Not reforms, it’s the global liquidity lift, stupid!

Monday, 21 January 2013 - 6:05am IST Updated: Monday, 21 January 2013 - 1:05pm IST | Agency: DNA
Half of the $24.5 billion that foreign investors poured into India in 2012 had little to do with reforms — $12 billion had already come in by August, when reforms were still on the backburner.

Yes, risk appetite is back, and how.

Let me explain. Bonds of Greece, the worst economy in Europe, returned 80% to investors last year, while those of Germany, the strongest, gave 4%. Even Spain, reeling under humongous debt, did better, returning 6-8%. Clearly , risk-prone investors couldn’t care less about the state of economies. One more example: Half of the $24.5 billion that foreign investors poured into India in 2012 had little to do with reforms — $12 billion had already come in by August, when reforms were still on the backburner. The point is, like a moth to the flame, risky markets always draw excess global liquidity, so India will continue to benefit this year, too. And excess liquidity it will be, for a while. Here’s why:

With British prime minister David Cameron eyeing another term, the quantitative easing programme in the UK, capped currently at €375 billion, will most likely get a leg-up.If LTROs (or Long-Term Refinance Operations) saved Europe the blushes last year, OMTs, or outright monetary transactions by the European Central Bank (ECB) will further encourage risk takers in 2013. With general elections in Germany in September this year and France expected to be in recession, the buzz-phrase is a no-brainer: “austerity be damned”. German Chancellor Angela Merkel and the troika (the International Monetary Fund, European Union and ECB) will go chin-up but keep the liquidity taps wide open.The US Federal Reserve will continue to buy $85 billion of government treasuries and mortgage-backed securities month after month. It’s unlikely to stop till unemployment retracts to the long-term trend of 6% from 7.8% now.

All of which would be vindication of the huge global liquidity surge, culminating in asset inflation — Indian equities included.

Japanese Prime Minister Shinzo Abe has already launched a 10 trillion yen ($117 billion) liquidity offensive, and don’t be surprised if his newly minted Chinese counterpart Xi Jinping follows suit and further reduces reserve requirements in 2013 from the current 20%, to breathe life into the Chinese economy, struggling with a sub-8% growth.

Every 50 basis point cut in Chinese reserve requirements infuses 400 billion yuan ($64 billion) into the Chinese monetary system, which, through a benign money multiplier effect, finds home in everything that’s risky, right from the Korean won and Filipino peso to Indian equities — all of which, in turn, had a brilliant run in 2012.

Believe me, the best’s yet to come.

I have always maintained stock markets are a lead, not a lag indicator. They mirror what and how the economy will do a few months down the road.

True, talk of emerging green shoots on the macro front is debatable with exports de-growing 1.9% last month and IIP number for November de-growing 0.1%, not to mention the current account deficit of 5.4% for the September quarter — indicative of deteriorating external trade and continuing rupee volatility.

That’s despite the RBI selling dollars worth $921 million in November 2012 alone.

The capital goods segment has de-grown 11% for the April-November period and domestic auto sales were up a mere 4.57% in April-December.

But amidst the sluggishness, what provides succour is wholesale inflation at 7.18% for December and, more importantly, core inflation (ex-food & energy) at 4.2%.

They signal falling sovereign bond yields, which I believe should settle at benign levels of 7% or even lower in the next few months. That will set the stage for the next phase of a meaningful bull run.

Sanju Verma is managing director and CEO, Violet Arch Group


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