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<b>Devangshu Datta:</b> Unpredictability could be a big factor

The lunar nature of religious holidays leads to difficulties in calculating consumption year-on-year. GST implementation could be delayed again. In the US, the presidential elections are turning out t

Devangshu Datta: Unpredictability could be a big factor

Devangshu Datta
Wandering around the Diwali melas, I had an intriguing thought: How much consumption has moved online, given humongous discounts from Amazon, Flipkart, etc? It’s hard to tell but online marketplaces are subsidising middle-class lifestyles. For what it’s worth, Amazon lost  $540 million on recent overseas operations (mostly in India) and Diwali melas seem less physically crowded than one expects, given a fair monsoon and Pay Commission hikes. Maybe there is a connection between those two data points. 

The lunar nature of religious holidays leads to difficulties calculating consumption. In 2015, Diwali was on November 11, with Dussehra in October, whereas both festivals are in October this year. This makes year-on-year calculations error-prone. 
 

Both Index of Industrial Production (IIP) and the Purchasing Managers’ Index (PMI) (services and manufacturing) ease down during Diwali-Dussehra because large chunks of the workforce are on holiday. The Muharram coincidence in 2016 would add to this downtick. 

In 2015, the lower trend was smoothened across October and November. This year will probably see a sharp year-on-year drop in October  IIP and PMI, followed by a sharp rise year-on-year in November 2016 indices. We’ll get a better sense of consumption only when October-December quarterly results and high speed data such as auto sales are released.

The July-September earnings indicate auto sales are doing well, and so are apparel firms. Auto ancillaries are certainly doing well and that is connected to strong OEM (original equipment manufacturer) offtake. Housing finance majors have seen okay volume growth, which could mean an uptick in realty. However, FMCG sales were flat. Banking continues to be in deep trouble and the export earners, IT and pharma are struggling, with poor earnings growth and conservative advisories. 

Returns in the last Samvat have been concentrated in smaller caps. The giants of the Nifty (up three per cent) have underperformed the Nifty Next 50 (up 29 per cent!) and BSE small caps (up 20 per cent). Overall, the Nifty 500 is up about nine per cent. 

Three central banks — the US Fed, the Bank of Japan and the Bank of England — release policy updates this week. All are expected to maintain status quo until after the US presidential elections. The strong US economy surprised on the upside and a Fed Funds hike is seen as highly likely in December. The UK has not yet suffered negative Brexit impacts. Gross domestic product numbers surprised on the upside there as well. Japan remains Japan.

The US presidential elections are harder to call than at first glance. Most polls favour Clinton on average but the standard deviations are very high. In specific “swing” states, the differences between Trump and Clinton are close to error range; there is a large undecided contingent of voters and about six per cent of voters favour Libertarian Gary Johnson. “Undecideds” and “Libertarians” could go decisively either way.

So the election is closer than it looks and dependent on the news cycle. The Federal Bureau of Investigation has said that emails collected in the Anthony Weiner sexting scandal may have a bearing on the probe into Hillary Clinton’s use of a private email server. (Weiner was married to Clinton aide, Huma Abedin.)

These developments — and the previous release of emails hacked from Clinton campaigner John Podesta —may seem bizarre. But there was instant negative impact on Clinton’s polls. There will be panic across global markets if Trump wins. 

Devangshu Datta: Unpredictability could be a big factor
On the domestic front, the goods and service tax (GST) is now running into another round of negotiation and dilution. A seven-rate tax with exemptions seems a little absurd — GST was supposed to simplify the tax system.  While analysts are still positive on GST, timelines on implementation could be pushed back, or the impact may be diluted. The closer we get to the next set of general elections, the more cautious the government will be about implementing a system that will cause chaos at least for one fiscal, probably more.

Last but certainly not the least where investors are concerned, the Cyrus Mistry versus Ratan Tata fight has been vastly entertaining but hard to parse, so far. This will continue to play out for months. It will cause huge fluctuations in valuations of listed businesses from India’s most respected conglomerate. 

Will it lead to drastic reshuffles in management? Quite likely. Will Tata concerns go out of business? No. 

Remember that the Mistry family is a very large shareholder in Tata Sons. Is this a buying opportunity? It could be like catching a falling knife. My instinct would be to wait for the next set of developments and perhaps, the appointment of a successor.

Technically, the US election results and news related to that event will be awaited with bated breath and that means price unpredictability. There could be a relief rally if Clinton wins. But the shadow of a Fed rate hike in December may prove a dampener. Foreign portfolio investors sold heavily in the last fortnight. The Nifty has held above support at 8,500. That level looks critical. If it breaks, a slide till 8,100 is likely.



Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

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First Published: Oct 30 2016 | 9:22 PM IST

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