In the first quarter of the current calender year, we had a whole host of hammers hitting on our head:
- Inflation (rising, and rapidly to historic highs 12-14%).
- Ballooning import bill (thanks to crude oil rallying to USD 140 a barrel)
- Rapidly deteriorating Corporate India's earnings quality
- Cost of financing shooting through the roof, thanks to the RBI
- Slowly, but surely drying up of domestic liquidity, owing to the Global Financial Crisis.
- Last but not the least, historically high valuations and euphoria on Dalal Street
Result: Sensex & Nifty posted their single largest peak-to-valley drop of close to 60%.
Flash-forward to the last week of Dec'08 and we NO LONGER have the problem of:
- inflation, which is soon expected to drop below 5%
- a ballooning import bill due to rising crude oil prices thanks to a 70% drop in intl. prices of crude oil
- high cost of financing, thanks to a sharp interest cuts seen in the past few weeks
- easing of domestic liquidity, thanks again to RBI's cuts in the CRR, SLR, et al.
And yet: The Sensex and the Nifty continue to struggle. They are now threatening to breach / kiss their October lows. They may, they may not. But, that doesn't matter. What matters is the fact that we are NO longer staring at an ever worsening macro economic situation. And, that to my mind is a big "Go-Ahead" in itself to make investments for the long haul.
One important factor that is still worsening is Corporate India's performance. Dec'08 numbers are likely to one of the worst we've seen in recent history. But, then as the broader macro-economic variables like interest rates, inflation, easing of liquidity, etc. keep improving, performance of companies will surely follow suit, albeit with a small lag. And, as we all know, markets are forward-looking, so maybe we may soon (even if painstakingly slowly) be out of the woods.
What I've not accounted for in this note is a possible war breakout btwn India & Pakistan or a Third Front taking centre stage in India politics in the coming general elections. Both are highly unlikely, but not impossible...