Mkts will correct post-budget

The year 2015 has marked the return of volatility to the financial markets. We have seen huge moves in the foreign exchange and bond markets in response to the European Central Bank's Quantitative Easing program, the "Grexit" debate, the surprise move by the Swiss National Bank to abandon the Franc's peg against the Euro and energy prices have been driving the risk on/risk off sentiment.

Most importantly, the US Federal Reserve is going to raise interest rates some time later this year, but the market doesn't seem to believe so. The US 10 year yield is at 2.1 per cent as compared to 2.7 per cent the same time last year. There is a huge mismatch between what market participants believe and the path the US central bank seems it's on. In this backdrop, Indian equities are trading near lifetime highs, not having lost their faith in Prime Minister Narendra Modi and his government.

Shankar Sharma, vice chairman and joint managing director of First Global financial consultancy, sees a deep correction post-budget, irrespective of whether it is good or bad. “Budgets never determine directions of markets 90 per cent of the time…The dream, unfortunately, ends the moment the budget speech stops. The nightmare begins the moment you start reading the fine print.”

On the likely direction of Indian interest rates in next 2-3 years, he observes that our 10-year bond yields are too high, at 7.7 per cent. Given that bust countries with falling currencies across the Euro zone have 10 year yields at 0.5 to 1.2 per cent, he asks why India should be paying 8 per cent on its long-term bonds. Yields in India will collapse to 4-5 percent in two years' time (we saw these levels in 2004), he stresses. Markets will automatically go up because of this one reason. Markets will not go up because of any policies or the like. Those are red herrings.

Globally developed market equities are near their all time highs primarily due to a dovish US Fed and QE from Europe and Japan. Is there any real economy recovery anytime soon - especially with regard to the Euro-zone and Japan? The analyst is very bearish on the outlook for growth revival almost everywhere in the world, let alone in Europe and Japan. In many ways, the US is like any pure Oil-dependent economy. What impact will $50 oil have on the US is not hard to imagine. That's why there is so much unhappiness in the US over the state of the economy. It has been a very segmented revival, largely shale driven. As regards UK and Europe, he sees plenty of slow growth ahead, the same as what we have seen since 2008. Years of living beyond your means can't be corrected in just five-seven years.

He says he has been bearish on oil and on all commodities in general for many years now. Commodities can never have sustained bull markets. “The world will always find ways to kill a commodity bull market because this is the only bull market that impoverishes most of the world.

All other bull markets be it equities, bonds, real estate, create widespread wealth. Given this, I see only chance of any sustained revival in oil, save for technical bounces,” he adds.

By: Vatsal Srivastava