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August 27, 2009

The Bull and Bear Cases

Two CNBC TV18 guests - Jim Walker of Asianomics and Adrian Mowat of JPMorgan - present contrasting views on the medium-term outlook for the stock markets.

Jim Walker feels while corporate earnings will surprise on the positive side, the RBI is set to raise interest rates as early as in October. And he feels markets in developed countries will be in a bear markets for next 4-5 years and there is no way they will enter a lasting bull phase in just 4-5 quarters.
We all know that the Reserve Bank of India (RBI) is not a central bank that will sit back and let inflation takes its grip and will not sit back and let excess liquidity dictate .., they will take action. As a conservative central bank, my expectation (is that) we will see the beginning of the tightening process as soon as October.
Here' is Adrian Mowat's very contrasting take:
I still believe that central banks are going to continue this aggressive easy policy at this point in time and so is the buying opportunity.

...It is a mistake if you think that the markets are going to going to go down meaningfully; if you look out over the balance of 2009 you have three very powerful drivers for the global economy. The first is the delayed monetary stimulus...We have high grade corporate bonds in the US yielding just about 5%, which is actually a historic low level. So the funding cost in the US are now meaningfully lower for the corporate sector, so this monetary stimulus is coming through and that is a global event and it is great news for India, where India needs to import capital from abroad to grow rapidly. So I have got a monetary stimulus.

The next thing that is going on is that the profits are a surprise on the upside and that would mean that there is less business retrenchment and that the non farm payroll and the unemployment statistics will not be deteriorating as poorly as they have been, so that takes away a very important drag.

The final point to make is that when we look at the Q2 GDP globally, you are going to see the biggest ever decline in the inventories. We are now beginning to see the industrial production cycle turn even in the US. Industrial production (IP) turned positive last month and when the IP cycle turns with the inventory cycle, it tends to increase for more than a year and this is a very protracted event. In our view, you have got an absolute text book economic recovery occurring. Maybe what is not normal textbook is that the global economy will synchronize on the way down and it is also going to be synchronized on the way up. (What was) also unusual (was) the amplitude of recession and I think that people are going to be surprised by the amplitude of the recovery.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in