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The results to the cruicial Gujarat Assembly elections are over and the markets are now set to move on to the next big triggers. In this Business Standard special piece, Mayuresh Joshi looks at some of the big events that will drive the course of market direction in the quarters to come.
The Indian markets and avid political enthusiasts have largely digested the mandate given by the Gujarat and Himachal Pradesh election verdicts, as the actual numbers indicate the average of what most exit polls were predicting. Though volatility and knee-jerk reactions in the financial markets for potential election outcomes are expected, it has been witnessed historically that election verdicts do not alter the course of the financial market direction in the long run. Putting things into perspective, in the next few days, the markets shall move on, putting the election outcome behind it, and start focusing on core issues that actually justify the valuations the financial markets derive. Let me put through the chain of events that can drive market direction in the next few quarters: Corporate earnings: With two major disruptive events -- the demonestisation effect and GST implementation behind us (though teething issue still persist), corporate earnings which ate the pivotal focal point for the re-rating of markets, should start showing signs of improvement. Two things that should work in favour of recovery of corporate earnings are a) on a comparative year on year comparison they should reflect better numbers on a low base due to the Demo effect last fiscal and b) GST in the next few quarters should have incremental flow of business to the organized sector albeit in a gradual manner but which shall ultimately reflect in better earnings profile for India Inc. and ultimately this earnings rub-off should reflect in the Index earnings projections over the next few quarters. Our sense is that corporate earnings should compound at a 13-14% CAGR over the next two years and that should give the impetus of justification in forward multiples underpinning Index valuations. Macro Data: A lot has been spoken and written on the various macroeconomic parameters and the sluggishness that persists in the economy. A) It is true that the government fiscal spending has reached 96% of the budgeted spend and that has raised valid concerns in terms of constraints of government spending going forward. But, it is equally true that the government has front-loaded the capex programme the benefits of which can be evident in the medium term. Again the entire argument of adhering to the fiscal deficit targets and the path of fiscal prudence is being carefully treaded upon and as disinvestments are occurring at a fast pace, it shall give that much-needed elbow room to the centre to meet the targets. B) GST collections are looking stable and though some concerns are being raised that the direct tax collection kitty might grow on expected lines the indirect kitty might actually lag behind. Let me state that any country that implements GST has taken 15-18 months at least to show the validity in its implementation (through improved collection numbers) and for an economy like ours the benefits of more unorganised players coming in the structured and efficient tax process shall ensure the indirect tax collect ions improve reasonably over the next few fiscal’s. C) Private capex has clearly lagged and the same shall not show evident signs of improvement. It is absolutely true that the private capex to GDP stands at 29.5% for FY17 (which is a decade low). This is apparent due to large capacity expansion in the past few years and constrained demand environment that has affected utilisation levels and higher fixed costs for most corporate. Our belief is that government spending on affordable housing, road transport, railways should spur order inflow for corporate, pushing up utilization levels and subsequent earnings recovery.
D) Inflation, IIP and PMI date: Though recent core inflation numbers have looked sticky, they should cool off especially the food inflation factor. As far as IIP numbers are concerned the factors mentioned above should lend a gradual improvement in the numbers but the consistency in the numbers shall take few months to achieve.Populist Budget: One of the other variables that the financial markets shall track over the next few weeks is the Budget and what to expect from it. Though a large part of the market is having perceptions of a populist budget being tabled, as it would be one of the last full fledged budgets before the next general elections, what the exchequer shall deliver would be an interesting affair. The Exchequer needs to balance that very thin line of being “too populist” and carrying on judiciously expending in areas where impetus is mandated spurring job creation, consumption patterns showing vital recovery signs with job creation going up leading to credit growth still languishing in mid single digits) picking up which would reflect in better and improved GDP numbers. Yes, a few social scheme announcements are on the cards spurring and incentivising rural and semi-rural areas but my opinion is that planned capital expenditure on the government’s balance sheet shall witness significant expansion and it ideally should not be a “too populist” budget that the apprehensions surrounding it might have. Actions by the FED/ECB: It seems from the recent FED commentary and the ECB notes that the monetary tightening schedule is on expected lines (Bond market’s long term paper indication) and the ECB is having a stable approach in lending support to the fragile economic recovery of the Euro zone. Crude Oil: This might be a joker in the pack. IN FY17, India’s import bill was close to $86bn with the presumption of crude prices hovering around that $55/barrel mark. With Oil prices around $60/barrel and if they stay this way for the better part of the remainder of this fiscal, the import bill might go up by $8bn assuming the currency movement against the dollar is not adverse. A general rule is that a $10 increase in oil prices can push up CPI inflation anywhere between 0.35 to 0.50%. A higher oil price scenario can thus negatively affect our trade, current and fiscal equations (due to more subsidies), create input cost inflation, affect corporate profits and put a wheel in the spanner for a recovering investment cycle. Though it is a outside risk for the markets, increase in prices shall lead to higher US Shale production (drawdown in US Inventories need to be closely monitored) offsetting the production cuts by OPEC countries and bring stability to prices. It thus should not be a risk factor until in crosses the $70 mark and stays above it. So, where do all these factors place the Indian equity markets. Domestic liquidity remains extremely strong and buoyant leading to support for the markets but all the factors in their own weightage need to be played out for a meaningful re-rating of the markets. Political events have a bearing on the markets from a short term perspective but the markets revert to core fundamentals of the economy and we are on the cusp of a strong economic recovery, placing us in a better position compared to most of our emerging market peers. Will the recovery be gradual? Yes. And will it reflect positively on our economic landscape? Absolutely so. That said, we do look forward to “acchhe din” going ahead.
Mayuresh Joshi is a Fund Manager with Angel Broking Ltd