The Three Es Investors Need To Watch Going Forward
Playing the game will now be tougher than ever before, even if you are a long-term investor. Most traders are losers with the exception of the seasoned. So, I will limit my monologue to retail investors, long-term or otherwise.
The three Es that we need to focus on: events, earnings and euphoria. The last of the three is the most worrisome as it can blind your vision of the shape of things to come. But more of this later in the narrative. Let me now focus on what I can see and visualise.
Governor Shaktikanta's Dilemma!
The big question in the financial markets is when will the RBI cut rates? October or December? After the 50-basis-point rate cut on Sept. 19 by the US Federal Reserve, almost every major country in Europe and Asia has cut rates. Japan is an exception, but China is aggressively cutting rates. India is caught in the global monetary dynamics as the RBI just doesn't want to budge. No rate cut until inflation comes down. That's been the narrative so far.
What Will Tilt The Balance
Apart from global developments, domestic compulsions will start weighing in. Money is too expensive. Yes, borrowing rates are high and it's simply throttling businesses. If not in October, the RBI is widely expected to cut rates in its December policy. Inflation, notwithstanding!
The Catch
Two factors will make the job tough for the RBI in addition to the inflation problem. One, banks are not getting deposits. Fresh money is going into stock markets either in the form of speculation, mutual funds and direct investments through the booming IPO market.
If the RBI cuts rates, it will only add fuel to fire. Cheap money will further accelerate the shift towards quick money.
For banks, struggling to raise deposits, it will be a nightmare. In an extreme scenario, some small/cooperative banks offering very high deposit rates may even go under.
The One-Week Cycle, The Vicious Cycle!
The game of making fast money has shifted to the IPO market, both mainboard and SMEs. The latter are finding it difficult to borrow from banks at usurious rates. Turn to the IPO market, get big subscriptions and replace debt or use it for working capital.
The cycle of making fast money is about a week. Players move from one IPO to the other. Those lucky get a 20–30% return on an average on the day of listing. The unlucky try their luck with the next IPO. The cycle goes on. My guesstimate: there's about Rs 60,000 crore to Rs 1 lakh crore in this game.
What Will Change
Two factors: Mega IPO rush with very large issues coming to the market. This could be roughly over Rs 1 lakh crore. Hyundai, Swiggy, NSE, NTPC to name a few could suck away most of this money.
Second, when the RBI starts cutting rates, bonds will give better returns. Bond prices go up during a rate cut cycle till they get adjusted over a period of six to nine months.
Can Earnings Keep Pace?
This is a question that has already started coming up and is being examined by every analyst on the street. With Nifty at 26,000, big institutional investors will be very selective in chasing the same set of stocks with valuations at unbelievable levels. The money coming through MFs will slowly shift to other classes. The trend is evident from the large number of multi-asset funds. Mutual funds are discouraging investors from pouring money into small and mid-caps. They are restricting inflows.
Sleeping Dragon Is Waking Up
The rhetoric of domestic money supporting the markets forever is flawed. The big shift in the global financial markets is getting a nudge from China. China can no longer be written off. They are aggressively cutting rates, pushing their currency down and preparing for a trade war with the US post elections.
Money is like water. Deluge can turn into a trickle. We have seen this in the past!
Muralidhar Swaminanthan is the Managing Editor at NDTV Profit.
