The Indian equity markets are carrying on their fine show, with the key indices moving into uncharted territories. Though we did witness some volatility towards the end of October, sentiments underpinning the markets have remained strong. This confidence is the result of a newly introduced progressive ecosystem, wherein there has been a huge penetration of mutual funds and stocks and increased financialization of household savings.
There are various headwinds that the market is encountering, which directly impact our medium-term outlook. While, the markets may consolidate in the medium term, the long term perspective appears to be strong.
Currently, the market is speculating on a significant rise in crude oil prices. Disruptions in the Middle Eastern oil producing nations has resulted in a spike in our import bills. Its consequent repercussions can be seen in our trade deficit. Though rising crude prices may be an outside risk to our markets, it would probably get mitigated in the $65-70/barrel mark since it would ensure enhanced shale gas output. Besides, improved supply would arrest prices from surging too high. Effectively, the crude equation should not be a huge worry for the equity markets unless there is a geo-political situation which causes an upheaval – affecting risks on asset classes worldwide.
The market headwinds are clearly being affected by the corporate tax cuts in the US. The unusual delay in the Senate nod for corporate tax reforms had led to disappointment in US markets. The volatility caused in the performance of other emerging equity markets was a direct aftermath of this phenomenon. However, we have expectations of earnings recovery in the second half of this fiscal year, making this easier to digest. The on-going debate of the GST council on whether to include a large number of components under the 18% tax bracket, is likely to provide a sigh of relief to businesses and consumers alike.
State elections and their outcomes have always been crucial in directing our domestic equity markets. Though it remains an elusive event, the risk in the markets is an outcome of two probable reactions. The markets might react positively on a favourable result outcome of the incumbent government retaining their share,or might get disappointed on a contrary result. At present, the Indian markets are valued higher than emerging markets. Even if one assumes a 14-15% CAGR in earnings over the next two years and there is an imminent sign of the private capex cycle picking up over the next few quarters, it needs to start reflecting in the IIP (Index of Industrial Production) and PMI (Purchasing Managers Index) numbers, leadingto an improvement in the capex/GDP ratio – which today stands at 29.5%.
While it is true that fiscal spending is in excess by 90% of the allocated budget figure, it is also true that the same has been front loaded by the government. Thus, fiscal deficit, along with Government spending has been curtailed. The tax base has gone up exponentially, and GST shall bring in better tax compliance as more businesses come under the tax net over a period of time. Also, the disinvestment targets should be achieved giving the government marginal headroom to work on its planned spending program.
There is no doubt about the valid apprehensions the markets are harbouring at this point of time – but as mentioned above, we seem to be moving forward nonetheless. Earnings recovery, and a strong capex recovery shall lend a fillip to the markets, and as corporate earnings start coming through far more consistently over the next few quarters, the Indian equity markets shall validate its earnings matrix and the premium that it derives.
Sectors that investors can look out for are –selective PSU banks, selective rural focused financing firms, EPC Players in the roads and power sectors, selective power distribution or transformer players, selective players in the abrasives, ceramics, plywood, home improvement spaces, and cement companies.