Expect A Soft But Positive Start To The Week

The Indian economy reportedly grew at 4.8% in the September quarter. To many, this will look like a first sign of an economic recovery. Agriculture is going fine, electricity, construction, and financial services are all looking steady, but the problem is with the manufacturing and the mining sector. Both of these have been dragging down the overall GDP growth. The optimism about a ‘higher than expected’ or at least ‘in line with expectations’ growth figure is understandable. But there is no way you can lose sight of the fact that we have been growing below 5% for four quarters now. That is a reason to worry. The slowdown that has hit us, is here to stay. It will certainly take some more time to get over it and gain momentum again.

Our policymakers have been optimistic about the situation even when we grew at a much lower pace than this. So obviously, the current growth rate that we have clocked should be a reason for them to celebrate. But investors would do good to keep in mind that a full fledged recovery could be some six to nine months away. Look at reports around you. According to one, gross fixed capital formation for the second quarter ended September 2013 stood at 29.4%. This figure should have yielded a growth of around seven percent. But that has not happened. The main reason for this according to a published report is the rising incremental capital output ratio. Which means, though capital is being ploughed in, the efficiency of the returns that are being generated on that capital are falling.

Unless inefficiencies of these kinds are completely wiped out, there is little scope for a full recovery. And the wiping out of these inefficiencies will depend a lot on how various sectors get supported by the government in removing the bottlenecks they face in furthering their growth. This in itself is a big challenge. Hoping to get over it could see you spend at least a quarter or more or even extend your wait until May 2014.

All said, the week begins with a lot of optimism in the air. The markets are surely going to react to the 4.8% growth rate that we have clocked. PMI data from HSBC will be a major factor that markets will cling on to from today. This too has become more of a ritual than being practically important. But statistical numbers are revered by the markets. So you could see them reacting to these even today.

On the global front too, there is a lot of economic data that will drive the markets. US job creation in November once again takes centre stage. Among other data points that are awaited include, those on consumer spending, home sales, manufacturing activity and an update on the third quarter (September quarter for the US) growth. All this will keep markets quite volatile through the week. As for todays market action is concerned,

Asia is trading quite mixed. Japan is trading quite volatile and has given away gains it registered in early trades. The Nikkei is trading almost a quarter percent down but is slightly better than the 0.45% decline of the South Korean, Seoul Composite. China is trading on the borderlines with the Shanghai Composite down just a marginal 0.04%, while Taiwan is marginally up in early trades. Singapore, Malaysia, Indonesia and Hong Kong are are trading strongly. The Hang Seng is up 0.85%, followed by the Straits Times, which is up 0.18%. The KLSE Composite is up marginally, while the Jakarta Composite is up by a quarter of a percent.

The Indian markets could continue from where they ended the week. They are expected to open on the positive side but trade volatile ahead of the PMI data. It may proceed in the week dancing to the tune of the host of American data that is to come out. Play by the day without being in a hurry to put all your money at one time. Caution remains the key word.