Global cues, macros to dictate markets direction
With the Q1FY19 results season showing some signs of gradual improvement in corporate earnings growth albeit on a lower base driving the equity markets to their all time high, experts believe that the performance of the markets over the next few months would depend on the strength of economic recovery, level of crude oil prices and global trade tensions.
According to Kotak Institutional Equities, crude oil prices may have a large influence on India’s macro if the IranUS situation were to deteriorate into ‘hard’ sanctions on exports of oil from Iran, which will upset global oil supplydemand balance.
“India’s macro position would worsen if oil prices were to shoot above $80 per barrel. We note that a $10/bbl change in crude oil prices results in 50 basis point impact on current account deficit and GDP, 30 basis point impact on inflation, modest impact on gross fiscal deficit through higher subsidies on kerosene and LPG. The fiscal deficit could rise further if the government was to reduce taxes on diesel and gasoline in order to mitigate the impact of higher oil prices,” it said.
The equity valuations at the moment are on the higher side as the markets have priced in a strong growth in corporate earnings and further improvement in India’s macroeconomic situation. Any disappointment on these fronts could lead to de-rating of several stocks.
“Volume growth figures could disappoint street’s lofty expectations unless the recovery is led by new job creation and investment and not simply a normalisation of demand conditions post the twin ‘blows’ of demonetisation and GST,” Kotak Securities said.
The markets would also have to contend with any contagion effect of the troubles in the Turkish economy and weakness in global economy on escalation of global trade issues. “These could result in a risk-off sentiment for emerging markets. As such emerging markets have been very poor performers over the past year or so, lagging the strong performance in developed markets,” it added.