Thanks to European Central Bank (ECB) president Mario Draghi signalling a further easing—and the Bank of Japan likely to follow suit—both global stocks as well as oil got a lease of life after several weeks of being beaten down. But those looking at it as bulls getting the better of bears would do well to keep their hopes in check. China may not have a recession as Morgan Stanley’s Ruchir Sharma has been forecasting, but there is a serious slowdown and $600 billion has flowed out of its markets in just the past six months, making it that much more unstable. Despite the Fed raising rates, US growth looks iffy—that is why stocks are down a fourth over their highs in the last 12 months.
Indeed, one of the reasons for last week’s rally is the view that the Fed may go slow in raising rates. The IMF’s latest growth forecast for 2016 is almost the same, of 2.5%, as 2015 and it is difficult to see how growth can accelerate in a slowing world, more so as the dollar gets stronger —that, in turn, would reduce the ECB’s need to stimulate further since European exports would pick up as a result. And, to the extent that oversupply as well as constrained demand cause oil to fall further, FII flows will slow across the world as sovereign wealth funds of oil-rich countries get strapped for cash—oil has fallen 17% in the first three weeks of 2016 and around 38% in the last three months.
The result of lower global liquidity and slowing growth in India, of course, is why Marc Faber of the Gloom, Boom & Doom report fame is looking at the possibility of the Sensex hitting 20,000, which is another 17-18% fall in a market that has already fallen 11% over the past three months. Poor demand has meant that, for instance, in the Kotak Institutional Equities universe, PAT fell from Rs 91,400 crore in the September 2014 quarter to Rs 84,300 crore a year later. For the BSE-30, as a result, Kotak has reduced its FY16 earnings per share (EPS) from Rs 1,714 in February 2014 to Rs 1,404 in November 2015. Poor demand also means capacity utilisation is at around 2009 levels.
The poor financials of India Inc also prevent a meaningful rebound in investment levels—add to this a real rate of interest of upwards of 12% for India Inc, and there is no reason to invest anytime soon. Talk of stepping up government and PSU investment to take up the slack can be discounted. Apart from the fact that FY17 will be a tough year without FY16’s oil bonanza and with the Pay Commission and bank recapitalisation to fund, while government (including PSU) investment levels rose from 7.4% of GDP in FY12 to 7.8% in FY14, that by the private sector fell from 26.2% 22%—in other words, that’s a gap that won’t be easy to bridge. India’s best bet is to accept a slower 6.5-7% growth for a few years and use the time to clean up India Inc and the banks’ balance-sheets to prepare for the next wave of growth.