POST the September quarter earnings, the market may remain bearish in the short to medium term due to stretched valuations with earnings not likely to pick up soon and further downgrades by analysts for FY 2016 and 2017. Also, the Fed rate hike is not going to be a one-off affair; rather, there may be a series of hikes. The world markets, especially the emerging markets, are likely to be on tenterhooks. Despite improved macro-economic fundamentals, India may still not be completely immune due to the impact the Fed hike may have on the outflows of FPI money. The global recovery too is taking longer than expected, resulting in Indian exports falling by 17.3 per cent y-o-y in October, the 11th successive month of contraction.
Most analysts feel that the dollar rally has just begun and that the rupee may weaken further. A weak rupee will not only push up inflation but can also result in financial trouble for companies that have un-hedged dollar loans as the rupee cost of their debt will mount. The dollar debt of Indian companies has grown rapidly and is estimated at $125 billion now. Though global oil prices are generally seen to have a negative correlation with the dollar, it is yet to be seen whether the trend holds this time too. All this can have a serious impact on the financial stability of the economy. The banking system continues to be under considerable stress, which is affecting both the earnings momentum for the market and investment activity in general. India’s growth story also appears to be fading out, as indicated by declining exports and also by the fact that non-oil, non-gold imports are not improving—pointing to declining domestic demand, especially investment demand. Bank credit growth too has declined in October.
FPIs have sold stocks worth Rs. 14,212 crore so far in this financial year. The market might have witnessed sharper correction but for the support provided by record buying of domestic institutional investors (DIIs) on behalf of retail investors who returned to the market in 2014. These flows are expected to sustain, given the lack of attractive investment alternatives and the general belief that the present government has been doing its bit on the reforms front. FDI has shown strong growth, providing some cushion to the rupee in the near term.
India still remains the most attractive market globally. Not only have macro parameters such as current account deficit, fiscal deficit and inflation improved considerably, the government is committed to reforms, boosting growth and creating jobs without going populist. This is evident in the spate of announcements post the BJP’s debacle in the Bihar elections. India’s attractiveness stems from the fact that nowhere else in the world can investors find a $2 trillion market growing at 7 per cent, with the economy at the bottom of the cycle and monetary policy becoming more accommodative. Investors may make effective use of the current lull in the market to get decent returns over a time horizon of two-three years.
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