Beware Of The Noise

We are well into the last quarter of this fiscal. Throughout the year so far, beginning with the budget, a lot has been said about the government being determined in putting its fiscal state in order. We have spent almost three quarters battling on various fronts without any noticeable change in the fundamentals. In fact, the fundamentals have further weakened adding to the pressures of an already tottering economy. GDP growth has hit a nadir in comparison to what it was just a couple of years ago.

But our policy makers continue to be super confident of their capability of turning around things for the economy, no matter how short a time frame they have for doing it. In August 2013, the Finance Minister, P Chidambaram had vowed to restrict the Current Account Deficit (CAD) to 3.7 per cent of the GDP. That was USD 70 billion. He expected a “full and safe” financing of the CAD to stem the slide of the rupee against the dollar. All of us know what happened thereafter. The rupee did come down to some sensible levels thereafter, but has not been able to stabilise as such.

While many factors continue to remain beyond comfortable levels including inflation, the CAD and now the again threatening depreciation of the rupee, our Finance Minister continues to be bullish on the capability of the economy to turn around corners. The target for the CAD was further brought down to USD 60 billion by the Finance Minister. The big talk and puffed up optimism is not just about CAD. Even on the GDP growth front the FM has been pretty enthusiastic. Right from challenging the IMF’s growth projection (3.6 per cent for the fiscal) and asking it to review its methodology and questioning the credibility of its surveillance activities to confidently stating that we could be growing at more than five per cent this fiscal, the FM has been putting up quite a brave face, oblivious of the magnitude of the task at hand. 

The case with the RBI governor is not really very different. In fact, his ambitions are one step ahead of the FM. By saying that the CAD will come in well below even what the FM had pegged it to be and assuring the markets that the rupees slide was well under control, Dr Rajan has actually managed to cool some frayed nerves.

As they say, it’s far easier said than done. There is not an iota of clarity on whether CAD can really come down to the levels that both of these gentlemen have been talking about, or, for that matter the GDP growth to come up to levels of more than five per cent. But every positive yap about an improvement in the economic factors substantially props up the markets. This is dangerous. 

The markets are dancing to the tune of a changing environment and the environment is changing almost on a daily basis. Market action over the past one month or so has been extremely volatile, primarily because factors that support its rise have ebbed considerably in degree of visibility while on the other hand those that threaten its sentiment have raised their heads yet again. So, you had the rupee moving up to levels which were clearly making it uncomfortable, while all other factors almost maintained a status quo. The usual threat of the US tapering its bond buying continued to come and go.

The point is, all these factors are only acting on the nerves of the market and not on its fundamentals. There has been no change in the basic character of the market which can decisively take it in any particular direction. However, the market will always seek to find direction in something or the other. This is more so from the short-term point of view and there are many factors that can drive the markets over the shorter term.

The biggest and the most important factor will be the state elections which have kicked off. Madhya Pradesh went to vote early last week and the pattern that emerges out there could well set the tone for May 2014. December will begin with the results trickling in and that will certainly be a point from where the markets will begin looking for a new course. Until then, it would be fair enough to explicitly caution investors on avoiding over-risking their money in the markets.

This issue of the magazine covers a lot of pertinent factors that have a bearing on how the markets are likely to pan out in the near future. Right from suggesting why you shouldn’t really read too much into the Federal Reserve’s noise of ‘tapering’ to a special feature on the small cap companies including SMEs, read is meant to help our readers take some informed investment decisions going forward. Happy reading!