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The year 2016, indeed, has been a year of many surprises. From Britain’s unexpected vote to exit the European Union to Republican candidate Donald Trump’s upset victory in the US Presidential election, from Raghuram Rajan’s decision of not seeking a second term as the Reserve Bank of India (RBI) governor to India’s sudden surgical strike on Pakistan – the Indian stock market dealt with all these shocks through 2016. The biggest of them all, however, was the government’s call towards the end of the year to demonetise Rs 500 and Rs 1,000 currency notes.
After 12 months of a roller-coaster ride, the market now seems poised to end the calendar year at almost the same level as at the start of 2016. As at close on Tuesday, the BSE benchmark Sensex was merely 96 points, or 0.4%, higher at 26,213.44, and the broader National Stock Exchange Nifty was up 86 points, or 1%, at 8,032.85.
“The year 2016 began with the hope that economic growth will pick up, monsoon will be normal after two years of drought, and consumer demand will get a boost after the implementation of the 7th Pay Commission recommendations and the one-rank-one-pension scheme. However, the demonetisation move shook the economy; its after-effects are still being felt, with most sectors tottering and consumers still recovering from the thriftiness imposed on them,” says independent market analyst Ambareesh Baliga, looking back at the year.
Here is a recap of all important events that moved the markets this year:
January: The devaluation of the yuan
After a rate increase in the US in December 2015, the market entered 2016 on a cautious note, amid worries over a faster pace of further rate hikes. And China’s fresh attempts to devalue its currency yuan brought back the bitter memories of the ‘Black Monday’ of 2015. In just the first five trading sessions of 2016, over 1,000 points had been shaved off the Sensex, and the Nifty had slipped below the 7,600 mark.
February: Union Budget 2016-17
The market tanked further in the run-up to the Union Budget 2016-17. Later, on the Budget day (February 29) the Sensex ended at 23,002 and Nifty below 6,700. As the market digested the Budget proposals in the days to come, it regained its lost momentum; the Sensex reclaimed 26,000 by April-end. The government meeting its fiscal deficit target for FY16 and setting a comfortable target for FY17, and a higher outlay for infrastructure and farming sectors, were taken positively by market participants.
June: The so-called Rexit
Just when the market was gearing up for Britain’s decision to stay in or exit the European Union, the then RBI governor Raghuram Rajan rattled everyone on a quiet Saturday evening on June 18 by announcing his decision of not seeking a second term at the central bank. A large section of economists and market participants were disappointed, though market reacted only marginally on Monday. The Sensex fell nearly 200 points in early trade but ended 241 points higher at 26,867.
Brexit
Another shocker hit the market as Britain, in a historic referendum on June 24, voted to leave the European Union, sending equity markets tumbling across the globe, with investors turning risk-averse.
The Sensex tanked 1,095 points in intra-day trade, but pared some of its losses to end the day at 26,398, down 602 points from its previous close. The Nifty closed at 8,089, slipping 182 points.
“Brexit happened against expectations of almost all pundits and created uncertainty over the stability of the euro zone. The latest Italian referendum further weakened the foundations of the EU. The world will closely watch the efforts of the leaders to maintain stability in the block,” says Kamlesh Rao, chief executive, Kotak Securities.
July-September: Monsoon, GST Bill
The market mood remained positive from July to September on the hope of above-average monsoon, expectations of an uptick in corporate earnings and the GST Bill turning into law. During the period between July and September, the Sensex reclaimed its crucial 29,000 level, while the Nifty surged beyond 8,950.
September: Surgical strike
Rattled by the Indian army’s attack on some terrorist camps on the other side of the border with Pakistan, India’s headline indices slumped to their Brexit day lows on September 29, making investors anxious over rising geopolitical tensions between India and Pakistan.
“The worsening bilateral ties between India and Pakistan as a result of the latter’s state-sponsored terrorism kept the markets on tenterhooks every now and then,” says Baliga.
November: Donald trumps Hillary in US election
The market reaction to Donald Trump’s victory in the US Presidential election was unexpectedly positive. “Trump triumphed against all odds and forecasts. While markets fell immediately after the event, his comments on providing fiscal stimulus to the US were greeted by the markets, with the Dow Jones Industrial Average almost touching 20,000. The strength of the dollar created a risk-off sentiment and emerging markets were hit by funds flowing back to the US,” says Kotak Securities’ Rao.
November: Demonetisation of high-value currency
All forecasts of an earning revival and market hitting fresh highs by December-end turned upside down after Prime Minister Narendra Modi on November 8 announced his government’s decision to withdraw the legal-tender status of the Rs 500 and Rs 1,000 currency notes. Since then, the Nifty has lost over 500 points, or 6%, to trade just a tad above the 8,000-mark, while the Sensex has shed over 1,300 points, or 5%, to hover around the 26,000 level.
“The demonetisation effort by the government has impacted the economy since November and the impact is also expected to persist in the January-March quarter of FY17,” Rao adds.
December: Surge in oil prices
Baliga says that the decision of the Organization of the Petroleum Exporting Countries (OPEC) to lower oil production confirmed that the days of subdued oil prices were set to be over, and the world should brace for higher prices. At present, crude oil prices are ruling at $53 a barrel for West Texas Intermediate and $55 for Brent Crude.
Another rate hike by the US Fed
Towards the end of the year, the US Federal Reserve raised its interest rate by 25 basis points, as widely expected, but Fed Chair Janet Yellen’s commentary was what took everyone by surprise.
“Fed said the rate hikes in 2017 would be faster than what was earlier expected, so we should expect more FII (foreign institutional investment) outflows going ahead,” adds Baliga.
What lies ahead?
Going into the calendar year 2017, the market will track the demonetisation impact on quarterly earnings. The Budget 2017 and any development on GST will also be in focus. Baliga believes the Union Budget could be tilted to balance the ill-effects of demonetisation. On the global front, Trump’s policies in the US and the impact of Brexit on the European economy will be keenly watched.
