Talking about Russian Revolution once Lenin said, “there are decades when nothing happens and there are weeks when decades happen”. The week of Brexit can be defined as one such case. The outcome of vote in favour of exit of the UK from EU, in the era of increasing globalization, has shocked the world and especially economists, who are champions of free trade. Contradiction do happens; in 1981, some 364 economists signed a letter to The Times denouncing Thatcher’s macroeconomic policies. Two years later UK equities entered a long structural boom. The far reaching economic consequences for the future of the UK and EU are yet debated and to be concluded. The global equity investors will ascribe a huge political risk premium in the near term while the fear of disintegration of the EU will be tested many a times by media, going forward. The biggest loser, if EU disintegration happens, will be Germany, which has benefited the most from economic trade and currency integration post formation of EU.
In midst of this high decibel noise of Brexit, the world is missing the initial sign of the weaker set of number from the US. The very weak pay roll numbers in May, tax receipts for non financial corporates, broad base built up in inventories, shrinking gap between return of capital employed and cost of capital and defaults in energy sectors are hinting towards a recessionary conditions in the US. I am sure readers are not wondering why FED hike looks a distinct possibility.
As well said, money manager are not paid to forecast but to adapt; of course, the challenge lies to know when & what to adapt to. Corporate results for Q1 FY2017 have surprised street on positive upside with an underlying improvement in corporate sales and earnings. Corporate balance sheets are still undergoing repair, delaying a recovery in restart of capex cycle. The two years of drought like conditions, water shortage, stagnant MSP, shrinking NREGA, logger jam construction activities and declining farm income has led to reduction in balance sheet and income of rural India. We are very hopeful that with onset of strong monsoon this summer rural India led consumption growth is on cards. The overdrive of government to bring efficiency in the economy and resuscitate government led capex cycle, is surely going to produce positive results for equity shareholders in the long run.