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The Initial Recovery

Normally a business cycle takes 9-11 years to complete a full cycle. In order  to understand a cycle we need understand it in 5 phases 1) The Initial recovery 2) Early upswing 3) Late upswing 4) Slowdown and 5) Recession.

When we see in context of India, business cycle is just about to kick start and we have started the first phase of Initial Recovery. Here are some of the key initial signs of Initial recovery

  1. Business Confidence: - Recovery last for 6-8 mths where business confidence started rising. Business confidence bottomed out in year 2013 and we have seen initial glimpse of confidence coming back in the year 2015 as more and more global MNC coming to India setting up plants and building with a long term view in the country.
  2. Government Stimulus: - Government stimulus by way of low interest rates and budget deficit provides the stage for growth. In India government has tried to structure its balance sheet and thanks to the gains from commodity prices government has been able to give a boost to the economy by way of Seventh Pay Commission, spending on infrastructure and also keep deficit in the control.
  3. Falling Inflation: - Inflation is well below RBI targeted rate which gives room for RBI to reduce rates and give oxygen to the economy by way of infusing liquidity into the system.
  4.  Large Output Gap: - Previous Capex cycle started in year 2003 and peaked with the global economic turmoil in 2008 and whatever excesses where build have been digested in the period from 2008 to 2014.It seems that Capex cycle should start in 2016 for much needed growth and soft commodity price will act as catalyst.
  5. Low or falling short term Interest rates: - Short term interest rates have started falling and the same is visible from the returns of liquid fund. Deposit growth in India is 14% while credit is 9% there is huge gap so rates have started falling in secondary market. 
  6. Bond yield are bottoming out: - Gsec seems bottoming out as government doesn’t need borrow and they have enough stimulus to fund the growth.

One interesting fact is Bank FD was the best asset class which defeated Real Estate, Gold and Equity Markets in the year 2015.Seeing this phase of the economy, fundamentally it clearly seems Equity markets should do well in the year 2016. People have lost lust in real estate and gold and falling deposit rates has forced money moving out of this asset class and entering in Equities. Sovereign wealth funds account 30% of the FII flows in India and sell off due oil is strongly absorbed by Domestic Investors. Once this selling stops market should give a strong bounce.

Falling lending rates will help cyclical industries to revive and 2016 seems to be year when small cap stocks and high yield bond should give maximum returns.

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