The Sensex and Nifty are feeling the heat at higher levels. The indices are down over 3% from peaks seen in the first week of September 2014 and could find it difficult to scale new peaks in the short term. Headwinds in the form of Fallout of Coal Block Allocation Cancellation, State Elections in Maharashtra and Haryana, Fed Rate Hike Prospects, China Growth Issues and Geo Political Tensions are playing out on equities that are trading close to all time highs.
The Supreme Court cancelling 214 out of 218 coal blocks allocated since 1993 has cast a shadow on bank loans to the affected entities including mining, power and steel companies. Both banks and affected entities would feel the heat of the coal block cancellations. This would in turn dampen the market sentiments leading to equities struggling to regain footing.
State Elections in Maharashtra and Haryana will be keenly watched for the performance of the ruling BJP party at the centre. Any hiccups would mean worries of reforms that are much needed for markets to trend higher.
Global equities are down over 3% from peaks on the back of bets of Fed starting to hike interest rates sooner than later. The Fed Fund Futures are predicting that rate hikes will start in July 2015 but if data comes in more positive than negative for the US economy, bets could be on earlier date of rate hikes. The Fed will stop its asset purchase program of USD 15 billion a month in October and will say that rate hikes will be data dependent. Read our September 2014 Global Economic Analysis for US economic data and Fed actions.
China growth is hurting commodity prices and feeding to weaker growth prospects for commodity driven economies such as Australia, Brazil, Russia and Middle East. The currencies of these countries are down sharply against the USD given weak growth prospects. Read our analysis on currencies and commodities to understand the price trends. China is growing at around 7.5% well below double digit growth rates seen in the 2000-2010 decade and the country is faced with issues of over investments, strong currency, property bubbles and bad loans.
Geo political tensions are hurting market sentiments. The Russia-Ukraine standoff is forcing sanctions on Russian by Europe and US and Russia is retaliating with their own measures. Russia is a big trade partner with the Eurozone and the sanctions would affect the Eurozone economies. The fight against ISIS in the Iraq, Syria region is also a negative given the strategic importance of the oil rich zone.
Equity markets can overcome the negatives in the medium term. The US economy is showing strength and that is prompting the Fed to turn policy neutral. Global oil prices are down to multi year lows on the back of the US shale oil revolution. Read our analysis on US shale oil dynamics. Growth in US coupled with lower oil prices is positive for Indian equities. The US accounts for around 60% of technology outsourcing revenues and oil account for around 69% of trade deficit.
The government has completely wiped out under recoveries in Diesel as prices have been raised steadily over the last one and half years. Lower oil prices will help the government cut its fuel and fertilizer subsidy bill. Read our Indian Economic Analysis for September 2014 to understand the impact of lower oil prices on subsidies. Government can meet its fiscal deficit target of 4.1% of GDP given lower subsidy outgo and that should help lower interest rates in the economy.
The near term looks shaky for markets but the medium to long term look promising. However, you should be careful on the kind of stocks you invest in as the economy is not really helping debt ridden companies and changing dynamics of the market is giving rise to new companies at the cost of companies that are not able to cope with changes.