Let’s take a quick look at what’s happening and the outlook for the medium term:
US economy is doing well. We have been saying this since early 2012. The last 4 years there has been enormous amount of credit in the system because of central banks easy monetary policies. The QE (Quantitative Easing) has pushed the prices of asset classes including those in emerging markets. Those who have invested are bound to take profits. Brazil, India, Indonesia, Turkey have all corrected and bond yields have started rising. The Sep 18th Fed meeting will have a formal communication and it will say how much will be withdrawn and the timeline will be given. The extra liquidity will be withdrawn from Sep to the next one year. Key dates to watch out Sept 17th and Sept 18th. Do refer our earlier views on US http://bit.ly/19Flh6c
Indian economy has more self-driven problems. Fiscal deficit, High Inflation and Current Account Deficit are concerns.Currency is likely to weaken by another 2 or 3 rupees.
Don’t expect a rate cut in the next 2 months. If currency depreciates further, money conditions will be tighter. Next 2 months, the bond yield might move beyond 9%. Short term rates to remain elevated. Market liquidity has reduced significantly in the last 2 months.
Do check with us about debt opportunities. In this time period, intermediate rallies can come and may not last long. General trend of higher interest rates and weak rupee will continue.
High inflation, high oil prices which is not passed on to consumer might hurt corporates and this might push the rating agencies to downgrade. The estimate is now down to 4.5 to 5% on the growth front. Earnings of large companies are now at 7 to 8% and may be lower. The market forward p/e (Price to Earnings) is now at 13. If markets fall another 5%,it might be a great opportunity to buy.
Now is the time to allocate more to equities, as long as one has a proper asset allocation according to his/her financial plan. If you don’t have a financial plan yet, please contact us.
By the time we get to middle of next year, one major event of elections and policy announcement can change the scene.
Reduction of tapering or reliable QE might also happen in 2014. Probability exists. This might again have a rally in world markets.One year from now the economic conditions will be much better.
Once again step back from the noise around and look into long term prospects. Happy Investing!