Wrapping up 2016: Hits & Misses in Stock Market

The Year 2016 was a tumultuous year in many ways. The year began with a tremendous sense of uncertainty and ambivalence. The global markets lost nearly $12 trillion in value in the first few weeks of 2016. That immediately brought back memories of 1992, 2000 and 2008. All these were nerve racking years for markets and 2016 fitted exactly into that mathematical series. That was however not the case, as markets rebounded sharply post the Union Budget and despite all the worries of Fed rates and demonetization, the Nifty has closed flat for the year. Here is a look back at the key events that shaped the year gone by…

Fortunately, 2016 did not live up to its previous paradigm…

That was, probably, the single biggest take-away from the year. In the past, markets have corrected very sharply at 8-year intervals. If it was the Banker’s Receipts crisis in 1992, it was the technology meltdown in 2000 and the infamous Lehman crisis in 2008. All these 3 years not only saw a sharp correction but also the reversal of a bull market. Fortunately, 2016 did not live up to that dubious reputation, thanks largely to India emerging as the fastest growing economy among the large economies with GDP in excess of $2 trillion. The dividends of cheap oil and a rapidly rising middle class saw India through the year, almost flat.

The dividends of cheap oil are continuing but the impact is diminishing…

Crude oil is still way below the levels of $115 touched in 2014 just before the correction started. So the wealth transfer from oil producers to oil consumers continued in 2016 exactly the way it continued in 2015. But the incremental benefits may be diminishing. Firstly, the government has skimmed away some of the benefits in the form of higher excise duties on oil. Secondly, the oil supply agreement of the OPEC and other friendly countries will act as a check on any fall in oil prices. This matters a lot for India as she depends on imported oil for nearly 80% of its oil needs and this is unlikely to change in the near future.

Monsoons returned to normalcy after 2 years of drought…

The truth is that in 2016, India still experienced a shortfall in monsoon by about 3%. But compared to the 13-15% shortfall in the previous two years, it had a salutary impact on the Indian economy. For starters, India has already reported a sharp increase in Kharif output, which largely depends on the timeliness and spread of the monsoon. Food inflation is sharply down to just about 2.11% in November and this is lower than the overall CPI inflation of 3.63%. Lower food inflation has enabled the RBI to maintain the dovish tone of its monetary policy, which has been supportive of debt and equity markets during the year.

Inflation is down but other concerns remain…

During the year, the CPI inflation fell sharply below the RBI’s comfort level of 5%, largely driven by food inflation. This opens the doors for further cuts in interest rates when the situation warrants. However, the RBI has expressed concerns over non-food inflation which continues to be sticky despite the base effect. The bigger concern for the government and the RBI will be the Index of Industrial Production (IIP) growth for the year. Led by negative manufacturing growth, IIP has disappointed with negative growth. An improvement in the IIP is the key to a revival in corporate top-line growth and a pick-up in the GDP.

India may have become the fastest growing economy in 2016…

While there are debates over whether Indian real GDP will grow at 7.1% or 7.4%, it is almost likely to outpace all the other large economies in the world including China. So why is this important? A growth advantage over China gives India the firepower to pitch more aggressively while competing for FDI and FII investments. During the year, India has been the largest recipient of FDI in most of the months and also likely to end the fiscal year as the biggest magnet for FDI flows.

Equity Mutual Fund cult finally caught up in 2016…

According to SEBI data, Indian mutual funds have reached over 37 million (3.7 crore) equity mutual fund folios during the third quarter of the year. This is an all-time high for the Indian mutual fund industry and the good news is that the number of SIP (Systematic Investment Plan) accounts also saw a sharp increase during the year. Finally, Indian investors have adopted the phased approach (SIP) to creating wealth in the long term and that bodes well for the equity cult in India.

Global trends added to the uncertainty of 2016…

There were a plethora of key global trends during the year. Firstly, in mid-2016 the people of Britain voted to exit the EU (Brexit as it was popularly called). This creates a lot of open equations for the coming years but we will have to wait as the entire process of disengagement takes nearly 2 years. However, the UK is likely to lose its preferred nation status in Europe and London may also lose its position of primacy. Secondly, Trump romped to power and promised to make America great again. To begin with, he has promised to cut individual and corporate taxes as well as spend over $1 billion in infrastructure. Lastly, the Trump effect is likely to keep the Fed hawkish and further rate hikes can be expected.

Finally, demonetization was the big story for the year…

In a drastic shift from incremental reforms, the Modi government decided to attack black money and terror funding by putting strict checks on high value cash transactions. Currency notes of INR 1000 & 500 denominations were demonetized and fresh notes were issued. This forces holders of these currency notes to necessarily go through the banking system and create an audit trail. While the demonetization exercise ends on December 30th, its impact on growth, inflation and liquidity is likely to be felt long after that. The impact is already visible in the IIP and PMI numbers in November.

Year 2016 has been an eventful year. The coming year will be more complicated with a new Trump government, new global equations, the impact of demonetization and a slew of political battles across Indian states.

Here is wishing you a happy and prosperous 2017 ahead of you!

The Year 2016 was a tumultuous year in many ways. The year began with a tremendous sense of uncertainty and ambivalence. The global markets lost nearly $12 trillion in value in the first few weeks of 2016. That immediately brought back memories of 1992, 2000 and 2008. All these were nerve racking years for markets and 2016 fitted exactly into that mathematical series. That was however not the case, as markets rebounded sharply post the Union Budget and despite all the worries of Fed rates and demonetization, the Nifty has closed flat for the year. Here is a look back at the key events that shaped the year gone by…

Fortunately, 2016 did not live up to its previous paradigm…

That was, probably, the single biggest take-away from the year. In the past, markets have corrected very sharply at 8-year intervals. If it was the Banker’s Receipts crisis in 1992, it was the technology meltdown in 2000 and the infamous Lehman crisis in 2008. All these 3 years not only saw a sharp correction but also the reversal of a bull market. Fortunately, 2016 did not live up to that dubious reputation, thanks largely to India emerging as the fastest growing economy among the large economies with GDP in excess of $2 trillion. The dividends of cheap oil and a rapidly rising middle class saw India through the year, almost flat.

The dividends of cheap oil are continuing but the impact is diminishing…

Crude oil is still way below the levels of $115 touched in 2014 just before the correction started. So the wealth transfer from oil producers to oil consumers continued in 2016 exactly the way it continued in 2015. But the incremental benefits may be diminishing. Firstly, the government has skimmed away some of the benefits in the form of higher excise duties on oil. Secondly, the oil supply agreement of the OPEC and other friendly countries will act as a check on any fall in oil prices. This matters a lot for India as she depends on imported oil for nearly 80% of its oil needs and this is unlikely to change in the near future.

Monsoons returned to normalcy after 2 years of drought…

The truth is that in 2016, India still experienced a shortfall in monsoon by about 3%. But compared to the 13-15% shortfall in the previous two years, it had a salutary impact on the Indian economy. For starters, India has already reported a sharp increase in Kharif output, which largely depends on the timeliness and spread of the monsoon. Food inflation is sharply down to just about 2.11% in November and this is lower than the overall CPI inflation of 3.63%. Lower food inflation has enabled the RBI to maintain the dovish tone of its monetary policy, which has been supportive of debt and equity markets during the year.

Inflation is down but other concerns remain…

During the year, the CPI inflation fell sharply below the RBI’s comfort level of 5%, largely driven by food inflation. This opens the doors for further cuts in interest rates when the situation warrants. However, the RBI has expressed concerns over non-food inflation which continues to be sticky despite the base effect. The bigger concern for the government and the RBI will be the Index of Industrial Production (IIP) growth for the year. Led by negative manufacturing growth, IIP has disappointed with negative growth. An improvement in the IIP is the key to a revival in corporate top-line growth and a pick-up in the GDP.

India may have become the fastest growing economy in 2016…

While there are debates over whether Indian real GDP will grow at 7.1% or 7.4%, it is almost likely to outpace all the other large economies in the world including China. So why is this important? A growth advantage over China gives India the firepower to pitch more aggressively while competing for FDI and FII investments. During the year, India has been the largest recipient of FDI in most of the months and also likely to end the fiscal year as the biggest magnet for FDI flows.

Equity Mutual Fund cult finally caught up in 2016…

According to SEBI data, Indian mutual funds have reached over 37 million (3.7 crore) equity mutual fund folios during the third quarter of the year. This is an all-time high for the Indian mutual fund industry and the good news is that the number of SIP (Systematic Investment Plan) accounts also saw a sharp increase during the year. Finally, Indian investors have adopted the phased approach (SIP) to creating wealth in the long term and that bodes well for the equity cult in India.

Global trends added to the uncertainty of 2016…

There were a plethora of key global trends during the year. Firstly, in mid-2016 the people of Britain voted to exit the EU (Brexit as it was popularly called). This creates a lot of open equations for the coming years but we will have to wait as the entire process of disengagement takes nearly 2 years. However, the UK is likely to lose its preferred nation status in Europe and London may also lose its position of primacy. Secondly, Trump romped to power and promised to make America great again. To begin with, he has promised to cut individual and corporate taxes as well as spend over $1 billion in infrastructure. Lastly, the Trump effect is likely to keep the Fed hawkish and further rate hikes can be expected.

Finally, demonetization was the big story for the year…

In a drastic shift from incremental reforms, the Modi government decided to attack black money and terror funding by putting strict checks on high value cash transactions. Currency notes of INR 1000 & 500 denominations were demonetized and fresh notes were issued. This forces holders of these currency notes to necessarily go through the banking system and create an audit trail. While the demonetization exercise ends on December 30th, its impact on growth, inflation and liquidity is likely to be felt long after that. The impact is already visible in the IIP and PMI numbers in November.

Year 2016 has been an eventful year. The coming year will be more complicated with a new Trump government, new global equations, the impact of demonetization and a slew of political battles across Indian states.

Here is wishing you a happy and prosperous 2017 ahead of you!