 "2016: Year of domestic improvement with global headwinds")
No one thought at the beginning of the year that the Nifty would give negative returns, with crude/commodity prices plunging, best current account deficit in 10 years, contained inflation levels, and the Reserve Bank of India (RBI) cutting interest rates by 125 basis points. So, what has happened? One could be tempted to blame the government for the weak market performance but that to my mind would be a hasty conclusion.
2015 began with high expectations on Indian macro, which surely improved but one missed to assess the impact of sharp fall in the commodity prices on emerging markets (EMs) as an asset class and thereby resultant outflows from the EM funds. India receives most of its flows being part of this class than as an independent destination, and that was a significant reason for markets’ weak performance.
During the worst periods for Indian economy – 2012 and 2013 -- when India’s prospects were deeply clouded by policy paralysis, persistently high inflation, large twin deficits and significant deceleration in economic cycle; India received extremely robust capital flows of $25 billion and $20 billion and Nifty delivered 27 per cent and seven per cent returns, respectively. Contrast it with 2015, where FII flows have slowed to barely $ three billion and Nifty is down five per cent, despite fundamentals looking best among comparable EMs. Whether we like it or not, India is a part of a larger EM asset class and sentiments of the global investors vis-à-vis EMs overwhelms the fundamentals of an individual EM.
One would shudder to think about the performance if domestic flows were not so strong. Undoubtedly, some of the issues like delayed pick up in corporate earnings, capex cycle and controlled government spending played its role as well.
The good part is, 2016 is starting with muted expectation unlike 2015.
Domestically, macros are improving and process of macro to micro percolation is on. Power sector reforms, government’s push on infrastructure spending and initiatives of improving efficiency will surely lead the way for capex recovery and thereby pushing the economic juggernaut rolling. Job creation and corporate profits are two key variable investors would love to see improving but they will happen with lag. I think the situation is well on its way of improvement. GST implementation, slowing exports, slowing rural economy are surely a cause of worry.
Global situation though remains very complex and uncertain. The US remains strong and the Fed is surely moving towards reverting to normalcy. Europe continues to be in weak spot. European banks are in a vulnerable situation with added stress from commodities and EM exposure. China is in its own process of finding a balance and any significant devaluation of the Yuan can unnerve the EM basket all over again. Headwinds can surely be expected from complex global macros and India cannot escape, in case of risk off. India will again benefit from flows only if EM funds get flows, which is a highly unlikely scenario. Surely, we might not see major outflows from current levels. India has relied on domestic liquidity which I remain reasonably optimistic on.
I continue to believe that India is in the middle of a structural bull-run and this period of consolidation due to global headwinds is a great opportunity to build exposure towards equities. Obviously, there is no substitute to bottom-up stock picking. I remain bullish with lots of apprehensions from global front.
2015 began with high expectations on Indian macro, which surely improved but one missed to assess the impact of sharp fall in the commodity prices on emerging markets (EMs) as an asset class and thereby resultant outflows from the EM funds. India receives most of its flows being part of this class than as an independent destination, and that was a significant reason for markets’ weak performance.
During the worst periods for Indian economy – 2012 and 2013 -- when India’s prospects were deeply clouded by policy paralysis, persistently high inflation, large twin deficits and significant deceleration in economic cycle; India received extremely robust capital flows of $25 billion and $20 billion and Nifty delivered 27 per cent and seven per cent returns, respectively. Contrast it with 2015, where FII flows have slowed to barely $ three billion and Nifty is down five per cent, despite fundamentals looking best among comparable EMs. Whether we like it or not, India is a part of a larger EM asset class and sentiments of the global investors vis-à-vis EMs overwhelms the fundamentals of an individual EM.
One would shudder to think about the performance if domestic flows were not so strong. Undoubtedly, some of the issues like delayed pick up in corporate earnings, capex cycle and controlled government spending played its role as well.
The good part is, 2016 is starting with muted expectation unlike 2015.
Domestically, macros are improving and process of macro to micro percolation is on. Power sector reforms, government’s push on infrastructure spending and initiatives of improving efficiency will surely lead the way for capex recovery and thereby pushing the economic juggernaut rolling. Job creation and corporate profits are two key variable investors would love to see improving but they will happen with lag. I think the situation is well on its way of improvement. GST implementation, slowing exports, slowing rural economy are surely a cause of worry.
Global situation though remains very complex and uncertain. The US remains strong and the Fed is surely moving towards reverting to normalcy. Europe continues to be in weak spot. European banks are in a vulnerable situation with added stress from commodities and EM exposure. China is in its own process of finding a balance and any significant devaluation of the Yuan can unnerve the EM basket all over again. Headwinds can surely be expected from complex global macros and India cannot escape, in case of risk off. India will again benefit from flows only if EM funds get flows, which is a highly unlikely scenario. Surely, we might not see major outflows from current levels. India has relied on domestic liquidity which I remain reasonably optimistic on.
I continue to believe that India is in the middle of a structural bull-run and this period of consolidation due to global headwinds is a great opportunity to build exposure towards equities. Obviously, there is no substitute to bottom-up stock picking. I remain bullish with lots of apprehensions from global front.
The author is president & chief executive officer, Edelweiss Securities