Markets are likely to remain volatile in Samvat 2075 owing to a politically heavy calendar (upcoming State elections over new few months, and General elections next year) and macro challenges emerging from rising crude oil prices and widening fiscal and current account deficits.
“The next 12 months will be quite challenging marked by uncertain political events and evolving macroeconomic scenario,” says Naveen Kulkarni, head of research, Reliance Securities.
While the recent sharp correction has made valuations attractive for select stocks, experts remain cautious and suggest investors adopt a stock-specific approach.
Kulkarni believes the market is unlikely to see any significant re-rating from the current levels and valuation multiples are likely to persist or even decrease from the current levels. But, such conditions provide opportunity to accumulate quality stocks at reasonable valuations.
Jagannadham Thunuguntla, Senior Vice President and Head of Research at Centrum Wealth appears to have a similar view, “Investors have to be extremely stock specific in the upcoming Samvat, as markets have become highly unforgiving on the fundamentally weak companies and rewarding the fundamentally strong companies quite well.”
Here are five key factors that are likely to impact market sentiment in Samvat 2075:
Elections: The outcome of assembly elections in five states – Chhattisgarh, Madhya Pradesh (MP), Mizoram, Rajasthan and Telangana slated for November and December – is one of the key factors that will decide the near-term market movement. Markets are currently factoring in a 2:1 win for the Bharatiya Janata Party (BJP) in the three large states of Rajasthan, MP and Chhattisgarh, and any disappointment could weigh on investor sentiment. That apart, pre-poll alliances and the actual outcome Lok Sabha elections will be key.
Crude oil is another factor that investors will keep an eye on. US sanctions on Iran, effective 5 November is an important development and will reflect on oil prices. For now, the US is reportedly allowing some temporary exemptions to countries including India, which import significant amount of oil from Iran, to help avoid disruptions. How the global demand-supply situation pans out and its impact on prices will have bigger ramifications for India.
Rate hike and trade war: Global trade war and risk of further rate hikes by the US Federal Reserve (Fed) also pose headwinds for international equity markets. With the US economy strengthening, the Fed has been on a rate hike path. This, in turn, has pushed up US 10-year yields to 3.2 per cent levels, leading to reversal of investment flows from emerging markets to the US (both bonds and equities). Some projections peg the US 10-year yield to move closer to 4 per cent in coming quarters.
Rupee: The rupee has been one of the worst-performing Asian currencies in the past year. Going ahead, analysts expect the rupee to stay under pressure in case the pace of outflows of foreign investors pick up pace amid deteriorating macros back home. Pressure on the rupee could increase if oil prices surge.
“Recently, the RBI seems to have started to intervene again in the FX market. Assuming global crude oil prices stay elevated (slightly above $80/barrel), we retain our bearish view on the rupee and see the USD/INR at 76 over the next three months," says Tanvee Gupta Jain, economist, UBS Securities India.
Health of the economy: Even though the GDP (gross domestic product) growth has picked up over the past one year to 8.2 per cent for April-June 2018 period (highest in two years), the next one year could pose a challenge in case the fiscal situation worsens due to rise in oil prices. The trend in fiscal deficit for the first half of 2018-19 already suggests that the government may miss its target for the year. Goods and Services Tax (GST) collections have also been lagging in comparison to expectations. The worry is that the government could dole out populist measures ahead of the general elections scheduled for May 2019, which in turn, could put pressure on the fiscal and current account. This, analysts say, may not go down well with the markets, especially the foreign investors.
“The variable which everyone will have to watch out for is oil price. Future inflation will be driven primarily by this factor. Going ahead, it does appear that GDP growth will move to 7.5 per cent with a downside risk in case the present liquidity crunch affects prospective investment. A 25 basis point (bps) rate hike by the Reserve Bank of India (RBI) cannot be ruled out this year and it is only the timing that will be a matter of conjecture,” says Madan Sabnavis, chief economist at CARE Ratings.