The tide turns: Markets have shrugged off the effects of Trump and note ban

The stock indices are attempting to scale new all-time highs once again after two years; both the Nifty and the Sensex are very close to levels reached in the first quarter of 2015. It is not India alone; the US markets are also making new highs. Both countries have gone through extraordinary events and the resilience of their markets has left investors surprised. Donald Trump’s presidency and his unconventional policies have not slowed down the rise of the Dow Jones Industrial Average, which has gained 14 per cent since November 8, the day Mr Trump was declared president. The next few days, however, were not good for emerging markets with the MSCI Emerging Markets index losing 7 per cent along with a rally in the US dollar.

While the new US president was the uncertainty from the global angle, India was grappling with the note ban, which was announced just a few hours before Mr Trump was declared victorious. There were fears that the note ban would shave off some part of the gross domestic product (GDP) and hence, corporate profitability. So, Indian markets languished till December. But come 2017, there are hopes of global growth improving as the US focuses on reviving its economy, Europe is showing a better outlook, and Brazil and Russia are on a path to recovery. Back home, while the pain of demonetisation was felt in certain consumer-facing industries, overall corporate results in the third quarter were a surprise as India Inc benefited from higher commodity prices and improved profitability in the manufacturing sector. Foreign institutional investors, which had sold equities of over Rs 11,000 crore in 2016, have already bought Rs 10,000 crore worth of stocks in 2017 so far. Domestic investors, too, are looking at equities as an important asset class and the number of accounts has gone up four-fold to 40 million since 2010-11. Equity funds have seen an inflow of over Rs 50,000 crore in 2016-17, most of which is coming through systematic investment plans.  

With these flows and improved sentiment, the Sensex is up nearly 5 per cent from its November 8 level, the day demonetisation was announced. In stocks, a major contributor to the current rally is heavyweight Reliance Industries, which has gained 28 per cent since November 8. The Sensex is trading at 22 times trailing 12 months’ earnings of its underlying constituents and is close to its five-year high of 23 times in July last year. In the tenure of the current government, this is the Nifty’s third attempt at crossing the 9,000-point mark, with the first two being in March 2015 and September 2016. On the lower side, the markets went through a rough patch in the first quarter of 2016 when the Nifty fell below 7,000 points due to fears of lower global growth led by a slowdown in China and the commodity price collapse. After demonetisation, the Nifty did not lose as much, falling marginally below 8,000 points for three days at the end of December. 

The outlook on equities remains positive globally. Investors seem convinced that Mr Trump’s economic revival plan will lead to growth, and some inflation will return, which is being seen positively as it will lead to a buoyant environment for stocks. The combined earnings of the S&P 500 constituents are expected to break out with double-digit growth in 2018 after three years of flat performance. In India, all eyes are on the outcome of elections in five states, especially in Uttar Pradesh. But the upside from current levels will be driven more by earnings expectations for corporate India and the downside is likely to be limited for the short-term.