Wednesday, 25 November 2015

Where is Dalal Street headed as December looms?

After a stellar performance in 2014 when the Sensex emerged as the second-best performer among major markets, 2015 has brought little cheer for Dalal Street traders with the 30-share benchmark tumbling over 6 per cent so far this year, as slow pace of reform implementation, a sluggish economy and global headwinds fuelled an exodus of foreign capital.

Discontented by the progress on key reforms such as the Goods and Services Tax (GST) and the Land Bill which have been hit by political roadblocks, coupled with heightened speculation of an imminent interest rate hike by the US Federal Reserve, foreign institutional investors (FIIs), a key driver of Indian equity markets, have pressed the exit button, selling Indian stocks worth USD 672 million in November thus far, the most among emerging markets after South Korea.

A tepid bag of Q2 earnings numbers, a continued export slump, the slowest factory growth in four months in September and a pickup in the pace of consumer inflation to a four-month high in October, are indicative of the fact that Asia’s third biggest economy has lost momentum, adding to the gloom and doom at D-Street.

As we approach the end of the calendar year, the Sensex is likely to be driven by three major factors i.e., the outcome of the Winter Session of Parliament which is crucial to deciding the fate of key bills such as the GST & the Land Bill stuck due to policy stalemate, the RBI’s policy meet on December 1 and the Fed policy outcome on December 15-16.

The BJP’s disastrous showing in the recently held Bihar elections means that the ruling NDA government still lacks the numbers to push through key economic policies in the Upper House of Parliament. However, if Modi and his men are able to muster enough support from the opposition and get key legislations passed, the Sensex could be in for a major positive surprise. While the government has its hands full as far as getting opposition parties on the same page with regards to key bills, it has signaled some seriousness over re-starting the stalled reform process by giving nod to a 10 per cent stake stale in Coal India, approving the IPO of Cochin Shipyard and announcing a five-year interest subsidy scheme for exporters.

The RBI is unlikely to oblige with another rate cut next month & maintain status quo on policy rates amidst a resurgence of consumer inflation which accelerated for the third straight month in October 2015, to 5 per cent from 4.41 per cent in September 2015, and as the central bank awaits the Fed policy decision.

Even as markets have already priced in a rate lift-off by the Federal Reserve next month, the occurrence of the actual event could prompt a knee-jerk reaction in domestic equities. But, stronger fundamentals compared to EM peers are expected to ensure that Indian stocks may be less affected by a Fed borrowing cost hike. Fed members have signaled a strong case for a hike in short-term interest rates for the first time in almost a decade, next month.

In the absence of any positive surprise on the reform front, the Sensex is likely to see a range-bound and tepid December, with foreign investors unlikely to bet big on Indian stocks amidst delayed reform implementation.

Latin Manharlal Group

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