Indian equities showing resilience to global headwinds.
There is a market efficiency investment theory, which believes that it is impossible to beat the market because the existing share price always reflects all available information. Many-a-times, in reality, markets also tend to move on insider news – information privy to a few insiders only. This information eventually starts getting disseminated and gets reflected into the stock prices, which tend to reflect its fundamental character. That is why seasoned investors always say: bhav bhagwan (the market is always right).
One classic example from the recent past substantiates this point. Much before Narendra Modi won the elections in May 2014, markets had shown tremendous strength, despite the prevailing mood of depression and despodency all around. NIFTY 50 was on an uptrend since September 2013, in anticipation of a strong performance by the NDA in the Lok Sabha elections.
One can see a similar trend in the Indian markets today. Despite numerous global headwinds, be it – the BREXIT fall-out, economic slowdown in China, a probable FED rate hike, etc – Indian markets have shown resilience to these global headwinds.
It was heartening to see how NIFTY 50 bounced back sharply by 162 points, after touching an intraday low of 7927 (a fall of 343 points from the previous close) after the news of the BREXIT fallout hit the market on 24 June. Even the adverse news of Raghuram Rajan’s decision of relinquishing the post of the RBI governor after completing his existing term (without waiting for an extension or otherwise) was absorbed well by the markets.
India is primarily a domestically driven economy. The UK accounts for just 3.4 per cent of India’s total merchandise exports and 1.4 per cent of the total merchandise imports. FDI flows from the UK to India stood at just $0.8 billion in 2015-16, as compared to $1 billion in the previous year. Markets have taken cognizance of the fact that the BREXIT fallout is a non-event for India from an economic perspective. Instead, a fall in the European Union’s strength could make India more attractive for investment. However, in the near term, soured sentiments could heighten global volatility and affect capital flows, as a part of the ongoing risk-off trades. It would be interesting to see how events unfold post the BREXIT.
The key risk for India in the medium term would be the currency exchange impact, which could affect business prospects of the large Indian corporates which have a presence in Europe and the UK. Immediately after the BREXIT, the rupee managed to remain fairly stable, withstanding the turbulence much better vis-à-vis other major currencies. It closed just 0.9 per cent lower at Rs67.88 on 24 June against the dollar, after touching a panic low of Rs68.22.
Despite all negatives, NIFTY 50 has been able to comfortably hold above 200 Day Simple Moving Average (200 DSMA) which stood at 7777 as on 28 June. These are clear indications of an ongoing bull phase in the Indian equities. During the bull phase, markets tend to ignore negative developments and greet each positive development with huge rallies.
Domestic factors are favouring India. The monsoon seems to be progressing well, after two consecutive years of below-normal rains. This will help in revival of the rural economy and boost overall economic activity. The recommendations of the VIIth Pay Commission have finally been cleared by the cabinet, making the way for long-pending bonanza to over 10 million government employees and pensioners. This will further boost demand for goods and services. Also, RBI’s Financial Stability Report (FSR) has shown an improvement in corporate India’s leverage position over the previous financial year. Corporate earnings are showing clear signs of enhancement.
The BJP has performed well in the recently concluded state elections, which has improved its tally slightly in the Rajya Sabha. It is working towards convincing leading parties to ensure a smooth passage of GST in the Rajya Sabha, in the forthcoming monsoon session of Parliament scheduled to start on 18th July. The passage of the GST Bill will sentimentally be a big boost for the Indian markets.
High valuations of Indian market relative to other emerging markets (EMs) is justified due to improved macroeconomic factors and the progressive, growth-oriented policies of the Modi government. Foreign investors are increasing their exposure to India, which is one of the few large economies that have successfully managed to keep sovereign debt under control.
NIFTY 50 is showing tremendous underlying strength, despite numerous external headwinds. Indian equities are in for a mega bull-run in the years to come. However, in this process, intermittent sharp corrections cannot be ruled out. One has to maintain calm and fasten one’s seat belt while taking off on this turbulent journey.
This article was originally published in Business India Magazine.
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Disclaimer: The views expressed in this article are personal and the author is not responsible in any manner for the use which might be made of the above information. None of the contents make any recommendation to buy, sell or hold any security and should not be construed as offering investment advice.
