Trigger-happy

Interest rates, movement of oil and rupee, corporate results, divestment and state polls will influence equities

 After furiously accumulating 6,300 points in the five months to end August 2018 as against 16 months taken to travel the same distance earlier, the equity benchmark seems to be losing stamina. It shed more than 4% in over a fortnight since reaching its life-time high. The US-China impasse on trade tariffs continues. Following Turkey, Venezuela became the second emerging economy to see flight of foreign capital. The fear is of the contagion spreading to more countries. Oil prices rebounded to US$ 79 a barrel and the rupee slipped below 72 a dollar.  Bond yields have crossed 8%, indicating the central bank might have to increase interest rates for the third time after four years in its October policy meet. After the euphoria, there is a sobering realization that the 8.2% expansion in the GDP in the June 2018 quarter over a year ago might not sustain as the spurt was on a low base of 5.7% increase in the June 2017 quarter. Floods in Kerala in August, too, are likely to dent the GDP numbers of Q2 of the fiscal year ending March 2019.  What is striking, though, is the side-way movements of the market. After declining for a number of consecutive trading days, equities bounce back over the next few days, fully or partially erasing the previous losses. There are alternate bouts of selling and buying by both foreign and institutional investors. Those who prefer to sit out during the surge enter on dips. The message from the market is clear: though expensive relative to their trailing earnings, the future of Indian companies is bright. To move up to the next level, there is need for fresh triggers.   

 

 A significant cooling of crude might come after the IPO of oil producer Saudi Aramco, slated anywhere between this year and 2020, is out of the way. Saudi Arabia is pushing for a price beyond US$80 a barrel to get a good discounting for the offering in spite of the Organization of Petroleum Exporting Countries meeting the objective of draining out excess inventories after agreeing to cut output end 2016 for a year and then extending it to end 2018. A barrel had crossed US$ 140 in July 2008. A few months later many US banks collapsed. After falling in reaction to the credit crunch, crude recovered to US$ 100 in 2011 as pump-priming by the US monetary authority opened up the credit pipeline. As many smaller European countries struggled with debt default, prices started slipping in 2013 and plunged by half a year later. Hopefully, the Gulf nations would not want such a situation to repeat as the current level of cutback in output is sufficient to put their economies back on track. Alternatively, a government-induced slowdown in the world’s second-largest economy, China, can soften commodity prices and lift import-intensive economies such as India. Easing of the current account deficit will follow. The second trigger will come from the Federal Reserve if it stays put for the rest of the year, citing contradictory signals from the US economy. Consumer confidence is high but uncertainty arising from tit-for-tat trade barriers has muddied the outlook for American exports. Compensating exporters with subsidies will expand the widening fiscal deficit and derail the booming domestic economy.       

 

Stability in US interest rates will give the Reserve Bank of India flexibility to pause from its money-tightening exercise. Soft consumer prices have enabled it to let the rupee beyond 70 so as to remain competitive. Despite dipping into the reserves, there seems to be no urgency to prop it up to above 65 prevailing at the beginning of the fiscal year. The existing disparity between the interest rates in India and US is quite attractive for dollar inflow into the local capital markets. The Make-in-India campaign is an acknowledgement of the limits of relying on exports to shore up foreign exchange. Instead of higher external borrowing limit for Indian companies, opening up aviation, insurance and multi-brand retail to controlling foreign ownership will prove a powerful magnet for overseas funds. In the short term, the Q2 and Q3 performance will reveal if the resilience of Corporate India in overcoming the disruption of demonetization and implementation of GST extends to circumventing the effects of expensive inputs. Release of more dearness allowance to Central government employees and enhancing the overdraft facility to Rs 10000 for Jan Dhan account-holders should spur urban-shopping just as a normal monsoon and higher farm support prices have provoked rural-buying. Many companies’ volume-push due to reduction in GST is slated to translate into higher margins on pass-through of costs after the cooling period and improved capacity utilization. In between, the beginning of bidding for bankrupt power assets and divestment in PSU cash-guzzlers will boost investor confidence. Later, results of elections to five states will provide clues on the mood of the market.

-Mohan Sule