FRONT RUNNING

Afew years ago, most Indian investors would have, at best, associated France with Shammi Kapoor dangling from a helicopter and serenading Sharmila Tagore as she surfed on the Riviera. Last Monday, however, Indian investors bought quantities of shares in the hopes of a favourable outcome in the French presidential elections.

The second round of French elections on May 7 is a straight contest for Emmanuel Macron versus Marine Le Pen. Monsieur Macron, a centrist banker who is pro-EU, leads the opinion polls. But there’s need for caution in calling the outcome, given very high stakes. Madame Le Pen wants to exit the European Union and to tighten immigration sharply. Frexit would effectively kill the EU.

Opinion polls have a tendency to go wrong — remember Brexit, TrumpClinton et al? Macron outscored Le Pen by about 2.7 per cent in the first round of voting. Over 50 per cent of the votes went to other candidates. Opinion polls indicate that Macron is heavily favoured as the #2 choice by those voters.

Assuming Macron does win, the next threat to the EU may be “Quitaly”. There are influential Eurosceptics in Signor Mario Draghi’s nation and there are chances of a quick election. Germany also goes to the polls in September in another key EU election.

Another point that killjoys will note is that a Macron victory would maintain status quo; it would not accelerate EU growth prospects. But those are believed to be improving with reasonable corporate results and some signs of inflation.

Regardless of such nuances, equity markets shot up and the Euro jumped as well. The European Central Bank meets this Thursday (before French elections) and this could provide some clues as to expected economic trends. Consensus opinion is that the ECB will continue with its bond-buying stimulus programme until December 2017. However, Draghi’s statements will be studied in detail.

The US Federal Reserve also meets this week. That will be watched with even more interest. The US recorded its slowest growth quarter (Jan-Mar 2017) in at least three years and corporate results have been mixed. Employment growth has slowed but unemployment is down as well. The Fed embarked on a course of rate hikes before this data came in. The market still expects another hike by June. But soft data could see the Fed holding off.

The other big “stimulus” for Indian investors was President Donald Trump’s eagerly-awaited tax plans, which proposed huge cuts. That proved a damp squib. The plan lacks details, and Trump’s own party seems unenthusiastic. Wall Street is wondering if the plans could be fleshed out and actually pass through Congress at all.

Emerging Markets (EM) remain the flavour of 2017. In general, Jan-Mar 2017 macroeconomic data indicate that EMs are doing well. EM debt and equity funds have received a combined $55 billion of inflows in Jan-Mar 2017, which is more than the $44.1 billion inflow across the whole of 2016. The PMI data from China and India could be key data-points this week.

The rupee briefly strengthened to ~63.97 versus USD before dipping to hover just below ~64.1. The Sensex is now trading at PE22 (last four quarters weighted average) and some analysts project it to be trading at about PE18 forward (next four quarters). This posits extraordinary growth acceleration to about 22-25 per cent in the current fiscal.

Historically, this sort of growth has rarely occurred in large companies. There are few signs of it happening in the current quarterly results. The IT sector giants have muted returns and poor advisories due to fears of tighter visa regulations and Brexit hitting operations. Reliance has delivered just under 13 per cent earnings growth in its core business and about 16 per cent EPS growth at consolidated level. Admittedly, it has sunk $30 bn into its telecom operations and those will start generating revenues now. The overall telecom sector is expected to do poorly. Pharma also has depressed advisories due to stringent US inspections and fears of protectionism.

Maruti has, however, delivered results in the desired range. A pickup is expected across the construction industry as the government speeds up clearances for infrastructure projects. There are also hopes that the goods and services tax will start delivering some impetus by the second half. In general, operating margins are expected to expand considerably this year.

The biggest cause of optimism is hopes for a recovery across banking. Credit growth last year was down to 60-year-lows by some counts. Nonperforming assets (NPAs) remain elevated to a point where there is an undeclared emergency across the banking sector and even the bluest of blue chips, HDFC Bank, has seen NPA expanding. If growth does accelerate, there could be a turnaround across banking.

Although valuations are elevated, technical trends suggest the market could go up indefinitely. It could also collapse spectacularly if some an unlooked-for overseas event happens to change risk perceptions about EMs and India. Statistically speaking, India’s market-cap to GDP ratio is at around 80 per cent and it has peaked at over 140 per cent in previous bull runs. So there’s room for more irrational exuberance.