Market Outlook
Markets will take a breather before making decisive move upwards
With stronger foundations being laid , it is only a matter of time before current measures begin reflecting in revival of economic growth
Motilal Oswal Chairman & Managing Director , Motilal Oswal Financial Services
Since 2014 , when the Modi-led government assumed office , Indian markets have been on a bull run . Investors perceive this government as pro-business and expected that economic growth , which was languishing then largely due to policy inertia , would revive quickly under the new regime . Three years on , and despite ( or due to , if you so believe ) the bold measures taken by the government , this is yet to happen .
Valuations have been running ahead of fundamentals and investors are concerned that Indian stocks have moved too far , too fast . However , there is little doubt that the longer-term prospects for Indian equities remain bright . I believe we are only at the beginning of a multiyear structural bull run . At this juncture , the markets could take a breather and consolidate before making a decisive move upwards .
I believe the markets are already discounting an increase in the US Fed rate in December . Domestically , a rate cut looks unlikely in the short term . Rising commodity prices , especially crude oil , need to be watched closely — in the absence of bigger triggers , it is concerns around these which will drive short-term market movements . I wouldn ’ t hazard a guess on the outcome of the assembly elections in Himachal Pradesh and
Concerns around rising commodity prices will drive short-term market movements
Gujarat , though wins by the BJP would be perceived positively by the markets .
India is in the midst of a massive renovation , not only in terms of physical infrastructure , but also in terms of mindset . The renovation will yield sizable benefits in the medium to long term . Until earnings revival becomes clearly evident , the market movements will be driven by renewed hopes of a brighter future and , at times , by these recurrent doubts .
Though not yet an ideal solution , GST has already seen a round of improvements . With a few more such rounds , we should quickly move towards the goal of a truly one-India-onemarket . Not only are inter-state tariff barriers being dismantled , the physical infrastructure for efficient movement of goods and people across the country is also being enlarged through initiatives , like DFCC , Sagarmala and Bharatmala .
The banking system , which forms the bedrock for economic growth is being strengthened through continued focus on asset quality , recoveries , and recapitalisation of the state-owned banks . Demonetisation has significantly hastened the financialisation of household savings , reflecting in unprecedented flows into mutual fund SIPs and the all-time high equity AUM of domestic mutual funds . The Indian stock markets are no longer dictated solely by foreign buying or selling .
India is recognising the fallacies of poorly-targeted subsidies that resulted in leakages and inefficient allocation of capital . It is , therefore , cutting subsidies in general . Where it is necessary to continue subsidies for social good , it is ensuring that they are properly targeted and the benefits are being credited directly to the targeted recipients . Aadhaar-linkage is ensuring the veracity of the recipients themselves .
Fiscal expenditure aimed at pumppriming the economy is no longer seen as merely pump-priming but also as an opportunity to create national assets for longer-term benefits . This is evident in the nature of projects taken under schemes such as MNREGA . Though the main emphasis remains on providing employment , the aim is also to create durable productive assets .
There is also a growing realisation among India ’ s citizens that they need to begin paying their share of taxes if they wish to enjoy the privileges of being Indian . Following demonetisation , there has been a rise in the number of income tax return filers . Also , the GST framework is intended to significantly increase indirect tax compliance . As overall tax compliance increases , there should be a progressive reduction in tax rates , fuelling a virtuous cycle of rising tax compliance and declining tax rates .
Strong foundations for a vibrant India are being laid . It is only a matter of time before these measures begin reflecting in revival of economic growth . Given the growing domestic flows into equity and foreign funds continuing to invest selectively even in an otherwise fairlyvalued market , would you like to risk waiting on the sidelines ?
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Outlook Money December 2017 www . outlookmoney . com