In the crossfire

Currency crosswinds due to liquidity injection and withdrawal and differing interest rate policies are complicating stock selection

By Mohan Sule
Those who were disappointed that the Union Budget 2015-16 did not produce a Big Bang will find plenty of fodder in the new fiscal to stock up the cannon. The moot question is whether the explosions will light up the landscape or trigger a bush fire. The era of a market throwing up only gainers, with all the stocks across the spectrum turning gold, during a bull phase is perhaps past us. This is because of crosscurrents of monetary policies as each region struggles to tailor the environment to suit local requirement. Even as the US Federal Reserve phased out its bond-buying and is poised to increase interest rates on signs of a recovering economy, the European Central Bank has embarked on a euro1-trillion liquidity infusion to revive confidence in the euro region. China, too, is expected to follow Japan’s example of loose money policy to stem the slowing of its GDP growth. India is on the path of low interest rates and massive infrastructure spending. Unfortunately, the fallout is not confined to the borders. The ripples are felt across the globe in differing magnitude. A prominent casualty of the declining consumption of energy by the euro zone and China is crude oil, which slide below US$50 a barrel at one point. Instead of cheering, most developed countries are worried how to stop the spiral of disinflation. The fallout is a slippery gold, a comfort investment to fend off inflation.

Withdrawal of foreign funds from the emerging markets when yields on US bonds become more attractive than dollar returns from equities could be a blessing as stocks cool down and the rupee weakens. For the Reserve Bank of India, however, this is a recipe for disaster: how to shore up the currency and at the same time keep interest rates low to keep the liquidity tap open. A strong dollar is a prominent manifestation of the complex global scenario. Nothing seems to soften the Teflon currency, even fears of recession in its home market. On the contrary, signs of uncertainty boost the greenback for its safe haven status. The mighty dollar is neutralizing the slide in oil prices for emerging markets. The net result is that neither fuel prices have fallen to the level they should have nor are the wobbly export markets bringing relief. Not surprisingly, the RBI is under increasing pressure to reduce interest rates and thereby let the rupee depreciate further to provide the winning edge to Indian exporters. The prevailing uncertainty has not dampened global markets, which are hitting highs in the belief that the problems in different corners of the world are not insurmountable. After the success of the US Fed, pump-priming is viewed as a solution to all economic ills. This is in contrast to the view last century, when distressed borrowers were bluntly told by multilateral institutions to tighten their belts. The rebellion by Greece and the cold caught by markets around the world subsequently has reconfirmed the premise that the penalty for splurging is injecting more money rather than imposition of fiscal discipline though it was living beyond means that was responsible for the mess in the euro zone.

If the inflows from the US slow down, the floodgates of the euro zone have been thrown open. If China is no longer attractive, there is India, despite no noticeable ground level change in the ease of doing business. The drumbeats heralding the country as the next financial hotspot has already begun, with the ADB and the IMF joining the chorus of various foreign brokers and rating agencies in revising up the growth forecast. Yet no one has been able to assert with any degree of finality that not only foreign money will stay but the inflows will continue in spite of the ramping up of interest rates by the US. As a result, tech stocks roar every time a Fed official reiterates sticking to its roadmap of hiking interest rates from June and falter on weak US job data. In the same way, banks and auto shares’ fortunes fluctuate with the unpredictable consumer price index as the RBI takes one slow step at a time to slash domestic rates. Evergreen FMCG scrips are no longer oases, wilting and blooming with the monsoon’s mood. Pharmaceutical stocks’ health depends on US regulatory approvals and crackdowns. Power and capital goods counters with plenty of potential are yet to share the enthusiasm for Make-in-India due to the overbearing public sector’s influence on their orders and bottom lines but cement companies, projected to be the beneficiaries of government-sponsored low-cost housing and infrastructure projects, race ahead of earnings. No wonder the market is looking like a game of Russian roulette more and more.