Many of the worrying factors like global corrections, implementation of GST, farm loan waivers , inflation falling off the cliff still hold true but market after a brief correction has again resumed its uptrend and Sensex today touched an all time high. Expected correction for the market is unlikely to happen from current levels.
The overriding of risk factors is largely due to the optimism over India’s biggest reform since opening the economy in the 1990’s, which is the implementation of GST. GST places India on par with the developed world on indirect taxes and this is seen as a huge positive for the economy.
Global economic data too has been positive with US adding more jobs in June and Eurozone showing fall in unemployment numbers and higher business optimism.
Why Correction was expected?
Any market that has had a sustained run will pause before resuming the run. The pause will be in the form of a correction leading to price fall in the markets. Sensex & Nifty too can see a pause and the correction could be around 10% if all factors causing the fall work together.
Given that markets could correct before rising again, investors can be selective in entering the market or can even wait it out to buy at corrections. Stocks that have run up without any fundamentals behind the run up should be sold as correction in these stocks will be the highest.
Post the demonetisation on 8th of November 2016, Indian Equities have had a stupendous run , Nifty ran up from 7900 to 9600 in the last 7 months .The Indian equity market has not had any major selloff during this period,the highest correction has been 2.77 %.
Here are some factors to watch out for in the near term which may contribute to volatility and corrections in the market.
Delay Vote on Health Care Bill : The highly anticipated U.S. healthcare reform bill, which was supposed to be cleared on Tuesday was delayed. Continuous hurdle in clearing the policies by the President Trump administration is heightening the worries over the timeline for President Donald Trump’s business-friendly policies. Senate Republican leader Mitch McConnell decided to put off a planned vote on a bill to dismantle the Affordable Care Act until after the Senate’s July 4 recess, to get more time to garner sufficient votes for its passage.
Implementation of GST : GST is complicated tax structure and presents mammoth logistical challenges to implement. The unorganised sector need to understand and embrace the new regulatory framework as there isn’t any gestation period to adapt to the new regime. The organised sector need to get their information technology compliant and processes streamlined. India Inc, does not seem to be completely ready to implement GST and some chaos can be expected post the 1 July roll out.
Manufacturers and distributors have started destocking inventories and may offer steep discounts to clear inventories, this may affect margins.
Inflation in a down trend : Retail inflation printed at 2.18%, the lowest it has been since 2012. The fall in inflation especially the fall in prices of farm produce will result in lower income in the hands of farmers and rural consumption can falter leading to cascading effect on the economy as a whole.
Farm Loan Waivers : Following States of UP & Punjab , Maharashtra also announced waiver of farm loans. Other states may follow, these moves promote credit indiscipline.The farm loan waiver puts immense pressure on state finances and on the banks who are already grappling with a huge NPA mess.
Global correction in Tech stocks : Last couple of days there has been a sellof in tech stocks in the US. There wasn’t a specific trigger for the sell off, but high valuation seemed to be a factor.
The big techies, Amazon, facebook, Apple, Netflix saw their stocks correct more than 3%. The tech stocks had run up quite a lot , this year they have risen by more than 20% and the correction is viewed as healthy. But this may snowball into a reversing selloff in the Indian Markets too.
Major sectors of IT, Pharma and Banks have been impacted due to slowing in outsourcing, FDA issues and NPA’s respectively and they can drag down indices.
Subscribers can be advised not to wait and to go ahead with their investments as normal in their portfolios.