Champagne times coming!

Sanjiv Chainani
Mr. Sanjiv Chainani is the Managing Director of Value Line Advisors Pvt Ltd.

Markets to resume uptrend post the US elections

For the past three months the NIFTY50 has been range-bound, trading within 400 points between 8500 and 8900. Investors are taking a cautious approach due to the impending US elections, which can affect US policies and global economic growth. This uncertainty is also reflected in the US Dollar Index, which is at 97.39 levels.

Our column in the previous issue of this magazine had suggested it was time for caution as too many global headwinds were adding to uncertainty – the major one being the outcome of the impending US elections. Most pre-poll surveys indicate a close contest between both the candidates, with Donald Trump showing a minor lead over Hilary Clinton. We believe the period of uncertainty will come to an end post the election results.

Today, Trump winning the presidential election is considered one of the biggest sources of global risks. If this happens, there could be a knee jerk reaction in the global markets in the short term, but as soon as the panic recedes Indian markets should bounce back. Trump has gone on record taking a positive stand towards India. On the other hand a victory by Clinton would ensure the status quo in policies and hence it will be business as usual for India. In both cases there will be no major negative impact on India. The Indian market will move ahead on its upward trajectory.

The asset quality of banks has stopped deteriorating further as economic revival gathers pace. Stressed sectors like infra and construction, steel, etc, are seeing government support. The government has already announced the release of arbitration proceeds for the cash-strapped infrastructure sector, and there are expectations of a one-time settlement package for the ailing construction sector. The government has imposed an anti-dumping duty on imports of steel wire rods from China to protect domestic manufacturers from cheap in-bound shipments. More steps are likely to be announced by the government as ASSOCHAM, the industry body, has urged government to address the steel sector’s core issues. These measures indicate the worst is behind as far as bank’s asset quality is concerned.

India has seen one of the best monsoons in recent years, covering the entire country. This, along with numerous government schemes, is bringing about major changes in rural income patterns. Government initiatives such as crop insurance scheme, water conservation by building ponds in rural areas, etc, will provide stability and help reduce volatility in rural incomes. The rural economy is in for good times in the years to come, creating a strong base for the economy.

Inflation has remained subdued, which will enable the RBI to cut interest rates to support economic growth. Urjit Patel has announced a 25 bps rate cut in his first monetary policy as governor. He also suggested that the “real” inflation-adjusted rate desirable by the RBI should be 1.25 per cent as against 1.5-2 per cent as desired by Raghuram Rajan. This gives more leeway for the RBI to cut interest rates even if the US Fed decides to hike interest rates. So, the hike in US interest rates in December will have no major impact on India.

As indicated from the surgical strikes by the Indian Army, the government has shown its resolve to deal firmly with cross border strikes and infiltration bids from across the border. Recent developments in the Indo-Pak diplomatic relation-ship have added tension between the two countries. These geo-political tensions are keeping investors nervous. The likelihood of any full-fledged war-like situation between the two countries remains minimal during the winter, thereby reducing uncertainty in the near term.

The government is working diligently towards timely implementation of GST by 1 April 2017. This will boost the growth prospects of the Indian economy. S&P has reaffirmed the stable outlook on the country’s ‘BBB-’ long term and ‘A-3’ short-term sovereign credit ratings. Despite global uncertainties and ongoing redemptions by foreign investors from Indian financial markets, forex reserves stood at $367.14 billion in the week ended 28 October 2016. India’s factory activity rose for the 10th consecutive month to a 22-month high in October. The manufacturing PMI increased to 54.4 in October, rising from 52.1 in September.

Indian equity in its current form is like a bottle of champagne: full of fizz, shaken but kept contained by the cork. The moment the cork is popped, it will unleash a mighty spout and send the cork flying forward at high velocity. The longer the markets remain suppressed, the stronger they will bounce back. We have experienced this earlier, post the sharp correction of February 2016. The best times for India are yet to come.

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.