Although the special “Muhurat” trading on the first day of Samvat 2073 saw the BSE Sensex fall by 11 points, the mood could be described as cautious optimism. After drought and falling consumption through the past couple of years, a fair monsoon has led to a turnaround in sentiment. The stock markets have yielded strong returns. The Nifty has risen by about 10 per cent since last Diwali, which was on November 11, 2015. Smaller stocks have done even better. The BSE smallcap index is up by 21 per cent while the Nifty Next 50 is up by 30 per cent. Diversified equity mutual funds have delivered excellent returns. Returns from debt funds have also been good. The primary market also saw higher activity, including major issues such as ICICI Prudential Life Insurance and L&T Infotech. Market professionals seem confident that growth will accelerate through 2017-18, setting up an extended bull run.
Personal consumption has shown an uptick. There is definitely a wealth effect, even if it is of modest dimensions. The rural economy has recovered momentum. In addition, there is the Pay Commission bonanza, which has put money into the pockets of government servants. An Assocham survey claims that year-on-year growth of spending during the festival season could be up by 40 per cent compared to 2015. Segments such as apparel, personal electronics (smartphones mainly) and other consumer durables are expected to be beneficiaries. Much of the activity is on online marketplaces. However, it must be noted that 2015 saw very low spending. The estimated rebound in 2016 spending will pull consumption back to around 2014 levels.
The goods and services tax (GST) clearing a major legislative hurdle also indicates that reform is still on the government agenda. The path-breaking change in tax norms could, however, still be derailed or diluted in Centre-state negotiations. The GST is scheduled to come through by April 2017. If it does, fund managers and investors concur, there could be sharp earnings gains. Investment maven Marc Faber, who is generally known for his bearish propensities, says that earnings gains of 20-40 per cent could be on the cards once the GST is implemented. Other analysts might not be quite so enthusiastic but earnings per share (EPS) growth is certainly expected to accelerate.
One possible concern is that valuations are extremely high. The Nifty is trading at a current price-earnings ratio of 23 and it has rarely sustained valuations at such levels. However, falling interest rates are being baked into future valuations. The Reserve Bank of India started cutting policy rates in January 2015 and the new Monetary Policy Committee seems ready to continue cutting. If it does so, higher equity valuations may well be on the cards. Foreign portfolio investments are also expected to keep coming in, given India's pole position as a fast-growing emerging market.
Most fears range around geopolitics or politics. The US will have a new president taking charge soon and that person’s policy stances could be unpredictable. Indo-Pak tensions have also ratcheted up. In addition, there are multiple large state assembly elections due through 2017 and setbacks there could hurt the Bharatiya Janata Party. Issues such as unemployment could also fuel growing discontent. So if the reasons for the optimism seem obvious, so are the reasons for caution. However, “animal spirits” do seem to be back on display and perhaps the first green shoots of economic revival are visible as well.
