FRONT RUNNING

Playwrights sometimes refer to “Chekhov’s gun” — if a gun is placed somewhere in plain sight on the set of a play, it will eventually play a role in the plot. Or else, why put it there? But it doesn’t work that way in real life.

There are multiple possible triggers for market action lined up over the next fortnight but some of these might not actually go bang. Central bank action, for example, has been cautious since Brexit. The Bank of England chose to maintain status quo and wait, in its mid-July meeting; the European Central Bank did the same last week, while making soothing noises. It is possible the Bank of Japan and the US Federal Reserve will also choose to do nothing. If that happens, it is likely that the Reserve Bank of India will also do nothing in its August meeting.

The goods and services tax (GST) is another potentially damp squib, with the Congress and the Bharatiya Janata Party flirting around the possibility of passing it. GST is not like some sort of plug-and-play device. It will take months to formulate and implement and that implementation will have to be coordinated across all states together. It will probably result in some chaos and lower revenues for the first year at least, and quite possibly, lower revenues for longer. A political strategist of the calibre of Narendra Modi would be reluctant to go into a general election until the GST had settled down.

Put all those premises together and GST has to pass in Parliament by this monsoon session. Or else, it will probably be shelved until after 2019. Either way, GST-related news will have some impact on sentiment. Obviously, the impact will be greater and more positive if the Bill is passed.

Another variable that affects sentiment is the monsoon. That has, so far, delivered. After two drought years, it looks as though 2016 will be a supernormal monsoon, as predicted. That has already had a positive impact on sentiment. A good monsoon is one of the factors that has influenced at least one Indian investment advisory to project average earnings growth of 16 per cent in 2016-17. On the macroeconomic front, exports may finally be turning around after six quarters of fall.

There has been huge foreign portfolio investor (FPI) buying in July, with over ~15,000 crore coming in (debt and equity combined) in the first three weeks. FPIs are experiencing a surge in “risk-on” sentiment and there is expectation that India will be an outperformer. Presumably, everything mentioned above – from hopes of supportive actions by central banks, to GST and monsoon – are influencing FPI movements. However, domestic institutions have been net sellers in equity across this period.

While Brexit has had little impact on equity markets, it has led to a series of swings in bond and forex markets. Commodity prices have also travelled lower as markets brace for a slowdown in Britain and Europe. This has pretty much put a ceiling on crude prices at present.

In addition to the pure economics, there is a large dose of political uncertainty for traders to cope with. There’s a new order in the UK, with a new prime minister. Britain must decide how it wants to play the post-referendum game. The European Union (EU) will also have to make its plans to manage Brexit. There is a chance this will trigger similar moves in other EU member-countries. At the same time, Europe’s “stress mechanisms” are being continuously tested with the persisting refugee crisis, the failed Turkish coup and its fallout, and terror attacks.

Across the Atlantic there is the known unknown of a new US president and the policy uncertainties that are part and parcel of that. Hillary Clinton is a more or less known quantity and she has been in public life for 25 years. But Donald Trump is an unknown in that sense. While Clinton leads in the opinion polls, Trump cannot be written off after his incredible campaign, which has just seen him take over as the Republican candidate.

In the midst of all this, corporate Q1 results have not been particularly good. However, expectations were not high. Two or three key sectors are worth mentioning. The infotech majors have produced lacklustre results and poor advisories. That impacted the price of L&T Infotech after listing, though the issue went off reasonably.

Private banks are also showing rising non-performing assets, though the problems are not of the same dimensions as in public sector banks (PSB). The announcement of a ~23,000-crore recapitalisation package for PSBs is hardly going to be adequate.

Technically speaking, the market continues to look bullish on the back of FPI inflows. The Nifty is testing resistance in the region of 8,600 points. If GST comes through, or there is some other news-based trigger, the market could break out past that 8,500-8,600 range and rally till the 9,000 level.