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Wednesday, January 27, 2021

Explained: Events in US could boost Indian markets, but why one must invest with care

While there has been controversy around the election outcome and there was chaos in Capitol Hill by Trump supporters, many feel politics will play a limited role in the markets

Written by Sandeep Singh , George Mathew | Mumbai, New Delhi | Updated: January 10, 2021 10:23:40 am
Donald Trump supporters participate in a rally in Washington. (AP Photo/John Minchillo)

Donald Trump supporters stormed Capitol Hill on Wednesday afternoon, but the Dow Jones Index was unruffled and ended the day at an all-time high of 30,829. Rather than being influenced by this, the markets were enthused by the news of the Democratic Party winning two Senate seats from Georgia and getting a slender majority (with Vice President-elect Kamala Harris’s vote), which could ease the path of a big stimulus announcement by President-elect Joe Biden after he takes charge on January 20.

Experts say while India will be a likely beneficiary of that stimulus package as some of that money will find its way into Indian equities, there are also risks involved.

Why did markets rise in the US and worldwide ?

Clearly, the markets are eyeing another stimulus, this time from Biden. While the Dow Jones rose 1.44% on Wednesday, the FTSE 10 in UK and DAX in Germany too rose 3.5% and 1.7% respectively. Asian markets rose on Thursday with the Nikkei 225 in Japan and STI Index in Singapore closing with gains of 1.6% and 1.65% respectively.

While there is optimism among global market participants around the anticipated stimulus, there are concerns around the higher corporate taxes and stricter antitrust scrutiny Biden has spoken about. However, with a narrow majority in the Senate, markets feel Biden is more likely to push through the stimulus package than make changes to the tax structure in the current situation.

While there has been controversy around the election outcome and there was chaos in Capitol Hill by Trump supporters, many feel politics will play a limited role in the markets. “Markets are more about trade and commerce and now politics does not matter much in commerce as it is big and powerful. Liquidity, globalisation of money and wealth is very big and the numbers are staggering,” said Raamdeo Agrawal, chairman, Motilal Oswal Financial Services.

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What does it mean for Indian markets?

In India, although the Sensex opened strong on Thursday in line with the global trend, it closed with a decline of 0.17%. It is important to note that the economic stimulus in the US and inflow of funds into Indian equities has been one of the dominant factors for the rise of equity markets. So, a majority for Biden on the Senate floor and his ability to push a stimulus will have a positive impact on Indian markets as a part of that money is expected to find its way into Indian equities too. Foreign portfolio investors’ net investment of Rs 2.22 lakh crore in Indian equities since April 1, 2020, resulted in Sensex and Nifty gaining 63.4% and 64.4% respectively.

“While Biden has spoken about his big stimulus, even if half of that comes through, it would be big. Markets are thinking that big money at low cost of interest will find its way into emerging economies including India and that will keep it higher in the near term,” said Agrawal.

If that has been the biggest driver for markets and has taken it to fresh highs, closing the tap may affect them adversely. This possibility, therefore, calls for rational behaviour by domestic retail investors.

Though FPIs have been dominant players, Indian investors — both retail and HNIs (high net individuals) — also played a big role in the market surge as they entered the markets in big numbers following a sharp decline in indices in February and March 2020. Between April and December, the Central Depository Services Limited has added more than a third (77 lakh) of the investor accounts that it held until March 2020 (2.12 crore) to reach 2.89 crore in December. Market participants say a large number of first-time investors have entered the markets and while they have been riding this high tide, they need to be cautious about an adverse movement.

Analysts say investors should not look at just one data point, but take a holistic view of the economy and the market. With RBI’s accommodative stance and low-interest rates that are going to continue for some time, equity is expected to remain the best asset class. “We are already seeing a gradual broad-based rally. If the commentary coming from the central bank is anything to go by, then this market rally is not a short-lived one,” said A Balasubramanian, MD & CEO, Aditya Birla Sun Life Mutual Fund.

Markets work on anticipation of the current and future economic outlook. The Covid impact on the economy was predicted in March, and hence the markets corrected — the Sensex has gained over 15% in calendar year 2020. Now, the pace of vaccination will have a bearing on the markets.

What factors could play out in the longer term?

Experts argue that the Indian economy is at an inflection point. The Covid curve has flattened out and economic activity is at pre-Covid levels as evidenced by various high-frequency data points like the IHS Markit PMI Index. The rural economy continues to be resilient, and economic growth estimates are being upgraded. Key macro parameters are expected to remain in India’s favour. Key policy rates are at the lowest levels in recent years. The RBI has projected the CPI (consumer price index) inflation at 6.8% for the third quarter of 2020-21, 5.8% for Q4 of 2020-21, and 5.2% to 4.6% in the first half of 2021-22. Real GDP is expected to contract by 7.5% in 2020-21 and expand by 0.1% in Q3 of 2020-21 and 0.7% in Q4 of 2020-21. GDP is expected to expand by 21.9% to 6.5% in the first half of 2021-22.

Going by these numbers, long-term prospects seem bright. “India’s growth has the highest catch-up potential post major reforms announced by the government. PLI Scheme should attract FDI, housing sector should see a recovery, bank NPAs should be manageable and credit growth should normalise. Earnings which have been depressed for a few years are showing reasonably strong growth. We are entering into an earnings upgrade cycle after a long time, which should drive markets going forward,” Subramanian said.

What are the concerns for the market and investors?

Foreign investors have been the big bulls in the market so far. If the liquidity dries up and the economy doesn’t show the expected resilience, the FPI flow will also come down and the markets will stagnate or slowly decline from the current high levels.

“In this excited state, the biggest concern is that the stoppage of FPI inflows could potentially stop this rally. For now, everyone is looking at the stimulus but if there is a disruption in US that impacts the inflow of fund, or if the Covid-19 issue gets extended to 2022 and 2023, then it could have a bearing on the market,” said Agrawal. He added that since there are a lot of moving parts to markets and we can’t control them, “we should focus on what we do as we have control over that. One needs to be disciplined in investment and be very guarded in where you invest.”

There’s already a feeling within a section of participants that the market valuation is running ahead of fundamentals. “If any unexpected risk factor comes into play, the market will correct or react. Much will depend on the FPI flows and the Budget which is on the anvil. Retail investors should be cautious in this market,” said veteran stock dealer Pawan Dharnidharka.

Another risk is the possibility of inflation remaining at an elevated level and the RBI unwinding the accommodative policy stance. While the Covid graph is curving downward, GDP growth will have to pick up speed in the coming months. If the economy doesn’t pick up the way it is projected, the high market valuation will turn out to be a bubble. That scenario will damage the sentiment. It’s unlikely to happen going by the way things are taking shape

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