The weakness in investor sentiment during the demonetisation period has been more than compensated by the receding post-demonetisation challenges that were expected to impact companies, strong inflow of foreign portfolio investor money over the last two months, continuing inflow of domestic retail money and a big victory for the Bharatiya Janata Party (BJP) in Uttar Pradesh (UP) and Uttarakhand. As a combined result of these, there has been a reversal in the declining trend seen in lead indicators such as fall in markets, foreign portfolio investment (FPI) flows and currency movement during the demonetisation phase and the benchmark Sensex that had fallen 3.5 per cent during that period (between November 8 and December 30) to close at 26,626 on December 30, has gone up by 12.6 per cent since then and closed at 29,585.8 on Thursday. While the Sensex is just eight points away from its all-time high closing of 29,593 registered on March 3, 2015, the broader Nifty at the National Stock Exchange closed at an all-time high of 9,153.7 on Thursday.
Experts feel that the recent election results in UP, where BJP-led alliance won more than three-fourth of the legislative Assembly seats, not only indicate a long-term political stability at the Centre but will also provide the ruling party the desired ammunition to push its economic reform agenda at the Centre. Many see the markets to continue to scale new highs.
“We expect markets to continue to scale new highs. While in between there may be some profit-booking but there may not be big falls. We don’t see too many red flags as of now,” said Pankaj Pandey, head of research at ICICIdirect.com.
“The overwhelming mandate received by the BJP in the state elections, especially in Uttar Pradesh and Uttarakhand has paved a path for sustained political stability in the economy along with continuance of the economic policy reforms initiated by the government,” said Mayuresh Joshi, fund manager, Angel Broking even as he pointed out that certain headwinds in the form of recovery in corporate earnings and pick-up in the private capex cycle do remain.
The quick revival
There has been a sharp revival in markets after the two-month lull seen during the demonetisation period and has been backed both by domestic and foreign investors. If the demonetisation phase saw FPIs pull out a net of Rs 25,935 crore from the equity markets between November 8 and December 30, post-demonetisation, the FPIs have invested a net of Rs 25,785 crore between January 1, 2017 and March 16, 2017. While FPIs largely stayed on the sidelines in calendar 2016, and invested a net of only Rs 20,565 crore in domestic equities, it was the domestic institutional investment (DII) that was supporting the market. The DIIs have invested a net of Rs 53,696 crore in the 11-months of the current financial year.
The strong inflow of foreign money between January and March 2017 has, moreover, ensured that the rupee strengthens against the dollar. While the rupee slipped from a level of 66.25 against the dollar on November 8, 2016, to 67.95 on December 30, it has regained its lost ground and as a result of string FPI inflow, the rupee closed at 65.41 on Thursday. Thus, the rupee has gained 3.74 per cent against the dollar since January 1, 2017.
Experts feel that the election outcome has re-established the confidence of both the FPIs and DIIs on the political stability and also on the governance over the next 5-7 years and, thus, they would invest in the country with a long-term view.
Will the rally sustain
Though the markets have had a sweet run post-demonetisation and have gained over 12 per cent during this period, there are concerns growing from various corners on valuations and corporate profitability not growing on expected lines. A report released by Kotak Institutional equities pointed that the market is unperturbed despite uncertain earnings outlook and unfavourable global and domestic interest rate cycles. It further said that it expects a slow economic recovery.
“We do not expect a quick turnaround in either domestic consumption or investment given weak job creation that will affect consumption and low scope for private sector investment in the context of excess industrial capacity across sectors and the nature of new infrastructure projects; the current policy framework precludes meaningful participation by the private sector in railways, irrigation/waterways and urban infrastructure,” said the report.
However, there are some who feel that the current rally is sustainable. Pandey said that the recent guidance from the US Federal Reserve was not hawkish and also said that it may go for three hikes instead of four which is a positive. “While FPIs have not been big investors, we may see increased inflow of funds from them. A revival in earnings growth and a good monsoon may further perk up the markets,” said Pandey adding that,
“The only hurdle could be the volatility in commodity prices.”
The Kotak Institutional report called for execution and extension of extant reforms rather than bringing out new reforms in order to support the growth of the economy. “In our view, it would be best for the government to focus on fixing the pending issues in the banking (NPLs) and power (distribution) sectors. Anyway, the government has completed most of the fiscal, investment and banking reforms that we were expecting at the beginning of its term,” it said.
Some others also point to the headwinds that the Indian markets may face and they include recovery in corporate earnings, pick-up in the private capex cycle and interim impact in the implementation of goods and services tax (GST) which might have a push through in the inflationary trajectory but would over the next few years lead to better compliances and tax collection efficiencies on the indirect tax front. Some concerns that emerge on the global front include delay in recovery of the Chinese markets; the European Central Bank stance and the state of the eurozone economy; policies of US President Donald Trump that can impact world trade and thereby impact emerging market currencies and bond movements.