8 factors that will drive markets in Q2

Global events will continue to be in the limelight, besides domestic policy, earnings and legislation, says Morgan Stanley's Ridham Desai in a new report

The first quarter of calendar year 2015 (Q1CY15) saw the S&P BSE Sensex and the CNX Nifty gain around 1.7 per cent and 2.5 per cent, respectively. For financial year 2014-15, the benchmarks gained 25 per cent and 27 per cent, respectively.

As the first quarter of CY15 and the financial year 2014–15 (FY15) drew to a close on Tuesday, analysts say while global events will continue to be in the limelight, there is a fair bit of domestic news (policy, earnings and legislation) that will grab the market’s attention in the second quarter of calendar year 2015 (Q2CY15).

Ridham Desai, managing director, strategist and head of India equity research, Morgan Stanley, in a new report co-authored with Sheela Rathi and Utkarsh Khandelwal, expects volatility to continue in Q2CY15, likely to be news-heavy with global developments around Fed (US Federal Reserve) policy, global growth data, domestic news flow around legislation and government policy.

Besides, the Reserve Bank of India (RBI)’s policy action on interest rates and the upcoming earnings season (expectations appear muted) will also add to these sources of potential market volatility.

“We expect government spending to rise, at least one rate cut (of 25 bps) if not two, and earnings to be better than in the previous quarter,” he says.

Market outlook
In a March 31 report, titled ‘India Equity Strategy: Events to Watch Q215’, Morgan Stanley lists the following eight events that are likely to impact market sentiment over the next three months (Q2CY15).

Legislation: The land Bill and the GST (Goods and Services Tax) Bill will be up for approval in Parliament in April.

Executive action by the government: Apart from ongoing changes to make business easy to do, the most important action could be in project awards. The government is targeting a 30 per cent increase in investment spending in F2016. This is the most crucial driver for India’s growth in the coming months, Morgan Stanley says.

Macro data: Apart from growth and inflation data, they are also looking at acceleration in government spending (fiscal data).

Rate cut in April? Our out-of-consensus view of a further 100 basis point (bps) of policy rate cuts for 2015 is premised on further weakening in the inflation data.

Export growth and the overvalued rupee: The concurrent subject is that of the rupee’s overvaluation (about seven per cent on REER) and its ongoing impact on export growth

Earnings: Earnings were very weak in the previous quarter. In the coming season, Morgan Stanley expects earnings to be better than in the previous quarter, though they do not expect recovery before the September quarter.

Equity supply: The government has budgeted a doubling of divestments. Morgan Stanley expects more initial public offers and other follow-on offerings in the coming months. A bunching of supply is a risk to short-term equity prices.

US Fed moves and other global factors: These will continue to drive volatility in Indian equities, which is expected to be higher than in the past 12 months. Global growth, China growth, oil prices, EM news flow and US Fed moves as an indicator of global liquidity, among other things, are factors to watch.