Market Outlook by Vinod Nair – 6 December

Headwinds turning into Tailwinds…

One by one, the various headwinds have turned positive. Last month the market rallied by 5%, supported by huge fall in oil prices, which also provided a breather to INR with improvement in FII inflows and a relief to the current account deficit. Now we have tailwinds like a short-term truce in US and China trade diplomacy, accommodative statement from Fed Chairman – suggesting a slowdown in the pace of interest rate hike in the US, and some likely measures by RBI to improve the liquidity situation of the domestic financial system. These goodies can continue to improve the confidence of the market by the first quarter of 2019. This is because the world knows the negative implication of trade war and more than the required hike in global interest rate it can lead to a recessionary issue post 2020.

Whereas in India, RBI and Government are working to improve the liquidity situation – which was impacted by NBFC crisis, through prompt corrective actions (RBI norms which had limited PSUBs to lend), NPA problem and Asset Liability Mismatch. Now, given the need for liquidity, an improvement in the fiscal situation and future outlook, both the parties may consider to infuse liquidity in the system. Given the effective measures by the Government, food prices have been bought under control. Also an economic slowdown in the last two quarters, control in consumer oil prices, inflation has been benign below the RBI’s forecasted bandwidths, as a result RBI is not likely to increase interest rates in the future. Given the current stance of “calibrated tightening” taken in the last policy, they may consider a change to “Neutral” in the future.

Some key lead indicators which has improved are; Crude from 86$ to 61$ in two months, Consumer Price Index from 5% in June to 3.3% in October, FII inflows has turned positive to Rs6000cr in Nov from negative 27,600cr in October, US 10 year Bond Yield has reduced from 3.2% in November to 2.9% today and India 10 year Bond Yield has declined from 8.2% in Sept to 7.55% today. This diminishing trend of headwinds at the end of the year are positive signs with ability to change the investment trajectory in 2019, while 2018 has been very volatile with fall in wealth. Domestic headwinds which we may have to face are outcome of state & national elections. This risk which the market is considering today is not going to impact the outlook of India over the long-term, as this will diminish over the next two quarters. Historically, it has been noticed that economic growth and investment reduces in the short-term as the country nears the election.

Market had a hope on the ruling central party in the national election while during the year its popularity has reduced, as per media reports. In the ongoing state election, market may try to examine the overall strength of the ruling party than on state-to-state results, since it can provide an overall glimpse of its performance in the National Election, for some states like Rajasthan, a fall in strength has been factored by the market. A reason for volatility in the near-term.

Posted: December 2018