CAPITAL MARKET YEAR WRAP UP: 2016
Demonetization, Trump & Brexit took sheen off Dalal Street
Indian equities had yet another somber year as the benchmarks settled with modest gains amidst many events that would define 2016 in times to come. During the period, the benchmark Sensex surged just 1.95% whereas Nifty 50 grew 3%. BSE market cap increased 6% from Rs 1,00,39,311 crore to Rs 1,06,47,561 crore. MF corpus swelled a massive 27.6% in first 11-month of 2016 to nearly 170000 crore.
On the primary markets front, 32 Indian companies successfully raised a sum of about Rs 25,000 crore via IPOs (excluding SME IPOs). 22 of the above companies were trading in green with a handsome average return of 58%.
Britons vote in favor of exiting from European Union (Brexit) and Italians’ referendum result may spell badly for the future of European Union. On the other hand, advent of Donald Trump as United States president may trigger a wave of protectionism in global trade.
Back home, in a bold stroke to target black money, counterfeiting and terror financing, Prime Minister Modi announced to demonetize Rs 500 and Rs 1000 note. The move was vociferously opposed by all opposition parties and became the reason for logjam in parliamentary proceedings. The move was hailed by most of the general public and experts for its long term potential benefits. In the short term though, the experts and rating agencies have predicted the slowdown in economic activities causing nearly 1% dent in country’s GDP for FY2017.
From the government coffers:
In addition to demonetization, GST Constitution Amendment Act, fiscally prudent ‘Jai Kisan’ led growth oriented budget provisions, liberal FDI policies, merging of Railway and General Budget, Nod to recommendations of 7th pay commission with an overall wage hike of 23.6%, constitution of Monetary Policy Committee were some of the positive measures from economic perspective.
India registered an economic growth of 7.6% for fiscal 2016. The GDP growth rate dipped at 7.1% and 7.3% for first 2 quarters of current fiscal. The demonetization may further reduce the growth for next quarter.
Government successfully achieved its fiscal deficit target of 3.9% of GDP in FY 2016 & set an ambitious target of 3.5% for FY2017. The number is already reached to 79.3% of the budget estimates till October.
The Current Account Deficit (CAD) for fiscal 2016 stood at 1.1% of GDP. CAD had narrowed to 0.3% of GDP in first half of current fiscal from 1.5% in April-September 2015, on the back of the contraction in the trade deficit.
Indian exports snapped 18-month losing streak in July. Cumulative value of imports for the period April-October 2016-17 registered a 10.85% y-o-y dip at $208.08 billion in Dollar terms. Cumulative value of exports for the same period registered a 0.17% y-o-y dip at $154.91 billion in Dollar terms. Trade deficit narrowed to $53.17 billion which is 32% lower to deficit of $78.2 billion in the corresponding period last year.
Inflation was largely under desired limit. Retail inflation eased to 2-year low of 3.63% in November due to lower consumer spending in the wake of demonetization of high value currency notes.
Industrial output on the other hand was sluggish in calendar year with data coming in negative for 5 months till the month of October signifying contraction in factory activities. RBI slashed benchmark repo rates twice by 25 basis points each time but could not revive the industrial growth which is facing another challenge in form of demonetization.
Strong BJP performance in assembly elections, good monsoon, and favorable crude oil prices helped to offset negative sentiments due to Rexit (rockstar RBI governor, Raghuram Rajan exiting from his post), India’s surgical strike in PoK, frequent parliament logjam, Fed rate hike and Tata Mistry fight.
OPEC decision to cut crude oil output from January will increase oil prices and spur inflation making rate cut choice difficult for RBI. The crucial Goods and Services Tax, targeted for launch by April 1 next year, may face political hurdles. Fed, while hiking US interest rates in December had forecast three hikes in coming calendar year which, in combination with above factors, may result in capital outflows from India.
On the other hand if government is successfully able to manage the fallouts of demonetization and one shot windfall productively, economic reforms including early passage of GST, favorable results of state assembly elections for NDA signifying political stability and supportive global cues will spell well for markets.
To end the year on a cheerful note Prime Minister Narendra Modi had announced sops including interest rate reliefs to boost housing sector, MSMEs, farmers and rural India to spur growth and compensate for demonetization. Overall, sanguine macro-economic environment gives enough confidence to hope for a great year for markets.
Please see below the month-wise recap of important developments from capital market perspective.
January: Sensex tumbled 1247 pts on global jitters & weak eco data
Benchmark Nifty tanked 4.8% to start year 2016 on a bad note. The month saw Brent Crude plunging to a new 12-year low below $28/barrel. China equity crash on growth woes and Jakarta terrorist attack caused further gloom on D-street.
Back home, Rupee plunging to a new 28-month low of 68.25/USD, merchandise exports shrinking for 13th straight month, factory output contracting sharpest in four years and retail inflation surging for fifth straight month took toll on sentiments.
On the brighter side, dovish monetary policy stances by Bank of Japan & US Federal Reserve and better than expected corporate results from biggies including RIL helped to contain the losses.
February: Nifty 50 sank below 7K in month of Sarkari Lekha Jokha
Indian benchmarks clocked massive losses as combination of domestic and global factors dented the sentiments of equity investors.
Firstly, US Fed Chair Yellen’s assertion that Fed is unlikely to reverse its rate hike plan despite explicit challenges to US economy amid global growth concerns. Secondly, global oil prices collapsing below 12-year low levels and weak revenue guidance by IT leader Cognizant further dented the sentiments. Later, supply freeze deal between Saudi Arabia, Russia and other key oil producers helped to trim some losses. The deal was also welcomed by Iran.
On the domestic front, sentiments took a huge beating on asset quality concerns and massive losses reported by leading Indian public sector banks. RBI also did not help the cause as it kept the policy rates unchanged despite growth concerns.
February month being Budget month saw Rail Budget, Economic Survey and Union Budget.
Railway Minister Suresh Prabhu, while presenting a ‘good for all’ budget failed to lift the sentiments of equity markets. The capex plan was raised by 21% to Rs 1.21 lakh crore without giving vision about the funding plan. Also Operating Ratio for FY17 was estimated at 92% versus 90% in FY16 taking into account the impact of seventh pay commission. The revenue target for FY17 at Rs 1,84,820 crore was also modest and indicated slowing economy.
On the flip side, Economic Survey 2016 presented an optimistic macro-economic picture as Finance Minister estimated the FY17 GDP growth to be in 7 – 7.75% range. Fiscal Deficit & Current Account Deficit (CAD) were pegged at 3.5% and around 1 – 1.5% of GDP respectively. Further, retail inflation predicted to be in acceptable range of 4.5 – 5% range. The survey also stated ambitious recapitalization plans for state owned banks and rights to recover money from debt ridden promoters.
The Union budget was hailed by market participants as rural consumption led growth oriented after infrastructure and ‘Jai Kisan’ attracted the maximum attention of FM in his budget speech. The highlighting feature of the budget was government’s intent to achieve the fiscal deficit targets for FY16 (3.9%) and FY17 (3.5%) which prompted investors to hope for an out of turn RBI rate cut.
March: D-street on fire tracking Budget optimism & global cues
Indian benchmarks posted hefty gains on budget optimism as government’s resolve to follow fiscal discipline amid easing inflation sparked rate cut hopes. Narrowed current account deficit & positive global leads including resurging crude oil, monetary stimulus from European Central Bank (ECB) and Fed status quo on interest rates boosted confidence.
On the other hand, sluggish factory output, exports plunging for 15th straight month and Brussels terrorist attack took some shine out of markets.
On reforms front, Real Estate Regulator (Regulation and Development) Bill 2016 passed in Rajya Sabha paving the way for an independent regulator for the sector.
April: Markets ended in green; good monsoon forecast weighs
Dalal Street continued the post budget momentum as RBI slashed the interest rates by 25 basis points.
On macro-economic front, IMD forecast of 106% rain fall (above normal) of long period average (LPA) cheered investors. Further, sanguine manufacturing/services PMI, robust IIP & inflation data and narrowed trade deficit data supported the buoyant sentiments. Exports contracting for 16th straight month was a dampener.
Moody’s asserted that ‘Make in India’ is helping India to attract more FDI inflows which in turn is helping to bridge the current account deficit in huge way and is therefore credit positive. FDI inflows registering a 37% y-o-y growth in CY2015 supported Moody’s assertion.
Globally, BoJ disappointed street with its status quo on key rates whereas Fed calmed sentiments by keeping the status quo on US interest rates.
May: Markets continued to blossom amid strong BJP performance in assembly elections
Robust tally of BJP in Assam assembly results and better than expected performance in West Bengal, Tamil Nadu, Kerala and Puducherry have inculcated optimism about economic reforms.
On the reform front, parliament passed Insolvency and Bankruptcy Code Bill 2016 which will ultimately improve ease of doing business in India. Rajya Sabha approval of amendment in mining law, Union Cabinet’s node to National Capital Goods Policy 2016 and SEBI tightening of P-Notes norms to check money laundering supported the overall optimism.
On the flip side, some concerns underlined by IMF about China & Japan renewed the global growth fears. Adverse manufacturing PMI, not-so encouraging service sector PMI and exports dropping for 17th straight month for domestic economy also capped the gains.
June: Dalal Street conquered Brexit & Rexit
Indian benchmarks continued their positive run for fourth straight month as sentiments recovered from gloom arose after two major events – Brexit and Rexit. Brexit refers to result of an historic referendum in which Britons had chosen to exit from European Union. Brexit caused shock waves across global markets. Back home, rock star RBI governor, Raghuram Rajan had also announced to exit from the post of Central Bank Governor raising fears of government interference on monetary policy.
Government on its part announced some measures to boost sentiments. Union Cabinet approved recommendations of 7th pay commission with an overall hike of 23.6% in government employees’ wages to be effective 1st January 2016. Further, the government had approved 100% FDI In civil aviation, defense, food and pharma sectors to bring more foreign investments in country. RBI on its part maintained the status quo on key rates amid global headwinds.
Sanguine macro-economic data also helped restore sentiments. Current account deficit (CAD) for Q42015 is narrowed to $0.3 billion or 0.1 per cent of GDP, lowest level seen in seven years. Govt achieves fiscal deficit target of 3.9% of GDP in FY16. India jumped 13 positions, ranked 2nd on ease of doing business among the 30 developing nation according to a study of A.T. Kearney 2016 Global Retail Development Index (GRDI). India posted GDP growth of 7.9% in Q4 of 2015-16. Manufacturing PMI improves modestly to 50.7 in May. To add to the cheer, IMD forecasted above-normal monsoon rains this year.
On the flip side, services PMI declined while inflation surged quashing hopes of RBI rate cut.
July: Sensex conquered 28K
Buoyed on the reform intent of government shown in previous month, Indian indices continued the winning streak for fifth straight month. Dovish policy stances by US Fed and Bank of Japan supported the positive momentum.
On macro-economic front, reports of good progress of monsoon rains, merchandise exports snapping 18-month shrinking streak and FDI soaring 46% during 20-month period after launching of ‘Make in India’ initiative worked in favor of bulls. Drop in Services PMI and surge in inflation could not contain the spirit of the traders.
The government’s decision to infuse first tranche of capital of Rs 18,000 crore out of Rs 25,000 crore i.e. almost 75% of capital allocated in the current Union Budget worked well for PSU bank stocks.
August: D-street settled in green for sixth consecutive month
Indian benchmarks continued the good run with Nifty50 crossing 8800 on intra-month basis.
Globally, Fed’s stance against rate hike, better-than-expected US payroll data and Bank of England’s slashing of benchmark rate by 25 bps to 0.25% boosted the sentiments.
Back home, the outgoing RBI governor, Raghuram Rajan kept status quo in 3rd bi-monthly policy due to inflation risk. Further, appointment of Mr Urjit Patel as RBI Governor spooked the sentiments as Urjit was known as an inflation hawk and hence was not expected to cut interest rates either.
On reforms front, GST Constitution amendment bill has cleared the hurdle of Rajya Sabha and Lok Sabha and the baton of this historical reform was passed on to states. In an important monetary policy reform government has set an inflation target of 4% with a range of 2% for next five years.
On macro-economic front, Indian Railways raising freight rates up to 19% was perceived negatively as the move will increase inflation. Rising food prices also pushed up Retail and Wholesale inflation data for July month putting a question mark on future rate cut probabilities. Exports resuming plunging streak after the pause of a month further dented the sentiments. On the flip side, Robust IIP data for June and improved manufacturing & services PMI data buoyed the sentiments.
Infosys lost Royal Bank of Scotland (RBS) contract causing ramp down of about 3000 seats. The development spelt badly for an already struggling industry for margins amid Brexit concerns.
September: Markets snap 6-month winning streak
Sensex crossed 29K during the month before closing in red. Indian army’s successful cross-LOC surgical strike inPakistan Occupied Kashmir (POK) was the most significant event of the month as the sentiments nosedived fearing a warlike situation. Some positive macroeconomic data, reform initiatives and sanguine global cues restored the sentiments to some extent.
On macro-economic front,India’s current account deficit (CAD) is narrowed 0.1% of GDP in the June quarter, significantly lower than 1.2% of GDP in Q1FY16. PMI for manufacturing and services sector denoted significant expansion. On the other hand, Q1 GDP dipped to six-quarter low of 7.1% versus 7.9% in Q4FY16, exports plunged and WPI inflation rose and unemployment rate in India rose to five-year high of 5% in 2015-16.
On reform front, after approval from 16 states, President Pranab Mukherjee has given final nod to the GST Constitution Amendment Bill. Ending 92-year old legacy of a separate rail budget, Union Cabinet cleared merger of Union Budget with Railway Budget. Union Government notified constitution of Monetary Policy Committee (MPC) of RBI which will take the interest rate decisions. SEBI issued guidelines for regulation of algorithmic trading in commodity market.
Globally, US Federal Reserve has maintained status quo on interest rates in its policy meeting. BoJ also announced to modify its monetary policy framework while keeping rates unchanged. OPEC in its meeting surprised and agreed to curb crude oil production.
October: Markets end flat in the Diwali month; Tata Mistry feud dominated sentiments
During the month, ‘inflation hawk’ Dr Urjit Patel headed Monetary Policy Committee cut policy repo rates by 25 basis points to 6.25% to cheer the investors. RBI also allowed up to 100% FDI in other financial services carried out by NBFCs under automatic route.
In the biggest story of the month, Tata Sons board removed Cyrus Mistry as the Chairman of the Tata Group unleashing a wave of allegations and counter allegations between Ratan Tata and Mistry. Tata group stocks suffered the brunt of investors’ wrath over leadership uncertainty dragging the overall markets down.
On macro-economic front, inflation eased & exports went up. On the other hand, services & manufacturing sectors expanded at slower pace.
On sector specific front, India’s biggest telecom spectrum auction did not fetch the desired investment.Only 965 Mhz of spectrum sold out of 2354.55 MHz and fetched Rs 65,789 crore against expectation of Rs 5.6 lakh crore from 31 rounds of bidding. IT heavyweights TCS & Infy posted weak revenue guidance which spelt bad for sectors amid fears of Donald Trump getting elected in US presidential elections.
November: Investors suffer massive losses over demonetization, Trump win
November 8, will be known as very important date in history as two major events shook investors. Republican candidate Donald Trump won the race to the White House and became 45th President elect of the United States. At the same time, back in India, Prime Minister Narendra Modi surprised everyone and demonetized Rs 500 and Rs 1000 currency notes to curb black money, corruption, counterfeiting and terror financing. The twin events having repercussions on short term GDP growth and IT outsourcing business took the markets by storm and Indian rupee touched an all-time low of Rs 68.86/USD.
IT industry body Nasscom lowering IT growth outlook to 8-10% from 10-12% in FY17 and persistent parliament logjam over demonetization did not help the cause.
On macro-economic front, economic data including FDI for H1FY17, services & manufacturing PMI, CPI & WPI inflation, growth in exports and industrial output data were all positive restoring the sentiments for long term investors. Q2 GDP data, on the other hand came in at below expectation level.
On policy front, the government has decided a four-tier tax structure of 5%, 12%, 18% and 28% on essential items in 2-day GST Council meet removing an important deadlock. FM Arun Jaitley has introduced the Taxation Laws (Second Amendment) Bill, 2016 in the Lok Sabha with a view to curb black money and to impose higher rate of tax and penalty on unaccounted cash deposits. To suck excess liquidity arise due to demonetization, RBI mandated banks to maintain an incremental CRR of 100% from deposits generated between September 16 and November 11 sending banking stocks into a tizzy.
December: Sensex settled flat; RBI preferred status quo, Fed hiked rates
During the month, the RBI defied market expectations of 25 basis point rate cut despite demonetization woes on inflation and Fed rate hike concerns. Negative repercussions on GST rollout from April due to no breakthrough in GST ‘dual control’ issue between Center & States and opposition sponsored parliamentary logjam over demonetization have added to the negative sentiments.
Among other macro-economic developments, Q2FY17 GDP growth disappointed at 7.3% versus Q2FY16 growth of 7.6%, whereas Current Account Deficit (CAD) narrowed to 0.6% of GDP at $3.4 billion in Q2FY17 versus 1.7% of GDP or $8.5 billion in Q2FY16. Fiscal deficit for first seven month stood at 79.3% of budget estimate for full year versus 74% in the same period a year earlier. Retail and wholesale inflation eased. However, IIP and PMI data disappointed denoting dismal economic activities. Indirect & direct tax collections soared 43.5% and 15.12% respectively during period April-November 2016 on year-on-year basis. FPI outflows hit $6 bn in November amid demonetization woes.
Among global factors, US Fed hiked US benchmark interest rates by 25 bps while predicting 3 such hikes in 2017. Bank of Japan kept its monetary policy settings unchanged. OPEC in its meeting surprised and agreed to cut crude oil production by about 1.2 million barrels to 32.5 million barrels a day.
Among geo-political factors, diplomatic tension between US and China after a Chinese warship seized an underwater US Navy drone in international waters which was later released, assassination of Russian ambassador to Turkey and killing of several people by a truck driven into a Christmas market in Germany weighed on sentiments. Elsewhere in Italy, Prime Minister Matteo Renzi resigned on losing referendum on constitutional reform sending signals of political uncertainty in European Union.
Towards the end of the month, Prime Minister Narendra Modi announced reliefs to spur economic activities in housing, rural and MSME sectors.
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Wishing you a happy and prosperous year 2017!