Dear Advisory Client,
The recent Indo-Pak conflict and May elections notwithstanding, there are positive factors emerging for equity markets. Equities have had a rough one year both domestic and global, largely due to economic slowdown issues, Fed tightening, oil price volatility, US-China trade war and earnings growth slowdown for many sectors and corporates.
On the domestic front, we have seen interest rates rise, the INR fall in value, credit concerns and earnings slowdown. Election uncertainty has also played its part in equity market weakness.
Many factors on the macro front are turning positive for equities. On the global side, Fed has indicated a pause in rate hikes and slowing its balance sheet drawdown, ECB is veering towards a long period of record low rates and is adding liquidity into markets through long term refinancing operations, China central bank is easing policy and Bank of Japan is highly accommodative.
Trade tensions are looking to ease with US-China trade talks and no extra tariffs imposed on Chines goods into US. Oil prices are down from peaks on US producing record shale oil.
On the domestic front, RBI turned policy neutral from calibrated tightening and has cut rates and is infusing liquidity into the system through bond purchases. Inflation is down well below 4%. The INR has strengthened from lows and is stable. CAD is not looking to balloon given fall in oil prices from highs.
The government presented a soft budget with elections in mind but did not show any alarming rise in fiscal deficit.
Earnings have seen hits and misses but given that India is a growing consumer market, demand slowdown is seen as temporary. Monsoons are predicted to be normal this year, which will boost sentiments on consumer demand.
On the election front, the market may see a pre election rally if expectations rise on the present government regaining power at the centre, However, elections are always a lottery and fundamentals are always a better trade than election speculation.