Market Musings on Liquidity Flow
It has been over a decade since the world experienced the worst ever financial crisis leading to a global recession. The crisis led to untold misery, with people losing their jobs and livelihood, besides experiencing significant decline in wealth.
 
Governments responded in ways best known to them, based on what the experts suggested and what was politically feasible and attractive. 
 
A crisis of comparable magnitude had earlier taken place in the 1930s. Quite obviously, the policy measures adopted differed significantly during the two crises.
 
Learnings of the past seven decades were effectively used to fight the latest crisis, and new policy measures, as yet unknown and untried, were deployed. 
 
As always, when economists are involved, unanimity of views is a virtual impossibility.
 
Whether such policy measures were effective, and whether alternative actions could have had greater impact, will always be open to debate. 
 
What is indisputable is that when a crisis strikes, especially of such a magnitude, liquidity is critical. The Reserve Bank of India (RBI) left no stone unturned in injecting liquidity into the system, ensuring that the crisis was averted as quickly as possible. Interest rates were reduced, coming close to zero percent in many countries, at times even flirting in the negative zone. 
 
The injection of liquidity, of course, did not remain a short-term affair and various central banks have established programmes that lead to continuous infusion of funds in the market. Terms such as quantitative easing, tapering, and inflation targeting have now become an integral part of the market’s lexicon.
 
Why is continued monetary easing essential? Apart from inadequate regulation, high level of debt was the primary cause of the financial crisis and, in fact, of its severity. From 1950 to 2007, private sector debt (household and corporate) as a proportion of gross domestic product (GDP) increased to 170% from 50% in advanced economies. 
 
The subsequent drawdown of debt-stifled demand, which would have resulted in a far more serious recession but for the various measures undertaken to boost demand. These measures included fiscal expansion and monetary easing.
 
Fiscal expansion has its limits and eventually, had to be halted, with monetary policy taking up its customary expansionary function of boosting the economy.
 
It was widely believed that monetary easing cannot continue indefinitely and will need to be reversed sooner rather than later. The US Federal Reserve, in fact, started raising interest rates from December 2015 when growth picked up in the country, but had to quickly retrace. A decade after the crisis, monetary policy continues to be expansionary, with no sign of a reversal. 
 
The 10-year real interest rate in the US, currently at 1%, indicates that any increase in rate is practically ruled out for the next decade. That holds true for Japan, Europe and other economies too. Historically, low rates, close to 0%, have never persisted for such a long period. Two decades of virtual uninterrupted monetary expansion is unheard of. Being uncharted territory, its implications are unclear to anyone, including the central banks.
 
What are the repercussions for the Indian equity markets? In the long run, market movements are determined by economic growth rate, in particular the corporate sector earnings and the overall liquidity in the economy. I am not optimistic about growth rate of the Indian economy in the coming years and believe it will go down further.  (Read: Here is why Private Investment is Down). 
 
At the same time, global liquidity will find its way into the Indian economy and its markets. India is likely to be one of the largest beneficiaries of any money that flows to emerging markets. The interplay of the liberal liquidity conditions and plummeting growth will be interesting to watch and will determine the course of the Indian equities in the years to come. 
 
The situation is fairly novel since we have never experienced prolonged liberal liquidity, as we expect to do now. We may indulge in crystal gazing to predict its impact but we are in uncharted territory. Economic forces rarely work unidirectionally. While we may project a positive impact on equity prices, it could also have pernicious unintended consequences, as yet unknown to us. Hopefully, the regulators and governments will display sagacity and acumen to counter any negativity emerging from high liquidity, especially in conjunction with low growth.
 
One thing is quite certain. Given the low growth rate of the economy, any time there is an apprehension of withdrawal of liquidity from the Indian markets, the adverse impact on equity prices is likely to be severe. One needs to be prepared for such brutal fall in stocks and be on alert for any impending squeeze on global funds. The fall could undo years of wealth creation in no time.
 
(Sunil Mahajan, a financial consultant and teacher, has over three decades experience in the corporate sector, consultancy and academics.)
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    COMMENTS

    mathew sabu

    3 months ago

    I am not a well qualified guy to comment here. But using the commonsense the world is not over. I see here as a opportunity or next leg of growth. Be it election,electric revolution,trade war etc. A new era will arise.

    Ramesh Poapt

    3 months ago

    crack visible now. dow jones/nasdek nosedied today thanks to
    trade war. indian kt will follow the suit(SGX) down 97
    just now. indian mkt was over valued since long ignoring all negatives.
    euphoria was bound to end. business media never showed the correct
    picture. debt mkt is fragile. mf aum in bubble phase. i will be pleased
    to loose if mkt goes down 25%. and mf assets reduces 25%.

    SANDESH PAWAR

    3 months ago

    I would have really appreciated the article even more if this was written when everything was hunky-dory.
    With the current situation in the market it just looks like more noise.
    I am sorry I don’t want to be rude, it’s just the timing.
    It is just too difficult to be greedy when others are fearful.

    Global Markets Continue to Pressure Nifty, Sensex – Monday closing report

    We had mentioned in last week’s closing report that Sensex, Nifty might try to rally if US market stabilises. The major indices of the Indian stock markets suffered a correction on Monday and closed. On the NSE, there were 352 advances, 1,429 declines and 337 unchanged. The trends of the major indices in the course of Monday’s trading are given in the table below:

     

     
    India's crude import bill will grow fatter despite numerous measures by successive governments to reduce its dependence on crude. A Moody's report on Monday said that "India's oil and gas consumption will support its investments in refining capacity and upstream production, but crude imports will keep growing amid stagnant production". India imports nearly 80% of its oil requirement which makes is highly dependent on imported oil and hence susceptible to wild fluctuations in the international oil market. Moody's said: "Even though the government is encouraging faster adoption and manufacturing of electric vehicles, the response has not been great because of a lack of high-quality, affordable vehicles and the evolving charging infrastructure". Besides, the government pressure for shareholder returns will "temper National Oil Company's (NOC) credit quality", Moody's flagged.
    SBI recently made certain changes to its interest rates in different financial products. On its savings bank account, balances above Rs1 lakh fetch a lower interest rate of 3.25% this month, compared with 3.5% previously.
     
    This month, SBI also announced a revision in FD or fixed deposit - also known as term deposit - interest rates in select maturities. The country's largest bank has also marginally reduced its MCLR or marginal cost of funds-based lending rate across tenors, making its loans linked to the key lending rate cheaper with effect from May 10. SBI shares closed at Rs307.95, down 0.03% on the NSE.
     
    Shares of Sun Pharma today plunged 20% suddenly today before recovering at close. The shares fell to a 52-week low of Rs350.4 on BSE intraday, over Friday's close of Rs438 before closing 9.39% down.
     
    Fast Moving Consumer Goods major ITC has reported 18.7% jump in its Q4FY19 net profit to Rs3,482 crore on the back of strong sales from the FMCG and cigarette units. ITC had reported a profit of Rs2,932.7 crore in the year-ago period. Its revenue was up 13% to Rs11,992 crore against Rs10,587 crore. The operating profit or earnings before interest, tax, depreciation and amortisation (EBITDA) was Rs4,572 crore, while margin was at 38.1%. Its cigarette sales rose 11.1% to Rs5,486 crore. The cigarette EBIT (earnings before interest and tax) was up 10% at Rs3,856 crore, while margin was at 70.3%. The total FMCG revenue was up 9.7% to Rs8,760 crore versus Rs7,988 crore. Its agri business revenue rose 16.2% at Rs2,101 crore against Rs1,808 crore, YoY (year-on-year). The board of directors of the company appointed Sanjiv Puri, managing director, also as the chairman of the company with effect from May 13, 2019, following Yogi Deveshwar’s demise. The board also recommended a dividend of Rs5.75 per ordinary share.
     
    The top gainers and top losers of the major indices are given in the table below:
     
     
    The closing values of the major Asian indices are given in the table below:
     
     
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    Sensex, Nifty May Try to Rally if US Market Stabilises – Weekly closing report

    We had mentioned in last week’s closing report that Nifty, Sensex might give up some gains. The major indices of the Indian stock markets suffered a sharp correction during the week and closed on Friday with significant losses over last Friday’s close. The trends of the major indices in the course of the week are given in the table below:

     

     
    The Indian markets, in line with the Asian markets, fell steeply over signs of escalating US-China trade tension on Monday. On Sunday night, US President Donald Trump threatened to impose fresh trade tariffs worth $200 billion on Chinese goods in an attempt to force additional concessions. The benchmark Sensex fell up to 450 points. Trump's threats came right ahead of a critical week of final negotiations between the two country to end the year-long tit-for-tat trade war which has roiled financial markets ever since it started. He has already imposed tariffs on $250 billion worth of Chinese goods and is now threatening to tax nearly all of the products China exports to the US. The Asian markets were all sharply down, as were the European markets and US futures. On the NSE, there were 588 advances, 1146 declines and 382 unchanged.
     
    Shares of Tata Chemicals rose 9% on Monday after the company’s consolidated Ebitda (earnings before interest, tax, depreciation and amortization) rose 3.6% year-on-year (YoY) at Rs531 crore in March quarter (Q4FY19).  The company’s adjusted profit after tax increased 2% at Rs317 crore on YoY basis. Its operational revenue grew 8% at Rs2,759 crore against Rs2,555 crore in the corresponding quarter of previous fiscal.
     
    The major indices continued to decline on Tuesday and closed with losses over Monday’s close. On the NSE, there were 559 advances, 1,209 declines and 330 unchanged.
     
    Gains from exceptional item aided telecom major Bharti Airtel to post a rise of 37.5% in its total consolidated net profit for the January-March quarter, on a year-on-year (YoY) basis. The total consolidated net profit (profit attributable to owners and non-controlling interest) of the company stood at Rs576.10 crore during the fourth quarter (Q4) of financial year 2018-19, against Rs419 crore reported during the corresponding period of the previous fiscal, Airtel said in a statement. Bharti Airtel shares closed at Rs323.85, down 2.88% on the NSE.
     
    The Indian stock markets contunued to fall on Wednesday. On the NSE, there were 440 advances, 1369 declines and 100 unchanged.
     
    Benchmark indices finished near day's low on Wednesday amid weak global cues. At close, the Sensex was down 487.50 points at 37789.13, while Nifty was down 138.45 points at 11,359.50. About 634 shares have advanced, 1,857 shares declined, and 145 shares are unchanged.
     
    All sectoral indices ended in the red and were led by energy, pharma, auto, bank, infra, FMCG (fast moving consumer goods), metal and IT (information technology). Midcap and Smallcap index shed 1% each.
     
    Nifty Media had crashed about 5% intraday. The fall was led by Zee Entertainment (-10.05%), Sun TV (-4.48%) and Network 18 (-3.61%). Nifty Media closed at 2,133.65, down 4.53% on the NSE.
     
    The stock markets suffered a further decline on Thursday. On the NSE, there were 734 advances, 1,005 declines and 360 unchanged. The S&P BSE Sensex plunged more than 300 points. Selling was seen in sectors like energy, telecom, power, metals, and oil & gas, while buying was seen in IT (information technology), consumer durables and auto index. 
     
    Asian markets hit a fresh eight-week low as investors waited to see whether Chinese and US trade negotiators can salvage a deal to stave off the threat of fresh US tariff increases, which would damage global economic growth. 
     
    The Ministry of Corporate Affairs (MCA) has asked the Serious Fraud Investigation Office (SFIO) to begin a probe into Jet Airways on suspicion the promoters siphoned off money. The investigation follows after the MCA opened a preliminary enquiry into the company and carried out an inspection of Jet’s books. The MCA also wants the company’s financials probed – why the company suddenly turned in a loss in fiscal year 2018 after posting a profit for a couple of years. This was despite the company receiving fund infusions in the form of Etihad’s investments twice during the period. Sources said another reason the Jet case assumes importance and warrants an SFIO probe is the recent turn of events, when the company shut down its operations, leaving the fate of about 20,000 staff hanging in the balance. The MCA’s Western Regional Director headed the enquiry and inspection into Jet. Jet Airways shares closed at Rs147.95, up 12.64% on the NSE.
     
    Sensex and Nifty traded in the red and green during on Friday and closed with minor losses, marking 7th consecutive day of decline. Investor sentiments have taken a beating following the surprise escalation of trade tension between US and China. Foreign Institution Investors have also turned sellers during the past few sessions and the fourth quarter earning outcome have not been encouraging. While the financial sector stocks gained, auto, FMCG (fast moving consumer goods) and IT (information technology) declined. 
     
    US President Donald Trump's tariff increase to 25% on USD 200 billion worth of Chinese goods took effect on Friday, ratcheting up tensions between the United States and China as they pursue last-ditch talks to try to salvage a trade deal. The Indian benchmark indices are trading on a positive note with Nifty up 30 points, trading at 11,331, while the Sensex gained 124 points and is trading at 37,683. Nifty IT shed close to a percent dragged by HCL Tech which shed 4% followed by Oracle Financial Services and Tata Consultancy Services. The breadth of the market favoured the declines as 998 stocks advanced and 647 declined while 454 remained unchanged. On the BSE, 1,200 stocks advanced, 893 declined and 124 remained unchanged.
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