BoE gives fresh wings to markets.
World-over equities are on a roll due to ongoing risk-on trades globally. This is driven by ample liquidity. Emerging markets (EMs) are enjoying their pie of global fund allocation, driving markets higher. Indian equities have been on an uptrend for over five months, and have not seen any meaningful correction after hitting 52-week lows in February. This long rally in Indian equities is clearly showing signs of fatigue.
The Indian Parliament recently cleared the GST Constitutional Amendment Bill unanimously, paving the way for India’s biggest tax reform post liberalisation. This blockbuster event failed to bring cheer to the Indian markets as the news was already factored in by investors. The NIFTY reacted mildly to the event, opening higher by 56 points but closing just 7 points higher at 8551.
The tiredness in the NIFTY remained short lived as the Bank of England (BoE) announced strong steps to cushion its economy from the aftershocks post the Brexit vote. The BoE cut its benchmark interest rate by 25bps to 0.25 per cent – the lowest in its 322 year history. It also announced a hike in purchase of up to £10 billion of UK corporate bonds and additional purchase of UK government bonds of £60 billion, taking the total stock of bond buying to £435 billion. This announcement has given further wing to the risk-on environment, fueling a sharp rally in global equities. The NIFTY closed up 1.5 per cent i.e. 132 points post the announcement by the BoE.
Most of the major developed economies are injecting liquidity through bond purchases to provide a boost to their ailing economies. This flood of liquidity is finding its way into global financial markets, resulting in risk-on. In the process, emerging markets are getting their share of fund allocation, driving their equity markets higher.
According to Timothy Moe of Goldman Sachs, Asian equities have seen $17 billion of FII inflows since Brexit lows. Fund managers look under-exposed and may be forced to chase markets. Countries like Taiwan, South Korea, Indonesia and Thailand have received $5.48 billion, $3.9 billion, $1.3 billion and $1.2 billion in July. Indian markets have received nearly $1.8 billion.
On a shorter timeframe markets are looking tired and may take a breather in the near term. Most positives are already factored in. Indian equities have run up by over 27 per cent since the February lows of 6825. Investors are apprehensive about the stretched valuations of Indian markets vis-à-vis other emerging markets. India is quoting at a substantial premium to EMs.
Corporate results were a mixed bag – not very encouraging, but balance sheets are on the mend. For these valuations to sustain, it is important for fundamentals to catch up with the prices. The passage of GST has paved the way for India’s biggest reform since liberalisation, but there is still a long way for that to be fully implemented. The government has set an ambitious target of implementing GST from 1 April 2017 in totality. But considering that it further involves multiple other challenges, the deadline seems too optimistic. The real benefits to the economy from the implementation of GST are at least 2-3 years away.
As expected, the RBI has maintained status quo in its August Monetary Policy, as it sees upside risks to 5 per cent inflation target for 2017. To counter inflation risks, government has unveiled a 4 per cent inflation target (+/- 2 per cent) for the next five years under the policy framework with the RBI which bodes well for the financial markets.
All the major events are out of the way and most positives are already factored in for Indian markets. In the near term, markets could show tiredness and may consolidate before the next up move.
Overall investors’ appetite for Indian equities is strong. India continues to remain largest overweight in Asia. The macro-economic fundamentals and demand scenario is steadily improving with above-average monsoons. The implementation of the VIIth Pay Commission will have a positive impact on the economy. The economic data came in better than expected, with industrial production and manufacturing PMI showing strong improvement.
In the otherwise gloomy global environment, India continues to remain the shining star. It is one stock which should be ‘Long Only’ in any portfolio. The real potential of the country is yet to be unleashed.
This article was originally published in Business India Magazine.
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