A change of guard

In 2017, markets will increasingly depend on domestic investors

The concerns of the global investment community in 2017 centre on known unknowns. It is known that a new US president with unusual policy prescriptions will take charge but it is not known what the policies will be. Britain is exiting the European Union but it is not known how. There are elections in Germany and France and (obviously unknown) outcomes could lead to tectonic policy shifts. The Organization of the Petroleum Exporting Countries and Russia have negotiated a cap on production of crude oil but it is not known if that will hold. The geopolitics of conflict resolution in West Asia and Nigeria could also have a bearing on energy prices. Closer home, China is struggling with its slowest growth since 1991 and a crisis in its bond market. It is not obvious how the world’s second-largest economy will handle this. In India, it is clear that policymakers must craft a path to recovery after demonetisation but how that will be conceptualised is also unknown. Yet, amid all this uncertainty, a few global themes are visible. 

A strong dollar has already triggered massive capital flight from emerging markets in 2016 and this trend could accentuate in the new year, given the hawkish prognosis from the US Federal Reserve. Indian equity markets have not seen much support from foreign investors in the past two years, with net equity inflows of around $3 billion each for both 2015 and 2016, as compared to a total of $60 billion in the preceding three years. Moreover, venture capital and private equity fund flows into India have also eased. Going forward, foreign investments may continue to remain muted as the US Federal Reserve increases interest rates in 2017, keeping funds away from emerging markets.

On the other hand, domestic institutions have emerged as a powerful counterforce, with equity investments of over Rs 36,600 crore ($5 billion) and Rs 66,800 crore ($10 billion) in 2015 and 2014, respectively. Since November 8, domestic institutions have stepped up to buy Rs 21,800 crore ($3.30 billion) of equities as foreign investors sold shares of over Rs 24,000 crore ($3.60 billion). Retail investments, mainly through mutual funds, are increasing and are expected to continue to rise. Interest rates, which are already low, will fall further, and domestic financial savings are expected to continue to flow into stock markets. Systematic investment plans in equity funds, which were at Rs 2,500 crore a year ago, are now seeing monthly inflows of over Rs 3,500 crore. In a world where countries are increasingly turning inward, the domestic investor will have to bear the burden of supporting stock markets. 

Currency risks in 2017 will be accentuated if the differential with the rupee yield is reduced. But a strong dollar can encourage exports. However, there are fears about incoming US President Donald Trump raising protectionist barriers. This may affect technology services revenue, too. What about domestic economic recovery? That depends on political developments. Already, there is a question mark on the timeline for the implementation of the goods and services tax. Complicating matters are several Assembly elections, especially the big one in Uttar Pradesh. Demonetisation is another factor that has reduced visibility. Future action by the government in terms of restructuring the tax regime, including direct taxes, as well as cracking down on benami property add to the uncertainty.