Podcast 19th May 2016
Hi I am Arjun Parthasarathy speaking and this podcast is on “What has Changed for Better for the Sensex & Nifty?”
The mood in the equity markets has turned distinctly upbeat after a weak start to 2016, which saw the Sensex & Nifty plunge to one and half year lows. The indices have climbed to their highest levels in 2016 and are up 23% from lows seen during the year.
What has changed for the better for markets? The factors that pulled down equities in the early part of the year are still very much alive, with Fed looking to hike rates for the second time in six months in June, China still looking vulnerable on the back of weak export growth and rising debt defaults, Eurozone and Japan still facing lack of inflation and commodity driven economies floundering in the wake of low commodity prices. India’s economy too is not robust enough to warrant undue equity market optimism with banks reeling under bad loans and many other sectors of the economy struggling on the back of weak demand. The government has postponed implementation of crucial indirect tax reform, GST, by one year.
Yet in all the negatives facing the markets, there are also positives emerging for the markets. The reason the Fed is showing inclination for a rate hike in June is the improved economic conditions in the US with labour markets showing stability, housing markets looking positive and inflation coming in closer to Fed target levels. In the Eurozone, economic growth and unemployment data are coming in positive. China, despite all its issues, is still growing at closer to 7%.
India is seeing positive effects of the government keeping down fiscal deficit in its budget for this year and lower inflation expectations. RBI has cut interest rates to multi year lows. Certain sectors of the economy are seeing improvement in demand. Results for the fourth quarter of FY 2016 have been better than expected for many companies. Outlook for rains is the best in many years though monsoons are yet to set in. The ruling Modi government has seen positive results in recent assembly elections giving them a firmer footing for undertaking reforms.
Oil prices have doubled from lows seen during the year and that has lowered the extreme negative sentiments facing oil exporting economies. Even though oil prices have doubled, at levels of USD 50/bbl, prices are still down 50% from highs seen a couple of years ago. India will continue to benefit from lower oil prices.
Given the positives in both global and domestic economy, equity markets are bouncing off lows. The Sensex & Nifty are still over 10% away from record highs seen last year. There is still a huge amount of liquidity in the global economy with central banks of ECB and Bank of Japan pumping in liquiidty through asset purchases. This liquidity will search for returns and with optimism in equity markets, more money could flow into equities leading the markets higher.
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