Indian equity markets went through a volatile phase in 2016. Aggressive guidance by the US Fed spooked them in January and February. Commitment to fiscal prudence provided support from March 16 onwards. Good monsoon, GST rollout and lower interest rates also helped. US elections and demonetisation triggered a correction in the last quarter of 2016.
In 2017, stock markets are unlikely to behave differently than in 2016. They will be influenced by the following events:
- Impact of demonetisation on corporate earnings: The market is factoring in a return to normalcy in three-six months and will correct in case of a delay. If Indians adopt to the cash-less economy, earnings will recover fast. The RBI is likely to get a windfall gain on April 1,2017, if a big chunk of black money doesnt return to the system. If the government uses that amount to spur growth through infrastructure spending, the earnings recovery will be faster.
- Globally, interest rates are bottoming out. The market has not factored in a steep rate hike by the US Fed. Rapid rise in US yields will result in capital flowing out of emerging markets. But we dont believe that global/US economy are strong enough to sustain a rapid rise in rates. Hopefully, FII allocations to India will be positive in 2017.
- Equity markets made a bottom on February 29, 2016, as the finance minister pursued the path of fiscal prudence in the Budget. On February 1, 2017, he has to again pass that agnipariksha. If the fiscal deficit for 2017/18 is capped at 3 per cent, markets will take a positive cue. Increased tax collections due to demonetisation should lead to fiscal prudence.
- The market is pricing in continuity of economic policies past 2019. UP election trends/results will be an influence here. A resounding BJP victory will positively impact markets.
- In 2017, we are likely to see the Italian banking crisis impacting the risk appetite. Our markets will gyrate based on the global risk appetite.
- Market has priced in smooth rollout of GST. Timely rollout with containment of disruptions can support market sentiment.
- China has excess capacity in many industries such as metal and capital goods. Their dumping can impact Indian companies. China is also lobbying for an increase its weight in benchmark indices like MSCI EM indices. This will mean a reduction in Indias weight and FII outflows.
It is impossible to predict all events that will impact markets in 2017. Foundation has been laid for strong corporate profitability. Interest rates have fallen. The RBI is likely to manage liquidity at a neutral level rather than at a deficiency level to support economic growth. Rupee is depreciating, which will support exports. Government policies across states have been pro-business. Rollout of GST & demonetisation will increase tax revenue and efficiency. The government is spending money on infrastructure while staying on the path of fiscal prudence. Bumper rabi crop is likely to support the rural economy.
Our recommendation to investors will be to invest systematically rather than in lump sum without worrying about short-term volatility. It is time for people who have not joined the SIP movement to do so as the yearly return from bank fixed deposits will be lower than a good weeks return from an equity mutual fund.
Since we dont know which week that will be, invest for a longer term.
This column is written by, NILESH SHAH, Managing Director, Kotak Asset Management