the analyst don’t even trust it. But if we take moving average of IIP, it does show general slowdown in economy. There is widespread pessimism among investors due to policy inaction from government. Stock markets and Rupee fell sharply yesterday after poor IIP figures. Selling in markets got accentuated after EU zone downgrade fears from Moody’s.

I have been negative on markets for quite some time. I was not completely sure if Euro zone summit will resolve this EU debt crises. Fiscal union formation is positive, but in the short-term only ECB intervention in a big way can stem the downside. Either way EU countries will be downgraded, if EU summit wouldn’t have produced any result on fiscal union then they would have been downgraded, now that they have done it and imposed strict austerity measures on suffering countries, on account of growth concerns they will be downgraded. Anyways Euro zone is in a recession and will deepen further during first half next year. I am not even sure if this fiscal union will take shape and all core 17 parliaments would pass it. Even if all core 17 countries are able to pass, there would be a lot of discontent about losing fiscal autonomy. What if in country like Greece, new government comes into power after elections and under public pressure they decide to opt out of Euro zone. Already there are a lot of protests across streets of worst hit Euro countries. It has to be understood that there is a lot of difference among various Euro zone countries. German Industry is highly competitive, whereas lot of countries are not and if they don’t have fiscal and monetary autonomy to maneuver, it would be very difficult to come out of recession. Lot of analyst have pointed that Euro present levels 1.33-1.34 is also overvalued and it should come down. It has happened in last few days and Euro currently is closer to 1.3 levels. In the meantime Rupee tracking Euro and widening current account deficit of India has touched it’s all time low at 53.52 versus dollar.

Concerns on Euro zone and more so growth concerns in India will make sharp rise in Indian market very difficult in near future. I have sold quite a bit of Nifty OTM calls. I don’t expect RBI to cut CRR in its 16th December meet.


INR Outlook..

INR depreciated sharply in the last few weeks and INR spot even touched 49.88 intra-day. Lot of market players were caught off guard with this sharp down move. More than fundamental factors, sharp move had to do more with technical factors. Across the board there was EM currencies long unwinding. Importers and FII’s had unhedged positions in INR and this up-move led to panic among participants. Exporters had already sold off large part of their USD earnings at 45-46 levels, so there was no USD selling at higher levels. It took dollar selling by RBI at 49.8 levels to arrest the sharp slide. Although intervention by RBI was not large (closer to USD 500 m), but it had sentimental impact and Rupee recovered to 48.9 levels.

In the short-term, everything depends on Euro-zone resolution. INR is taking cues from Euro movement. I am not very optimistic on Euro zone resolution. It’s a case of economies having slow or zero growth with high debt levels. But once panic settles down, INR should provide good returns. I will slowly start building positions in Indian currency. If there is capitulation over Euro crises, Rupee can go below March 2009 lows of 52-53. It will be dream levels to go long into Indian currency. If there is capitulation, then commodities along with all asset classes will go down substantially. This will help bring down inflation concerns and pause by RBI, may be cut in interest rates later next year. This will build good case for Indian equities and INR in turn.

February 2019
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