Trump, oil, interest rates, cash: events that markets will react to in 2017

Demonetisation impact, earnings growth, central bank policies are key things that will get attention

It has been an eventful year for the markets that took most of the global and domestic events in its stride. At a global level, events such as Brexit, surprise victory of Donald Trump in the US Presidential elections, rate hike by the US Federal Reserve (US Fed) impacted sentiment. 

On the other hand, events such as government’s clamp down on black money via the demonetisation route, amendments to the Indo-Mauritius tax treaty, passage of the GST Bill in the Parliament, surgical strike on Pakistan and sudden exit of Raghuram Rajan as the Reserve Bank of India (RBI) governor were some of the events back home that the markets reacted to.

Though the markets saw a sharp rally post the presentation of the Union Budget in February, the fall has been equally sharp. As a result, the benchmark indices – the S&P BSE Sensex and the Nifty50 – have moved up just 2% thus far in calendar year 2016 CY16.

Here are five key events that the markets will keep a tab on in calendar year 2017:

Demonetisation impact and corporate earnings: Given the policy move by the government, experts have revised downward their estimates for GDP growth in FY17 and FY18 and recalibrated earrings forecasts for India Inc. Credit Suisse, for instance, recently lowered its FY2016-17 GDP growth forecast to 6.9% (consensus 7%) from 7.8% earlier on demonetisation-led supply-side disruptions in the third and fourth quarter of the current fiscal year. 

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Analysts say the markets are already factoring in the possibility of things returning to normalcy in the next three – six months. A delay, they caution, could see markets correct.

“We expect Sensex earnings growth of 2.5% and 18% year-on-year (y-o-y) in FY17 and FY18, respectively. The relative valuations of equities to bonds are the best post the 2013 low. We expect market to deliver 14% returns in 2017,” points out a recent Morgan Stanley report.

Donald Trump’s presidency and the US Fed: The markets will also be keenly watching key appointments under Donald Trump, his policy initiatives once he assumes office in January, and how the US Fed responds to these initiatives amid a gradual pick-up in its economy. The moves will also impact how the dollar and the bond markets play out, which can have an impact on flows to emerging markets, including India. A brisk pace of hike by the US Fed will dent flows into EMs, including India.

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Assembly elections in key Indian states: Assembly elections are scheduled for Uttar Pradesh, Punjab, Goa, Uttarakhand, Himachal Pradesh, Gujarat and Manipur in 2017. Of these, experts say, the markets will be eyeing the outcome in Uttar Pradesh and Gujarat. The market is pricing in continuity of economic policies past 2019. However, UP and Gujarat election results will be an influence here, and a BJP victory will have a positive impact on the markets, analysts say.

RBI policy: With the RBI maintaining a status quo in its last policy review, most analysts expect the central bank to cut rates in the next policy review in February. By then, they say, the RBI would have had ample time to assess the impact of demonetising and the absorb shocks, if any, after the hike in rates by the US Fed in December.

“W‎e grow more confident of our 25 basis point (bps) ‎RBI rate cut call ‎for February 8 (and 50 bp by April) after November consumer price inflation (CPI) surprised at 3.6% (4% BofAML estimates; 3.9% consensus). Second, industrial production, reported recently, contracted 1.9% in October. It also appears that the demonetisation shock will spill over to January,” points out a note from Bank of America-Merril Lynch (BofA-ML).

Oil prices: For the first time since 2008, Organisation of Petroleum Exporting Countries (OPEC), agreed to limit production by 700,000 barrels per day (bpd) to between 32.5 million and 33 million barrels of oil per day.

 

According to Goldman Sachs, said the deal should add $7 to $10 to oil prices in the first half of next year. This could be a sentiment dampener for India, which imports nearly 70% of its oil requirements. Moreover, any spike in inflation on account of a rise in oil prices could hold back RBI from cutting rates.