Fiscal deficit to oil & polls, 5 triggers that will drive markets in 2018

While the year 2017 turned out to be a rewarding one for Indian markets, the New Year 2018 will keep investors on the edge of their seats as they take cues from a number of events lined up. While higher oil prices and a widening fiscal deficit could be making them nervous, a political stability with recent election victories of the Bharatiya Janata Party (BJP), in power at the Centre, and signs of an earnings revival would lend them some confidence.

The S&P BSE Sensex and the Nifty50 ended 2017 near their respective record high levels, gaining 30% each.

Here are the top triggers that will drive the markets in the New Year 2018:

1) FY19 fiscal deficit target

The Centre breached the fiscal deficit target it outlined in the Budget 2017-18 in November itself. The country’s fiscal deficit stood at 112 per cent of the full-year target during the April-November period, with four months still to go. There are concerns that the target of a fiscal deficit not exceeding 3% of GDP for FY19 might also be revised in the Union Budget 2018-19. Finance Minister Arun Jaitley will need some additional spending room in the Budget, given that tax collections, especially after the goods and services tax (GST) rollout, has been less than expected.

2) State Assembly elections

The year 2018 will be a politically risky one, with Assembly polls lined up in Karnataka, Madhya Pradesh, Rajasthan, and Chhattisgarh, and the Lok Sabha elections 2019 only a year away. If the tanking of the markets briefly on the day of the Gujarat election results – when the Congress appeared ahead of the BJP for a few minutes – is anything to go by, any poll outcome against the BJP might dampen markets sentiment, and any BJP victory might push the indices higher.

3) Oil prices

India has long enjoyed the economic benefits of lower crude oil prices, but the spectre of rising oil prices is back. Brent crude oil prices surged about 20 per cent to $66 per barrel in 2017 and a sustained upmove to $75-85 a barrel could roil Indian equities, say experts. Going by brokerages’ estimates, every $10 a barrel rise in the oil price worsens the fiscal balance by 0.1 per cent of GDP, and every 10 per cent increase could lead to a 0.5-0.7 per cent increase in the wholesale price index (WPI), besides up to 0.3-0.35 per cent rise in the consumer price index (CPI).

4) Corporate earnings

The strong market rally seen in 2017 was not supported by corporate earnings. The benchmark and broader indices are quoting an incredibly high level of valuations. While the September quarter did show signs of revival in corporate earnings, a disappointing show in the coming quarters could put the brakes on the market’s upward trajectory.  

"Corporate earnings in Q2FY18 were better than expected. Although this is not a guarantee of a full-blown recovery, an earnings recovery for domestic-facing sectors, PSUs’ performance, which has been a drag for several quarters, and globally-linked commodities, is highly encouraging. The drag comes from sectors like pharma which are outward-facing. The low base of the previous years, bottoming of the capex cycle, low interest rates, and boost from infra spends are some reasons why the hope of an earnings revival will remain alive among investors. I personally see a big recovery in earnings closer to FY20, which will start getting discounted next year,” said Amar Ambani, partner & head of research, IIFL Wealth Management.

5) Global cues

The US Federal Reserve is likely to opt for three rate increases next year, somewhat choking the supply of easy money flowing into risky assets. The impact will magnify if other central banks like the European Central Bank follow suit. According to Bank of America Merrill Lynch’s India equity strategist Sanjay Mookim, the US Federal Reserve’s liquidity infusion is likely to peak in the second quarter, which could impact global asset inflation, hurting Indian equities.

“India is joined at the hip to the global tide, irrespective of its differentiated long-term potential. Foreign investments (into India) have been pretty volatile and increasing return on equity in US, if and when the Fed hikes rates, may shift the flow of funds,” Mookim said. CLICK HERE FOR FULL STORY