Podcast 6th November 2015
Diwali brings in the New Year as per the Hindu calendar. Diwali 2014 or Samvat 2071 gave a lot of hope to the Sensex and Nifty with positive expectations of the performance of the strong Modi led NDA government at the center. However going into Diwali 2015 or Samvat 2072, the mood is less upbeat and the Sensex and Nifty have hardly gained since the last one year.
Why has Sensex and Nifty returned nothing at all since Diwali 2014? The reasons are both domestic and global. On the domestic front, the expected uptick in both business and economic performance has not come about. On the global front, many headwinds have emerged for economic growth and that is hurting prospects of equity markets globally.
India’s economic growth is pegged at levels of 7% to 7.5% for fiscal 2015-16, not much of change from growth levels of 7.3% seen in fiscal 2014-15. Business climate too has not changed with corporates struggling to grow revenues. Read our monthly market analysis for the month of October 2015 for analysis on corporate revenue growth. Corporate balance sheet health too has not improved with banks NPA’s not showing any signs of decline from last year.
Bank credit growth has fallen from levels of 10.8% to 9.5% while export growth is negative 17% in the first six months of this fiscal. Weak domestic and global demand is hurting investments.
On the global front, China is slowing down to growth levels of 7% and below and that is hurting many countries that are doing business in China and with China. Commodity export driven countries such as Australia, Brazil and Russia are facing sharp growth downturns. Global demand for goods and services are turning weak on China factor.
The Eurozone and Japan are facing weak growth as well as deflation while only the US is looking reasonably healthy with strengthening labour markets. US unemployment rate has dropped from 5.8% to 5.1% over the last one year. The Fed is looking to turn policy neutral with the first rate hike in seven years expected in December 2015.
Global markets have had to contend with both volatility in equities and bonds with worries of bond bubbles and record high equity levels. The USD has strengthened over the last one year with many emerging currencies hitting record lows. Volatility in global markets have hit capital flows into India, with FII investments in equities and debt in the April-October 2015 period negative by around USD 3 billion this year against positive flows of over USD 20 billion seen last year.
On the positive side, domestic inflation has come off from 5.5% to 4.4% over the last one year and inflation expectations are well anchored on the back of weak global commodity prices. RBI has lowered the Repo Rate by 125bps from 8% to 6.75% over the last one year. The current account deficit is low at around 1.3% of GDP while fiscal deficit is kept in check at 3.9% of GDP.
Global liquidity is still cheap and easy with both ECB and Bank of Japan pumping in USD 125 billion a month through asset purchases. ECB is likely to easy policy further if economic situation in the Eurozone does not improve.
Going forward with inflation staying down, deficits kept down and global liquidity easy and cheap, Sensex and Nifty could see better prospects ahead and Diwali 2016 could look much better than Diwali 2015.
Wish you a Very Happy Diwali!
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