FRONT RUNNING
Geopolitics left investors puzzled and markets without a clear sense of direction in the past fortnight. The US hit Syria with a missile strike and dropped a massive, nonnuclear bomb in Afghanistan. The Syrian strike has led to heightened tensions with Russia. Turkey heads into a referendum that could lead to constitutional change to a presidential government. Either way, the results will cause volatility across forex markets and affect European Union equity markets as well.
In India as elsewhere, corporate results season gets moving. Infosys came through with Q4, 2016-17 results and guidance for 2017-18. The results were flat. The guidance was a little below expectations. Infy also says it will disburse about ~13,000 crore to shareholders by March 2018. The stock lost some ground. TCS is due to declare results on Tuesday and that could set the pace for the information technology industry.
The US economy remains strong. March saw 98,000 non-farm jobs created, well below consensus expectations of 180,000. But the unemployment rate dropped to a 10-year low at 4.5 per cent. Inflation seems headed up and a tight labour market makes it likely that the Federal Reserve will tighten soon.
Investors are still wondering about Donald Trump’s policy direction. Trump said recently in an interview that the USD “was getting too strong” (though USD has weakened a lot since he was sworn in). He also stated a preference for “a low-interest rate policy”, which is not in his hands.
India has mixed macroeconomic news. Exports seem to be rebounding. Exports grew by 4.7 per cent in 2016-17, which is excellent since three of the past four fiscals have seen shrinkage. February and March 2017 saw big yearon-year increases over corresponding months though this was partly due to base effects. Imports also rose, and this included a big jump in gold imports.
The trade deficit is about $105 billion and the current account deficit is about 0.7 per cent of gross domestic product (GDP). The INR is ruling strong, and overvalued by the Reserve Bank of India’s (RBI) calculations. The USA is threatening protectionism while the UK is embroiled in the throes of Brexit. So it remains to be seen if this positive export trend is sustainable.
The Index of Industrial Production (IIP) indicates year-on-year contraction in February 2017, and 0.4 per cent cumulative growth for the April 2016February 2017 period. That’s effectively zero. This is yet another number that leads to doubts about official estimates of GDP growth at 7.1 per cent for the fiscal.
In its latest release, the Central Statistics Office has cut its estimates for GDP growth by about 30 basis points from the January 2-17 estimate. Gross-value added (GVA) may be a better indicator than GDP given that the latter includes net indirect taxes. GVA numbers suggest that growth fell by 1.1 per cent during Q3.
March inflation was 3.81 per cent year-on-year on the Consumer Price Index (CPI). This is higher than the 3.55 per cent in February. The Wholesale Price Index for February was at 6.55 per cent. That’s the highest CPI value in five months and it could climb above the RBI’s medium-term target of four per cent. The central bank held rates steady at its April review. It is unlikely to cut rates given that it sees a “hardening of inflation expectations across product groups”.
The Monetary Policy statement was cautiously positive. Growth acceleration is expected due to various favourable factors, including remonetisation, a global rebound, structural reforms via goods and services tax (GST), and so on. Like every other commentator, the central bank has its proverbial fingers crossed in the hopes of a good monsoon. Other downside risks include “ebbing consumer optimism on the outlook for income about the general economic situation and about employment gains”, going by the polling in the March 2017 round of the RBI’s Consumer Confidence Surveys.
To that, one would add that the inevitable chaos of changeover to the new tax system could mean a shortterm to medium-term dip in growth rates until the economy adjusts to GST. The Supreme Court’s ruling banning liquor sales within 500 metres of a highway will lead to the loss of up to an estimated one million jobs. That’s bound to have some adverse impact.
The RBI also expects most commodity prices, other than crude, to harden next fiscal. The bank’s poll of professional forecasters suggests that modest growth is expected through the 2017-18 with little change in interest costs. Bank credit is expected to pick up slightly to around 10 per cent, from a multi-year low of five per cent in 2016-17.
The Nifty is in the middle of what looks like a small correction that’s landed on good support. Next week could see the correction continuing if foreign portfolio investors continue to sell as they have done for the past few sessions. Also, look for news flow to continue driving trends.
If the market does fall further, it could knock another three per cent off values. It could also bounce to new highs as easily. To use the RBI’s terminology, “risks are evenly balanced” in the short-term. In the longer-term, the bull market continues.