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Reasons why there's much to like about India and its equity market in 2016

The biggest concern that is surrounding the equity market is the sell-off from sovereign wealth funds, especially the oil exporting nations.

twitter-logo Mahesh Nayak        Last Updated: January 4, 2016  | 13:05 IST

Business Today Senior Associate Editor Mahesh Nayak
In 2015, the Indian equity market ended 4 per cent lower compared to 2014. Last year the market remained volatile and 2016 would not be any different. Investors will have to be careful while treading the equity markets.

The biggest concern that is surrounding the equity market is the sell-off from sovereign wealth funds, especially the oil exporting nations. The sharp fall in oil prices has shaken their countries' balance sheet from a surplus economy to see huge deficits. And, therefore, to rebalance their balance sheets, they may continue to sell their holdings in global equity. This, in turn, may put pressure on Indian equities.

The second concern for India and Indian equities is the financial risk. Indian companies are still sitting on high debt.

However, here's why 2016 could be good for India and its market:

  • International crude oil prices to remain low. Lower oil import bill augurs well for India and its balance sheet. After all, oil is the biggest component of our import bill.
  • Domestic funds, especially mutual funds, to continue to witness inflow from investors. This will support the equity market. On an average Rs 2,500 crore a month of inflow comes into the Indian equity market through SIP. Last year Indian MFs were the unsung heroes of the Indian equity market and this year, too, they may dominate and give a huge fillip to the market.
  • Money from EPFO into equity is also a big boon, which will continue to support our market. Unlike last year, this year insurance companies will support the market. Last year, insurance companies were reeling under redemption pressure. In all, domestic institutional flows will continue to dominate the Indian market.
  • Pain still in the real estate sector and lower returns from gold will see investors prefer to stay away from these asset classes and will continue to look at financial assets for returns.
  • US Fed may actually not increase rates. The US economic growth was led by credit growth and past experience has shown that when credit did not grow, neither did the economy. The US cannot afford recession and therefore the Fed may not hike rates as planned, thus helping India as it will keep the FII tap on.
  • One can't predict if it would be a soft or a hard landing for the Chinese economy. But one thing for sure is that the world financial markets can't afford sudden devaluation of the Chinese currency, which was seen in 2015. China is making structural changes by focusing on being a domestic lead economy rather than export driven. Until then it would mean that China will keep on depreciating its currency to keep its exports competitive. Thus it would also mean that globally policy makers would be careful in framing their policies such that they don't have huge impact on China. Meanwhile weak expansion in China will be good for India and its market, giving us some more time to get in shape.
  • The increase in US interest rates and dollar strengthening doesn't augur well for many countries in the Euro-zone that are struggling with high debt and are on the verge of defaults. In 2016, Europe will continue to depend on quantitative easing and that would see flows coming into emerging markets including India.

 

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