I have been cautioning investors about the risks in Indian markets over the past few months. Equity markets have corrected substantially to the levels of 7900-8000 on Nifty, which I had anticipated. However, our markets have not factored in all the immediate global risks and the negative impact of 'Demonetization'. So where are the markets headed in the next few months from now on? Let us try to find the answer to this question.
Global research houses are now coming up with their revised estimates for India's GDP growth, and most of them have painted a rather gloomy scenario. There have been serious downgrades for GDP estimates for second half of fiscal 2016-17. As equity investors always take a forward looking bet on the markets, they are likely to take a bearish view in the near term. The 2 most important factors that stunned the markets in November (Modi's Demonetization & Trump's victory) would continue to drive the fortunes of our markets in the medium term.
International Factors:
Global research houses are now coming up with their revised estimates for India's GDP growth, and most of them have painted a rather gloomy scenario. There have been serious downgrades for GDP estimates for second half of fiscal 2016-17. As equity investors always take a forward looking bet on the markets, they are likely to take a bearish view in the near term. The 2 most important factors that stunned the markets in November (Modi's Demonetization & Trump's victory) would continue to drive the fortunes of our markets in the medium term.
International Factors:
- US Monetary policy action of raising interest rates has led to the strengthening of US Dollar. The Dollar index has risen beyond 103 and is likely to test 105 in the short term, putting pressure on inflows into emerging markets
- After several rounds of negotiations OPEC and non-OPEC countries have arrived at a consensus on cutting global oil output, leading to a sharp uptrend in Crude oil prices. Crude is like to head towards $60-65/ barrel, which is negative for net importers like India
- Protectionist stance by global leaders: Britain & USA may impose restrictions on overseas workers leading to a shrinking in global trade, which is negative for countries like China & India
Domestic Factors:
- Economic activity has slipped to multi-year lows, leading to a sharp decline in GDP growth for next couple of months. India may clock a GDP growth of 5.5-6% for FY 16-17, a sharp decline over the previous year
- Large scale unemployment in SME sector and Rural sector will put adverse pressure on consumption demand from the rural markets, leading to a big blow to our 'consumption theme'
- Rupee would continue to decline, leading to further exodus of FII money from our markets. FIIs would take any new bets on emerging markets only after January 2017, after Donald Trump takes over as US president on 20th January
- There is also a likelihood of an escalation in Indo-Pak hostilities across the border, adding to the economic uncertainty.
Considering the above factors corporate earnings of India Inc. are likely to grow by a meager 2% during FY 2016-17. The markets are likely to take the final plunge sometimes in January 2017, after the inflow of Corporate results for Q3 ending December 2016. The markets may react to levels of 7500 or lower on Nifty during that period. But due to the 'Spring effect' we could see a U-shaped recovery thereafter. The upcoming Union budget to be announced on 1st February 2017 could prove to be a game changer for the markets. Investors are advised to buy aggressively in the 7500-7700 range on the Nifty to lock in handsome gains during the next year. Long term investors should continue to hold on to their investments in the market mayhem.
