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Standing in the end of 2011 amidst all the carnage in the Indian and the global financial markets and economies, somehow, a
famous quote by Winston Churchill keeps resonating in the mind, the quote goes something like this The pessimist sees
difficulty in every opportunity. The optimist sees the opportunity in every difficulty. Though we admit that the state of
affairs that exist today all over the world, be it in terms of economic condition, political condition or in terms of share market
performance are nothing to feel cheerful about and as we have explained in the ensuing paragraphs in this report, that there
are lot of factors that points to the fact there are more pain yet to come, we feel that short term pains set stage for long term
gains. We feel that for the next 6-9 month we are going to go through a turbulent time, and in the mean time we might see
even lower level in the markets going forward. However, we feel as the market goes through this rough patch, we will witness
a level of valuation that might not have been seen even in 2008 lows and that will create a base for a new bull market to start
in FY13-14.
Let us start our analysis from the recently concluded event, the 3rd quarterly review of the RBI's credit policy. The languageand the expectation set by the RBI in the review have been in line with the economic realities and market expectation. The
following table outlines the policy action of the RBI.
Policy Action
The tone for the review was already set by the previous quarterly review wherein the governor indicated a rate hike pause
after raising rates for the 13 consecutive times to tame the all-illusive beast called 'inflation'. Considering the current global
and local economic situation the step that was taken by the RBI seemed justified then and today's action seems to reinforce
the same. RBI has been demonstrating the fact that they are proactive in taking appropriate decision in pursuit of balancing
growth and inflation. This is evident from the fact that the apex bank has decided to maintain status co while signaling the
market that it has changed its long-standing stance of being hawkish to dovish. The evidence of this can be found in the last
paragraph of the RBI press release where it has been stated and I quote While inflation remains on its projected trajectory,
downside risks to growth have clearly increased. The guidance given in the SQR was that, based on the projected inflation
trajectory, In view of the moderating growth momentum and higher downside
risks to growth, this guidance is being reiterated.
However, it must be emphasized that inflation risks remain high and inflation could quickly
recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of
further actions will depend on a continuing assessment of how these factors shape up in the months ahead.
As has been outlined in the earlier paragraph, the apex bank has taken cognizance of the recent data such as the IIP for the
October (which came at dismal -5.1%, with capital goods showing contraction of upward of -25%), the HSBC PMI data (both
manufacturing and servicing) and the Q2 GDP growth (which came at dismal 6.9%); all pointing toward a stark slowdown
compared to the government and RBI estimation. As such, a pause and a dovish tone from RBI were on the cards.
Taking cognizance of the rapid rate of rupee depreciation against the US dollar, which hit a low of Rs. 54.30/$ on 15th
December 2011, RBI took a decision to put a curb on the cancellation and rebooking of forex forward contracts and limitbank exposure in such contracts. The move is suppose to put an end to the speculative activities undertaken by the market
participants to take advantage of the unidirectional move of the Re/$ exchange rate that has been continuing for last 2.5
months. In our opinion, while this move might curb the rupee's fall in the very short run, we feel the inner dynamics of the
further rate hikes might not be warranted.
From this point on, monetary policy actions are likely to reverse the cycle,
responding to the risks to growth.
Our view on Dollar Movement against Major Currencies
Re/$
RESEARCH
26th December, 2011
ECONOMIC & MARKET
OUTLOOK FOR 2012-13
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macro situation that exists within the country such as widening fiscal deficit (which is expected to hit ~11% of GDP), current
account deficit and to a lesser extent, the withdrawal of FIIs will continue to keep the rupee under huge pressure going
forward.If that is not bad enough, during the course of FY'13, FCCBs worth Rs. 33,000 crore (or around $6.17 billion) are about to
mature. Under the current stock market condition where the current stock prices are trading anywhere between 1/5th to
1/9th of the conversion price agreed at the time of the issue of such instruments, it is but obvious that conversion to equity is
not going to be an option for the investors and hence around 24 companies (in BSE 500 index alone) would have to make
redemption of such debt in US dollar. This would also be another major factor that would weigh heavily on the rupee in FY13.
Otherwise, the conventional stuffs like worsening balance of payment situation, with oil, fertilizer and a pulses etc., imports,
which by the way are expected to remain strong, and muted export due to lack of international demand are going to cast its
spell on the rupee in the near term. However, theoretically speaking, this depreciated rupee should increase India's
competitiveness in the international market and hence would be supportive of the indigenous industries and should help
narrow down the current account deficit going forward by boosting the country's export. However, this phenomenon shouldtake some more time to play out in reality.
In this regard a skeptic would say, 'RBI has $300 billion in reserve, it can intervene in the market as soon as it goes beyond a
particular level, say Rs. 54/$'. Well, let us analyze this fact by turning our attention to the interventions made by the RBI in the
forex market in the recent months. In the month of September RBI had intervened and bought dollars in the spot market to
the tune of USD 800 million, on two days in November, i.e., November 23 and 24, RBI pumped in close to USD 3.5-4 billion.
However, apparently that did not help the rupee much as it depreciated 20% calendar year-to-date. This data points to the
fact that the RBI's ability to intervene even if it wanted to be more aggressive in doing so is pretty much limited with forex
reserves at USD 300 billion. This reserve might be good enough to cover 9-10 months of imports to the maximum. Another
point that one need to look at is the composition of the reverse, out of this $300 billion reserve, $88 billion is extremely
short-term commercial debt with will be paid back in the next 3-6 months period.
In addition to this, we feel that the Euro debt problem is not getting solved any soon and the measures that are taken so far
do not address the problem at its core. Moreover, if one goes by history no country in the world has ever been able to grow its
way out through austerity and the current euro zone situation is not going to be an exceptional one in this regard. The real
condition of the bank balance-sheet is also not known for sure because they have not provided for M to M on account of
sovereign bond/toxic loan losses, so even if the banks were to be capitalized the quantum of money required to do so is not
fully known, though a rough estimate of the bank exposure goes somewhere in the region of ~$18 trillion (source: CNBC).
On top of this, Italy, Spain, Greece, etc., are going to witness many of their bonds worth billions of dollars maturing in the next
3-6 months, for how long they would continue to borrow to refinance their old debt and meet the retirement benefits/social
security burden and who would be willing to lend them are all open questions whose answers are hard to conjecture at this
point of time. The January 2012 meeting of EU is also not going to have much of an impact because as long as Germany is onboard they are not going to let the ECB monetize or float Euro Bonds as the memory of Weimar Republic must be fresh in
their mind. This would trigger more downgrades from credit rating agencies and eventually translating into weaker Euro.
This, in turn, like a bad circular reference, which cannot be sorted out, would have negative impact on the US economy via its
bank exposure to the region.
The condition in Asia, led by China is not any rosier. China's net export contributes only 5% to its GDP and the rest is
contributed by the massive capital expenditure the country undertook in the form of construction of real estate assets,
infrastructure development and capacity creation in factories. The capital formation to GDP ratio of the country stands at
over 50%, higher than even Japan, which clocked ~32% during their hay days, which evidently is not sustainable, and we are
all well aware of which direction Japan took post 1989. With Western Europe, China's largest trading partner, and also theUS, the second largest, standing at the threshold of depression, it is expected that its trade surplus would get wiped off in
/$
RMB/$
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next 2 years time, triggering a massive slow down in factory output and hence capacity utilization, and also triggering a
monumental unemployment problem. On top of it, with numerous ghost towns and bridges to nowhere, an outcome of
debt fueled capital building, would lead to melt down of property prices and in turn enhance NPLs and debt defaults for itsbanks and local municipal authorities going forward (the signs of which is already becoming evident).
If one considers all the off-balance-sheet debt that China has accumulated and so far been very ingeniously camouflaging, its
Debt to GDP ratio would stand near 200% of GDP, which is comparable to that of Greece. These structural issues would not
allow the country to grow its domestic consumption overnight. The best estimate for per capita income of China by 2050 is
expected to be somewhere near $8500, compared to that US per capita income as reported in 2005 was ~$46000. Thus, one
can very pragmatically expect that China does not stand a chance to emerge as a savior of the global growth any sooner.
However, having said that, we do expect China to continue to grow at 6-7% over the period of next 2-3 years, as the Chinese
authority would try to prep up domestic consumption by cutting various bank rates like CRR, Repo etc., or through
privatization of infra and real estate companies. By China's standards, this can be construed as hard landing. Thus, the crux
of the matter is that we feel that Chinese Yuan is set to depreciate substantially in the years to come against US dollar.
Now, turning our attention to USA, though the recent data suggest unemployment rate coming down to 8.5% compared to
over 9% couple of quarters back and consumer spending increasing by 2% (at the cost of savings and investment), however,
the sustainability of such bump up is highly questionable. According to a study conducted by an eminent research house in
the US, where the study involved in drawing a correlation between demographic trends with that of the Dow Jones
performance. A high degree of correlation has been found between these two aforementioned variables, albeit with a 46
years lag. This means the economy and in turn the stock market, as represented by the DJIA, peaks after 46 years of peak
birth rate in the US. This birth rate also includes immigration into the country. This study mainly pinpoints the fact that the
economic boom or bust is more influenced by the demographic trends rather than the government action, contrary to the
popular belief of conventional economists.
This study proves beyond doubt, with empirical evidence, that the consumption boom of the US is about to get over as the
baby boomers (the group of people responsible for unprecedented spending) are on the verge of retirement and theiroffspring are already leaving the nest and now the main focus is going to be to repay their loans and build their retirement
kitty. Under this kind of circumstances, no matter how much they are allured by record low mortgage and interest rates, they
are not coming back to consume more goods and services going forward. Thus, with consumption tapering off and a massive
drive to deleverage keeping credit creation in the economy at bay, an estimated $20 trillion contraction of money in
circulation is likely to take place. This figure, when compared against only ~2.5 trillion pumped in by the Fed through QEs, is
miniscule and it is already evident that the longevity of the impact of successive QEs has been diminishing. Thus, contrary to
the popular belief that US dollar should weaken going forward, we expect the US dollar would continue to regain strength as
the debt destruction continues and as risk aversion continue to rise, forcing financial institutions, governments and hedge
funds to park their fund in the safe haven of US treasury. All these mean that US dollar is going to become scares
commodity and the dollar demand all over the world would continue to rise, forcing it to rise against all major currencies in
the world (and rupee is not going to be an exception. One can visit the website, www.hsdent.com for details.
As has been discussed in the previous paragraphs that we are entering an era of a tough economic times where the debt
fueled excesses are getting trimmed and general level of consumption, which has been fueling the global growth since late
70's when Nixon officially abolished the dollar peg to gold and ushering in the period of unlimited fiat money. As these
excesses reduce through the curtailment of the government and private spending causing economic recession to set in, the
elevated demand for industrial commodities are going to come down substantially. On top of this, as the US dollar gets
stronger, contrary to much popular opinion, it is but obvious that an era of deflation rather than inflation would set in.
Under this kind of scenario, excepting for agro commodities (where the demand remains inelastic and decreasing
productivity, climate change, increasing urbanization and diversion of crops and cultivable area for bio fuel) whose prices in
our opinion are going to remain strong, even prices of precious metals such as Gold and Silver are going to come undersevere pressure. This will happen mainly on account of two reasons, 1) gold performs well in the time of inflation and not
Era of Deflation has ushered in
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deflation as it is considered to be good inflation hedge, 2) as the global liquidity shrinks, the market participants are going to
withdraw funds from gold (which can be considered as one of the very few asset classes that have been showing profit for all
this time) and they either may sit with cash or put it in safe havens like US treasury (as this is the only asset class whereinvestors are at least assured of getting their money back, at least in nominal terms due to the dollar's hegemony status. This
also is the only market in the world, which is large enough to absorb such huge liquidity).
While we expect that going forward, in Indian context, the food price inflation, as well as the international industrial
commodities prices are going to come down sharply. However, to what extent the fall in international commodity prices will
be offset by the depreciating rupee is yet to be seen. Thus, for now, the direction the domestic inflation will take is very
difficult to ascertain. Thus, RBI has to rely on more price and exchange rate data over the period of next couple of quarter to
be convinced about the fact that inflation has turned down for good.
Secondly, with rupee depreciating at such rapid pace, it is unlikely that RBI would take the risk of decreasing the interest rate
in a hurry, at the risk of being too academic, even if we assume that of all the factors, Interest rate parity also have someinfluence in forex rate determination, any rate cut here onward is suppose to have further depreciating effect on the rupee
even further, this is a risk, in our opinion, RBI would be reluctant to take.
However, in our view, as in the rest of the world, liquidity crisis is about to unfold in India over the course of the next financial
year, the indication of that is already visible from the inverted yield curve that we are witnessing. There are quite a few
reasons based on which we arrive at this conclusion.
Firstly, as we have stated above, that Rs. 33000 crore worth of FCCBs are about to mature in FY13, now with conversion not
being an option, all these debt needs to be refinanced as none of these companies have enough reserve or cash flow
generating capacity to finance them from the internal accrual. Thus, even though the cost of money has increased anywhere
between 400 to 700 basis points, depending on the credit rating enjoyed by companies, these companies have to come to
the debt market to refinance these FCCBs. With the credibility of these companies already substantially tarnished, it isdoubtful whether such fund could be arranged from abroad. Presuming, these companies have to arrange fund from the
domestic market, would in turn mean further pressure on the liquidity in the domestic economy.
Secondly, we feel that the government would have to enhance its borrowing programme in the next fiscal. Already, it has
been announced by the government that the treasury will sell a record Rs 4.7 lakh crore worth of securities this fiscal, up
from Rs 4.17 lakh crore budgeted in February, the figure could go higher as well. The reason is obvious, as stated earlier in this
report, the government is expected to end this fiscal with a fiscal deficit of 11% (state and central combined) of the GDP, with
corporate profit coming under severe pressure on account of RBI rate action and forex related losses, it is but obvious that
the government is going to miss its revenue collection target. However, the subsidy on oil and fertilizer alone are expected to
be off the charts, thanks to the rupee depreciation, on top of that we now have a food bill to contend with. With the
prospects of divestment under water and the twisted plan of using public sector companies' cash reserve to buy government
stake in other PSUs not finding much support, the government have little choice but to go for massive bond issuance. If that isthe case, then we can pretty much expect a crowding out effect in the economy, translating in higher bond yield going
forward. Thus, the temporary euphoria in the bond market is likely to fizzle out, and considering this scenario, RBI's
reduction of rate would not have much of an impact.
Lastly, we feel that as the Indian economic condition worsens (provided the political stalemate continues, which, at this
moment seems to be the most likely scenario), banks are going to see further deterioration in its asset qualities. While,
sectors like power, construction, real estate etc., has already been causing trouble for banking sector because of increasing
NPL problem. On top of these textile and telcos are becoming a new source of worries for the Indian banking industry. Thanks
to sharp depreciation of the rupee (as majority of the funds supplied by the domestic banks to fund telcos to participate in
3G auction were borrowed from foreign financial institutions) and muted 3G uptake, the chances that these loans turning
bad are increasing by the day. Even the subscriber addition rates by telcos have dropped significantly compared to even a
year ago. Contrary to the expectation, the so-called export oriented sector, textile, is also increasingly becoming a cause of
Rate Cut by the RBI in Subsequent Policies? Looks Unlikely in the Near Term!
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worry for the banks. With demand in the western world shrinking thick and fast, even with such massive rupee depreciation,
these companies are on the verge of a slowdown. Now, as loans get restructured and in some cases becomes bad over the
course of the next financial year, the magnitude of the liquidity crisis that is about to unfold is not very hard to assess.Thus, in view of these developments, we feel that a rate cut is not going to be an option for the RBI going forward for at least
two quarters; however, a substantial cut in CRR is definitely on the offing. We expect a CRR cut to the extent of 300-400 basis
points over the course of next 2 years to be quite feasible. This could infuse liquidity to the extent of ~Rs. 36000 crore in the
system, assuming a ballpark figure of around ~Rs. 9000 crore released in the system for each percentage point decrease in
the CRR.
We feel that the current global economic condition is a perfect breeding ground for war like situation. However, we are not in
the business of prophesying, and we are definitely not in the camp of painting the so called Doomsday picture, but if we
take a closer look at the history of major wars, the present economic scenario presents an uncanny similarity as far as the
economic and political environment that preceded those wars. Let us illustrate this point with some examples, after the1797's economic deflation; there was war between US and France from 1798 to 1800. The war between US and Great Britain
in 1812 followed the depression in 1807-1808. The long depression of 1873-1879 paved the way for war between US and
Spain and the First World War which lasted till 1918. The Second World War was followed by the Great Depression of 1929-
1939. The early 1990's recession again put US on the war front against the Iraq. History shows that most of the wars have
followed the economic crisis-- there are very few occasions when world faced slowdown or recession after the wars.
Economy faced a recession after the First World War, which lasted for 3 years from 1918-1921.
If one looks at the demographic characteristics of these countries prior to these wars, one would find that during the time
they all had a large proportion of young people in the overall population, majority of them were unemployed and hence
frustrated due to the lack of productive opportunities to vent their energy and off course for lack of ways to earn money. This
if left unattended, can lead to violent social unrest, conflicts, class war, with a potential to tear the social fabric of a nation. To
quote E.F.M. Durban and John Bowlby, eminent psychologists human beings are inherently violent. While this violence is
repressed in normal society, it needs the occasional outlet provided by war. This mixes with other notions such as
displacement, where a person transfers their grievances into bias and hatred against other ethnic groups, racial groups,
religions, nations or ideologies. Now, if we turn our attention to the recent developments, unrests in Middle East and North
Africa, Occupy Wall Street, recent riots in Britain, protests in Greece, Spain, Italy, etc., all can be construed as a manifestation
of this psychology.
In this context, we are extremely wary of the fact that going forward it is going to be China and not Pakistan, that's going to
emerge as bigger threat to India if not the World. As we have outlined in the earlier paragraph where we discussed about the
Chinese economy and currency, we outlined why we feel that China is going to see a massive unemployment going forward.
This gives them enough reason to vent this public frustration into full-scale war. The repeated threat to India in terms of
advancing in Arunachal Pradesh, conflict in South China Sea, broadcasting anti India propaganda in Nepalese FM radio,creating naval bases in Myanmar, Sri Lanka, Pakistan to encircle India are all emanating ominous signs. Even the international
community has taken cognizance of this aggressive behavior of China and its desire to emerge as a super power. The recent
visit of Obama to Australia, Hillary Clinton's visit to Myanmar etc., points to the factor that the US is monitoring the
movements of the Chinese. This has certainly increased the geopolitical tension in the Asia Pacific region. We feel as China
slips to severe economic slowdown in FY12 and FY13, the possibility of conflicts are going increase many fold.
As we all know, nature intended everything to play out in well-defined cycles, be it weather, tides in the ocean, vicissitudes in
human life and so on and so forth. Even business and stock market are not immune to this phenomenon. However, if we look
at the chart of the human population growth it has been on a one way up since 1348-50 (when around a 100 million people
died on account of the so called 'black death plague' reducing total world population from 450 million to 350 million). The
following figure illustrates the point.
Risk of Heightened Geo-political Tension
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From the figure above, it is clear that since 14th century, growth in human population has been practically defying this
natural law of cycle, as propagated by Thomas Malthus.
Are the Havens too conspiring Against Us? It Seems so.
The question is what does Haven got to do with stock market, war and peace and economic boom or bust? Well it seems
a lot. We are alluding to Sunspots and solar flares. Sunspots are regions of intense magnetic activity on the sun that are
cooler than the surrounding photosphere. They are cooler, because the intense magnetic field literally pushes the
fluorescing ionized hydrogen out of the way as charged hydrogen is diamagnetic, or in other words, is repelled by the
magnetic field much in the same way as aluminum is. Intense magnetic fields create "holes" in the photosphere, which
produces the characteristic dark appearance of sunspots. With this occurrence causes the sun's magnetic field to fall indisarray, sun's magnetic field reverses causing a reversal in its polarity. In the process, this tension causes the sun's magnetic
field to snap, releasing a huge solar flare with proton storm and electromagnetic waves.
Electrical storms that frequent all planets with an atmosphere in the solar system have a cycle coupled with the sunspot
cycle. As proton storms and magnetic sectors intersect the magnetospheres of the planets, energy dissipates, primarily
through the magnetic poles, showing first as auroras and then along the magnetic lines to the opposite poles. When there is
a surplus of energy, some of it leaks down in the form of sprites above the atmosphere.
At atmospheric level, charges build in cloud forming regions and lightning is the result. It is interesting to note that the overall
charge of lightning coming from above is positive, while the lower regions closer to the surface is negative in keeping with the
proton source of energy emerging from the sun. Solar storms that are most frequent at sunspot maximum times will
overload our power transmission lines due to magnetic induction. This occurs because a proton event vibrates thegeomagnetosphere, which in turn induces current in power lines far in excess to what they are designed to carry. The result is
a black out when power lines literally snap from an overload. Such an event occurred in Quebec in 1968, which also affected
the North Eastern part of the US. Similar event happened in 1859 which destroyed all the telegraph lines in the US. However,
this effect is not limited to electrical power lines only; oil pipelines are also negatively impacted. If not properly grounded,
they build up charges measured in tens of kilo-amps, which will rupture the lines and ignite fires. On a dry, hot year, which
often typifies years of a sun spot maximum era, a side spread wildfire can arise out of this. Massive electromagnetic wave can
also cause untold damage to satellite and communication systems.
In view of this, there is a possibility that the year 2012 might not be such a good one if one happens to own a satellite or a lot
of shares in the electricity generating business. That is because 2012 is being forecast as the peak of the next sunspot cycle,
and physicists are saying it's going to be an active one. Though these cycles manifest itself in a short cycle of 11 years and a
full cycle of 22 years, this time around scientists are predicting it to be an active one. Researchers at the National Center forAtmospheric Research (NCAR) in Boulder, Colorado, have used a new model of the sun's interior to refine predictions of
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future sunspot activity. By using data going back over a century, the scientists were able to determine that the sun's
magnetic field has a memory of around 20 years. This model was able to predict the past six cycles with around 97 percent
accuracy, and has led to revised predictions about the next cycle, number 24. According to NCAR the next sunspot cycle willbe between 30 and 50 percent stronger than the current cycle, with a peak in activity in 2012.
Even human psychology is not immune from sunspot activity. Though unconscious for the most part, history of the species
tends to show more agitation during sunspot maximum events than during solar quiet periods. Those may arise from all the
other circumstances that arise at the time of solar maximum and/or the fact that we have a bio-electromagnetic field that
would be influenced by such external stimuli. Even Psychiatrists have noticed that voluntary admissions to mental hospitals
increase for two to three days after a solar-induced magnetic disturbance. Joe H. Allen, Chief of the Solar-Terrestrial Physics
Division of the National Oceanic and Atmospheric Administration, said scientists at the Kettering Magnetic Laboratory have
found that geomagnetic disturbances may produce a temporary deficiency of calcium or lithium ions inside brain cells,
which is a characteristic of progressed manic-depressives.
On the same note, it has been observed height in sunspot cycle also seem to match major global events such as war and civil
unrest. There might not be direct causal relation but history of empirical evidence points otherwise. Please refer toAnnexure 1, attached herewith this report for details. The high correlation between the events definitely points to the fact
that there are more to this than meets the eyes.
Sunspot Heights since 1900
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However, all said and done, we in the investment community are more concerned with the market movement, how things
are going to pan out in the future and where we can see the ultimate bottom. In the following paragraph, we try to find
answer to such questions by applying both conventional and unconventional methodologies.
After touching a high in November 2010, the Indian stock market has established a firm trend and as we are all aware, it is on
the down side. However, in the last couple of weeks, this downward momentum has gained substantial steam. While, many
companies in the mid cap and in the small cap segment are trading below the 2008-09 lows, some companies, like BHEL,
JSPL, Jaiprakash Associates, etc., are trading below the 2008-09 lows in terms of P/E and other valuation parameters, of
course, the earnings considered here are on TTM basis. Now, the obvious question is with such valuation destruction already
have taken place, is there any room for more damage going forward. In this section we are trying to analyze and find some
credible answer to this stupendously difficult question.
In this regard, we thought, Sensex to Gold ratio analysis could be a good starting point.
The idea to use Sensex / Gold (LME) ratio came from the time tested Dow jones /Gold ratio relationship. The Dow/Gold ratio
calculation can be traced back to more than 100 years. In almost all occasions, Dow jones tops and bottoms at
predetermined level, compared to gold price. The bottom has been around 1-2 for last 100 years. Hence we have tried to use
the same relationship between Sensex and gold price to make out a case for market top and bottom.
Look at the identical nature of the 2 graphs for last 10 years.
The million Dollar Question-How Far is the Bottom from the Current Level?
Sensex / Gold ratio: This ratio has been fairly accurate about market tops and bottoms
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As the above graph shows, the moment Sensex/gold ratio goes up above 14-15 times, Indian markets have struggled to carry
on the momentum. On the other hand, it peaked at about 21 in January 2000 and 23 in November/December, 2007. Thus by
this account, the ratio did a pretty decent job at predicting the end of a long term bull market rally. On the other hand, whenthis ratio crosses 14, we have witnessed at least intermediate market correction. The above two graphs strongly corroborate
this.
On the other hand, when this ratio hits around 9, the Indian market has a tendency to find a firm bottom. This bottom was
reached at June-July, 2000, then August-December, 2002, then March-April, 2003, then January-february, 2005, then
March-April, 2010, then August-September, 2011.
Only in one occasion that is in March-2009 this ratio went down to around 7 before a superb rally commenced. Thus at the
worst case, we may witness this ratio going down to about 7 in coming days/months before a powerful up move resumes in
Indian market.
Thus Indian market stability also depends on gold price movement. Higher the gold price, at the same level, Sensex
becomes cheap. Lower the gold price, at the same level, Sensex becomes expensive. As the gold also crashed a goodamount after reaching life time high, Sensex did become cheap. But not enough to call it a formidable bottom.
As the following graph shows, gold is sitting on pretty borderline support. If this level is breached by gold in coming days,
gold can straightway come down to US$1200-1300.Gold has a tendency to do well when people rush to park money in so
called safe assets when a financial crisis is foreseen. But when a liquidity crisis actually hits, people tend to sell gold to meet
so many objectives from meeting redemption requests to compensate for losses in other assets like equity and currency.
Hence as the Euro crisis gathers storm in coming days, it is perfectly possible that gold will see correction. This does not mean
that after correction, gold will not rise in future. But gold's rise will be more measured as many questions are raised about
the counterparty risk of Gold ETF's. Hence despite direct or indirect quantitative easing in USA or Europe, it is highly unlikely
that only Gold is going to benefit.As the above graph shows, though not exactly at bottom when compared to Gold, Sensex is undervalued compared to Gold
even on historical basis. Likewise many emerging countries also look cheap when measured in terms of Gold. Hence there is
a very good chance that emerging countries like India will reward stock investors more compared to Gold investment.
Hence in worst case scenario, multiplying gold at 1300 by 7-8 multiple points to Sensex level of around 10,000-11,000. We
believe that this level will be the ultimate bottom for Sensex for many years to come.
Gold price movement
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Trailing TTM P/E ratio also points to similar level for Sensex at market bottom.
Let us consider the above graph of Sensex TTM P/E ratio for last two decades. What is striking is that starting from 12/13
TTM P/E, Sensex starts looking attractive. At worst, it can go down to 11. But from these levels, market bounce back has
been sharp.
Assuming TTM EPS of around 1000, multiplying with a P/E of 11 gives us a Sensex target of around 11000.
As part of inter market analysis, it is useful to observe relative performance between two market segments to derive a
message regarding market top or bottom. One of the popular inter market analyses is relative performance of midcap/small
cap index compared to large cap index. In Indian context, we have tries to analyze BSE Midcap/Sensex ratio to see whether
this ratio has indicated some sort of bottom .This ratio was signaling alarm in the middle of October, 2011 itself when Sensex
was recovering as it broke to new low. This ratio needs to come closer to about 0.3 or a firm rising trend to indicate market
bottom. That is not very far. But still we are not quite there despite such massive fall.
BSE Midcap/Sensex indicates some more pain left before market rally starts (data updated till 21/12/2011)
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FMCG /Sensex ratio too points to more pain before a firm bottom is reached
While we feel that there could be some downside left in the market, we do not rule out a sharp bounce back before
reaching an ultimate bottom. Now, while we might sound alarmist in the report, the idea that we are trying to present
here is that bear markets should be considered a friend of serious investors and this kind of market presents the
opportunities to make substantial wealth in the future. While we are advising not to start putting money immediately,
the market is going to present very interesting opportunities to invest for the long haul and such opportunities are going
to present itself in the next financial year. While, it is extremely difficult to pin point the exact bottom, it is advisable to
take a calibrated approach and deploy small portion of the total investible fund into the market, once we go down by
another 5-7% from the present level. We from our side would try our level best to provide with the best investment ideas
that we can. Thus we end this report by wishing you happy investing for the next year, the fruit of which could be reaped
in FY14.
Unlike BSE Midcap/Sensex, FMCG/Sensex is a contrary indicator. That means a top in this ratio indicates market bottom and
a bottom in this ratio indicates market top. The ratio clearly pointed to Sensex bottom in February, 2009 inself before apowerful rally started in March, 2009. Likewise in November, 2010 itself the ratio signaled bearish mood by trending up. Now
this ratio has made new high compared to February, 2009 high. This means that final leg down in Sensex is not yet over. Once
this ratio starts coming down, we can expect Sensex to stop falling further and rising again.
Please refer to the Annexure 1 of the report below
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Annexure 1
Early Solar Cycle Peaks: 1704-1770
Solar Cycle 1704-1706
Solar Cycle 1716-1718
Solar Cycle 1726-1728
Solar Cycle 1737-1739
Solar Cycle 1749-1751Solar
Cycle 1: 1760-1762
Solar Cycle 2: 1768-1770
Solar Cycle 3: 1777-1779
1776-1783 American Revolution
Solar Cycle 4: 1786-1788
1788-1791 French Revolution
1789 US Constitution adopted
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Milan, Venice, Naples, Prague, Budapest, Warsaw; US Mexican War
starts; Taiping Rebellion starts
Solar Cycle 10: 1859-1861 under 100
1858 Bottom year of a depression in the U.S.
1861 American Civil War begins
1861-1865 Civil War in America, revolts in India, Italy, China
Solar Cycle 11: 1869-1871 wide 1869-1872
1869-1870 Franco/Prussian War
1869-1872 Paris Revolutionary CommuneSolar Cycle 12: 1882-1884 under 100
1883-1886 Big US labor strikes, revolt in Sudan, First Indian Congress meets
1883 Bottom year of a major depression in the U.S.
Solar Cycle 13: 1892-1894 under 100
1893-1895 Zulu revolt, Cuban revolution
Solar Cycle 14: 1905-1907 under 100
1904-1905 Russo-Japanese War
1905-1908 first revolts begin in Russia1905-1908 Widespread strikes, revolts among German miners, Hottentots, Turks,
Indians, Honduras
1908 Bottom year of a short depression
Solar Cycle 5: 1803-1805 under 100 wide (1802-1806)
1803-1806 Napoleon conquers Europe
Solar Cycle 6: 1815-1817 under 100
1815-1817 Two wars to defeat Napoleon; German, English and
Serbian riots; Brazil, Chile and Argentina declare
independence.
Solar Cycle 7: 1829-1831 under 100
1828-1832 Revolts in Turkey, Mexico, Belgium, Poland, France,
Britain; Virginia slave revolt; the Black underground
railroad begins
Solar Cycle 8: 1836-1838
1837-1840 Constitutional revolts in Canada, slavery debate outlawed in US,
Texas Independence, Boer separatists occupy African lands, British-
Afghan war; Opium War
1937 Major Banking Crisis in the U.S.
Solar Cycle 9: 1847-1849
1846-1848 Mexican War
1848-1851 Revolts and revolutions in Poland, Switzerland, Paris, Vienna, Berlin,
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Solar Cycle 15: 1916-1918 just barely 100
1914-1918 First World War1916-18 Irish and Indian revolts
1917 Russian Revolution
1919 The Atom is Split
Solar Cycle 16: 1927-1929 under 100 wide 1926-1929
1927-1929 Fabled American Bull Run ends in crash of the stock market in long
slow slide which bottoms in 1933
1926 Hitler in jail for NAZIs attempted Munich Putsch, begins writing Mein
Kampf which outlines how he will lead Germany to make the worlds
greatest power.
1927-1931 Mussolini and Hitler build power on economic unrest; revolt in Viennaand China; formation of Red Army; Spanish Republic formed; mass civil
disobedience in India launches Ghandis campaign to free India
Solar Cycle 17: 1936-1938 wide 1936-1939
1936-1939 Spanish Civil War, Germany and Japan start World War II
1937-1940 US steel strike
Solar Cycle 18: 1947-1949 wide 1947-1950
1946-1949 Greek Civil War, India-Pakistan riots, Red Army wins China, Vietnam
revolts1947
1948
Flying saucer sightings begin, saucer crashes in Roswell, NM, shadow
government is set up inside the military industrial complex with the CIA
to fight communism and hide the remains of ET
1948 Gandhi assassinated, Israels War for Independence
1950-1953 Korean War
Solar Cycle 19: 1956-1958 huge peak wide 1956-60
1957
1960
Israel invades Sinai, Hungarian uprising, Cuban revolution, civil rights
movement begins in US, French-Algerian war, MauMau revolt, Iraq
revolt,
1957 Vietnam War begins1958 Eisenhower recession
1960-1961 Eisenhower warns of the danger of shadows in the unfettered
military industrial complex, Kennedy race to the moon begins
Solar Cycle 20: 1967-1969 stumpy wide 1967-1970
1965- 1967 Haight-Ashbury Flower Children launch the hippie movement
1967-69 Height of Vietnam War, peace demonstrations, worldwide student
uprisings, Czechoslovakian uprising/USSR invasion, US inner city riots,
Israeli Arab war, Woodstock and height of hippy movement,
1968 Martin Luther King and Bobby Kennedy assassinated , first big anti-war
marches in US, first US inner city riots,1969 First public men on Moon
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USSR & US sign missile treaty, USSR begins pullout from Afghanistan
1987 Crash in World Stock Markets
1989 Tianamen Square Chinese student democracy movement crushed
1989 Protest and peaceful revolution in Eastern Bloc, dismantling of Berlin
Wall,
1989-1992 Glasnost process begins dissolution of Soviet Union, end of Communist
Party domination; Communist Party coup in Russia fails
1989-91 End of apartheid in South Africa, beginnings of patriot and militia
movements in US, Somalia civil war, Yugoslavia begins slaughter in
Bosnia, Sandinistas lose Nicaraguan elections
1990 Mandela Released, East and West Germany Re-Unite
1990 Iraqi Troops Invade Kuwait
1991 The Gulf War; multi-national forces liberate Kuwait from Iraq, Balkan
Civil War begins as communist Yugoslavia collapses.
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Solar Cycle 21: 1978-1980 wide 1978
-1982
1978 Worlds First Test Tube Baby Born, Carter Camp David Accords
between Israel and Egypt
1979 Three Mile Island Nuclear Plant leaks radiation
1979-82 Polish Solidarity begins, US anti-tax movement reaches heights and
elects Reagan, Shah of Iran overthrown, Iraq-Iran war begins, USSR
invades Afghanistan, Falklands War, Sandinistas oust Somas, Zimbabwe
gains independence, anti-nuclear and peace demonstrations increase
worldwide, US aid to contras in Nicaragua, US invades Grenada,
Tamils rebel in Sri Lanka
1979-1980 US Bid to Rescue Hostages Fails
1980 Iran-Iraq War begins (lasts until next peak in 1988)
1981 President. Sadat of Egypt assassinated
1982: Israel Invades S Lebanon, Falklands War
1982 Reagan recession
Solar Cycle 22: 1988-1990 wide 1988-1992
1987-88 Palestinian Infiltada begins, Eastern European dissidents organize,
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Solar Cycle 23: 1999-2001 wide 1999-2002
1998-2000 Peace treaty in Northern Ireland, overthrow of Indonesias Suharto,
Serbian-KLA conflicts increase and US/ NATO decides to resolve
conflict through massive bombing of the whole nation, India-Pakistan
skirmishes over Kashmir increase; militias burn East Timor, drive
people into camps in West Timor; big demonstrations at WTO
meeting in Seattle; rising religious strife in India and Indonesia,
increasing civil war in Sierra Leone and Sri Lanka; overthrow of
Milosevic in Serbia;
1999 Worldwide Y2K Scare
1999 Palestinian Infiltada re-commences after virtual agreement with
Israel
2000 Dot-com bubble breaks; Supreme Court intrudes in the U.S. elections,
throws results of Florida vote to make the loser of the popular vote
into a winner of the electoral vote to become the U.S. President made
by judicial interference.
2001 Attack on World Trade Center and Pentagon; War on Terrorism begins
2000-02 Peace treaty disrupted in Northern Ireland; land confiscations in
Zimbabwe; worldwide protests against WTO/IMF/World Bank in
Seattle, Washington DC, Prague, Goteborg, Quebec City, Genoa and
other cities
2002-2003 Bush diverts War on Terrorism into personal vendetta against Saddam
Hussein, massive protests demonstrate against Iraq war
Solar Cycle 24: 2012-14
Consequence ????????
Source:http://kondratieffwinter.com/blog/esoteric/sunspots/
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SPACE FOR AD