Green Shoots

The last couple of years have been a treacherous time in the financial markets. There has been no boom in any financial asset with the possible exception of US treasuries. Even there, the pickings have been slim.

I get a sense that we are starting to see green shoots in financial markets. I am not sure if the green shoots will transfer to the economy but I can see them in the financial markets for sure. My belief could be self serving and biased because I do want this period of pain to end and do want to see happier times. However, I've managed to come up with some reasons to justify my gut instinct. You can probably drill a million holes into each reason so if you are a pessimist, you can stop reading further.

- The two largest economies in the world have completed the re-validation/change of their leadership and have visibility for the next few years. Their mandates are very clear and known to the markets. In the case of the US, it is to push the economic system more to the left and to accelerate redistribution of wealth. In China, it is to revive economic growth and to maintain the raison d'etre of the Communist Party.

- Europe has dragged the world economy, sentiment and financial markets for two entire years. It is clear that the problem is not fixable. With Francois Hollande at the helm in France and with Spain and Italy in a complete mess, Germany will not be able to power the Eurozone any longer. Europe is probably headed toward irrelevance like Japan. I believe that the financial markets will start ignoring news coming out of Europe very soon.

- Japan is irrelevant.

- India has put a solid bottom in place both in its financial markets as well as in its economy. It has been one of the worst affected economies in the last two years due to global risk aversion and drying up of capital flows. India will experience simultaneous tail winds in the next 18 months including a) declining interest rates b) appreciating rupee and capital inflows c) rising GDP growth and earnings growth d)improvement in capital investment and e) expanding earnings multiples with improvement in sentiment.

- Risk appetite is due for a cyclical rebound and an improvement in capital availability for companies with stressed balance sheets is likely to power rallies in markets around the world.

The most difficult thing for investors during this time will be to stop looking in the rear-view mirror and to avoid exiting sound positions prematurely.
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