WWRR Vol.2.017

YOY increase in FED balance sheet
Mar-95
Jun-96
Sep-97
Dec-98
Mar-00
Jun-01
Sep-02
Dec-03
Mar-05
Jun-06
Sep-07
Dec-08
Mar-10
Jun-11
Sep-12
Dec-13
Mar-15
Jun-16
Sep-17
Dec-18
Consumer prices inflation in %
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
India
Strategy Note | January 1, 2019
relationship between Saudi Arabia and Petrodollar-driven US diplomacy drove
most of the economics in the two decades that followed. The US emerged from
the recession after the Lehman crisis and without inflation, only because the
world funded the US’s fiscal deficit. If that changes in the coming years (and this
is happening slowly), the markets are bound to be volatile. We advise shunning
anything that drives revenue from US discretionary spending. We also believe
that the best of the commodities is over. Although in a bubble valuation zone,
consumption may still do well in CY19, in our view.
Post Lehman crisis and unprecedented monetary expansion,
people feared inflation but it never materialised…
Figure 15: Post Lehman, there was unprecedented balance
sheet expansion by the Federal Reserve
100.0%
80.0%
Figure 16: Economists feared inflation but it never materialised
as the world led by China purchased dollars
4.50
4.00
3.50
60.0%
40.0%
20.0%
0.0%
3.00
2.50
2.00
1.50
1.00
0.50
0.00
-0.50
-20.0%
-1.00
SOURCES: CIMB RESEARCH, Bloomberg
SOURCES: CIMB RESEARCH, Bloomberg
However, with the potential decline in the demand for US$, the
US has to control its fiscal situation which may not be great
news for US$ bulls
The US has invested close to US$6tr in its “war against terror” (Please see the
link here). The bulk of the deficit in the past few years may be the result of this
costly war on terror and hence, the need to pull back from these costly
battlefields. However, the fields the US is vacating may be taken over by Russia
and China, both of whom are signing agreements with potential buyers of their
crude/trade/military hardware in Chinese yuan and Russian rouble. The net
impact is that the US$ is slowly but steadily losing its trade dominance. If the US
fiscal deficit is not controlled quickly, then much against the wishes of President
Trump, the Fed may have no choice but to keep raising rates.
The coming years are going to be extremely volatile for Indian
equities
While domestic flows into equities have increased over the years, the emerging
markets remain susceptible to what happens in the US. We believe Indian
markets are going to be volatile in the coming years, as:
● Global markets will remain volatile;
● Given the near-term turbulence, currency is bound to remain volatile; and
● The upcoming elections could lead to political risks. We believe the market
does not care which political party wins the election, it needs stability. As
such, if a coalition with different political beliefs wins the election, it will be
negative for Indian equities.
Indian market’s (NIFTY) valuations are neither cheap nor very
costly, compared to recent history
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