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Sandeep Bamzai is a media professional of standing and repute having held editorial leadership positions right through his 32 year career. Visiting Fellow at think tank ORF, he is currently writing a book for Harper Collins on the Role of the Indian PriMore From The Author >>
Disequilibrium | Hoping For A Better Year
While untangling of knots left behind by the UPA has taken its toll, but the time has come for the Modi Government to show resolve, stomach and steel to go in for metamorphic reforms
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As we gear up to make our tryst with the other side - 2016 - one must remember that this is the first calendar year in four where the equity markets have registered a negative return. Obsession with legislation and elections, a recalcitrant opposition, visceral hatred for each other's top leadership, intellectual bankruptcy when it comes to transformative reform, recycling of old ideas among other things contributed to a stop-start-stop year for the equity markets. The Chinese meltdown and the impending threat of a Fed Rate hike also ensured a decelerating process in the equity markets.
FIIs have sold ~ $3.5 billion worth of Indian equities since July 2015. Emerging markets in general suffered primarily due to expectations of rising US rates and a sharp fall in commodities prices. Unlike most emerging markets, India benefited from fall in commodities prices and its growth outlook seems to be improving. The presence of domestic mutual funds as a sizeable counterweight to foreign institutional investors proved to be one of the biggest emerging themes this year. Retail and High Networth Investors remaining invested in the market was heartening, which meant that there risk averseness has reduced considerably over time. There was no real panic on their part, no one blew a gasket. Continuing weak rural consumption and poor pick up in private investment remained the underlying worries for India. Market makers reasoned that the sale of Indian equities by FIIs is unlikely to sustain for long. The table above summarizes the performance of Indian markets after periods of FII selling:
The above table suggests that investment made around FII selling have as a rule done well over medium to long term. This time should not be any different in our opinion. Markets are a function of liquidity, events and earnings. Anyone of these three factors can trip the market. But markets also run on the basis of empirical evidence. If one looks at data over the last 25 years from the western world, then normally around December 23, a Santa Claus rally sets in and carries on in the new year. For emerging market per se, new year means fresh allocations from bulge bracket funds. Though market have underperformed in India in 2015, by my reckoning domestic mutual funds and other financial institutions are now a large institutional bloc of monies, something that India has not really seen since the destruction of the Unit Trust of India. Its one time chairman M J Sherwani was the original big bull as UTI flush with domestic money used to be a player. But as FIIs rapidly got their clutches in Indian markets, domestic players withered away. The only time, they played a part was when the finance ministry wanted them to shore up a failing disinvestment. According to the latest Sebi data, domestic mutual fund (MF) managers have invested a net Rs 70,173 crore in the equity markets in 2015. using there systematic investment plan, retail and HN investors have bucked the trend in 2015. Another impressive statistic is that as per the industry body AMFI, 4-7 lakh retail folios are being added to the industry every month. For mutual funds and in turn retail investors, this may well be the breakthrough year as their trust in equities grew substantively.
The uncertainty around expected US Fed rate hike is behind us. There is a clear evidence of falling commodity prices working to India’s advantage. The steady recovery in Indian economy and improving margin outlook for corporates coupled with reasonable valuations leads to a positive outlook for equity markets over the medium to long term. HDFC Equities in its note says, "The sharp fall in oil prices has led to a saving of ~2.5 per cent of GDP. This has lowered CAD from ~4.3 per cent of GDP in FY12 to ~1.0 per cent in FY16 (Citi Research Estimate- 2nd November’2015); fiscal deficit in on a steady decline from ~5.8 per cent of GDP in FY12 to 3.9 per cent in FY16BE (is projected at 3 per cent by FY18 as per budget documents). CPI Inflation has fallen sharply from 10.2 per cent in FY13 to 5.9 per cent in FY15 (latest reading is ~5.4 per cent in November 2015) and is projected to reach 5 per cent by March 2017 by RBI.
All this augurs well for India which has waited almost 19 months now for some sort of transformative change. Maybe untangling of knots left behind by the UPA has taken its toll, but the time has come for the Modi Government to show resolve, stomach and steel to go in for metamorphic reform. Like the PM himself showed by using executive authority at his disposal tweaking Transaction of Business Rules to hike FDI caps just before his visit to the United Kingdom. The PM himself stated in his first full review meeting with his council of ministers - recycling of 'old wine in new bottle' is out and transformational is in. This year's Budget will be the focal point of this exercise to change. From what I hear and see, the PMO is already talking to Finmin bureaucrats...
Leap year for change...hopefully.