Global turbulence may cause nervousness
Indian equities, which were showing signs of fatigue, now warrant caution as the global environment turns turbulent. The NIFTY has moved up one-way from 6900 levels in February-end to 8900 levels in the first week of September, without any meaningful correction. Since then it has been consolidating in the 300-350 point range. Mid-caps and small caps (including penny stocks) continued to outperform, in spite of rising global risks.
India VIX, the leading indicator of volatility in equity markets, continues to quote at lower levels of around 14-15 despite rising turbulence, indicating complacency.
In the near term, India may face the brunt of the volatility in the global environment, despite strengthening its position fundamentally. Chinese trade data for September raises fears about the faltering economic recovery. Chinese exports fell by a shocking 10 per cent y-o-y, creating panic in the commodities and equities markets.
Fed minutes from the 20-21 September meeting has raised expectations of an interest rate hike in the US in December. The central bank has two more policy meetings this year, in early November and mid-December. Street expectations suggest the Fed will hike the interest rate in December, after the US presidential elections which are to be held on 8 November.
Geopolitical situation is a key cause of worry for investors. From the US presidential elections in November 2016 to the impending exit of Britain from the European Union to the constitutional referendum in Italy in December and general elections in France and Germany in 2017, countries around the world are growing increasingly anxious about the effect of these political developments on business activity across the globe. The British Pound slipped to a 31-year low as investors fear UK heading hard for Brexit.
The global financial system is still prone to risks from failure of large financial institutions such as Deutsche Bank, which is Germany’s largest bank. There is a perception that Deutsche Bank is under serious financial stress as it is facing a massive $14 billion penalty from the US Justice Department for mis-selling mortgage backed securities in the run up to the 2008 financial crisis. This perception of failure of the bank, if turns true, could lead to tremors in the European Union and the financial world in general.
Geopolitical tensions and rising uncertainties may weigh heavy on market sentiments. The rising tension driven by a series of preparations for war by the US, Russia, and China have heightened risks, which many believe could turn out in to a possible Third World War.
The data released in India too does not give much comfort. The Index of Industrial Production (IIP) for August 2016 contracted by 0.7 per cent, contracting for the second month in a row. This was primarily driven by persistent contraction in capital goods output, reflecting lacklustre investment demand. Bank credit growth to industry too slumped by 0.2 per cent – falling below zero for the first time in a decade. This reflects lack of demand for credit from the private sector due to under utilisation of capacities. Global crude prices have started hardening which could increase the import bill for India.
The earnings season has just kicked off, which will provide more clarity on revival of earnings growth. Investors will track forthcoming results to gauge the strength of economic recovery.
These are just near term concerns and do not reflect India’s strong position fundamentally. Indian markets are quoting at premium to other markets due to strong fundamentals. The ongoing global uncertainty may keep Indian markets under pressure in the near term. Markets could correct in the event of some mis-happenings in global markets.
On the positive front India has a clear political mandate till mid-2019 and is led by one of the strongest leaders India has seen in a very long time of its political history. The government has shown the resolve to tackle issues to the core, making the Indian growth story stronger.
India has experienced one of the best monsoons in last few years, with a good geographical spread. This will drive rural demand. The payout on account of the VIIth Pay Commission is also expected to improve consumer demand. Monthly sales numbers announced by auto companies reflect a strong revival of demand. Strong consumer demand, as reflected from bumper sales of leading online shopping companies during the ongoing festive season, shows optimism.
The near term correction in Indian markets will only strengthen the long-term trend of the Indian markets. In the ongoing long-term bull-run, every sharp dip should be used as an opportunity to accumulate.
This article was originally published in Business India Magazine.
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Disclaimer: The views expressed in this article are personal and the author is not responsible in any manner for the use which might be made of the above information. None of the contents make any recommendation to buy, sell or hold any security and should not be construed as offering investment advice.
