Turbulence unlimited

The sombre mood prevailing among market participants was evident in the quiet muhurat trading session on Sunday. While optimists bought stocks that made the Sensex and the Nifty move higher in the initial part of the session, prices could not sustain at those heights and slipped to close with mild losses. Market participants cannot be faulted for adopting a cautious stance, given the uncertainties that cloud the near-term outlook for stocks. The US presidential poll scheduled early November is turning into a close race now. Financial markets favour a Clinton win, with global stocks moving higher every time opinion polls veer towards a Clinton victory. Heightened volatility is, therefore, possible if Trump manages to win the race to the White House. Of greater concern is the impending rate hike by the Federal Reserve. Since many investors have used cheap dollar loans to buy assets across the globe, rising interest cost can lead to an unwinding of these positions, causing a sharp decline across markets. The flight of money away from riskier assets can hurt Indian stocks too. With Brexit expected to unfold from March 2017, global growth could slow further. The IMF has revised downwards the growth for this year and the next by 0.1 percentage point, citing weakness in the US and Europe.

The first few months of Samvat 2073 are, therefore, likely to be difficult for investors. However, the factor that can buttress equity in this turbulent patch is liquidity. Retail investor appetite is evident in the over-subscription being witnessed in initial public offerings. Many investors have also begun investing in equity markets through mutual funds resulting in surging inflows to these funds. Foreign portfolio investors continue to adopt a benign stance towards Indian equity. These investors have net purchased equity worth $7 billion so far this year even as they pulled $500 million out of India debt. Global interest rate movements and currency volatility has a greater impact on foreign fund flows into debt. In 2013 too, when financial markets became choppy following the Federal Reserve’s move to taper its quantitative easing programme, foreign portfolio investors continued to buy stocks even as money was pulled out of debt. It is the demand from domestic as well as foreign investors that has kept stock prices buoyant so far this year.

These investors appear to be betting on the long-term prospects of Indian stocks. While certain pockets of the market are getting overheated, investors appear willing to pay a premium for the relatively better growth in the Indian economy. Corporate revenue growth is beginning to improve since the June quarter, showing a slow pick-up in demand. While many segments such as banks, real estate, steel and infrastructure continue to bleed, consumer-centric segments have been powering ahead, driving the stock indices higher. These sectors will receive a boost from the Seventh Pay Commission, normal monsoon and declining interest rates. It might not be smooth sailing in Samvat 2073, but investors willing to hang on may yet get rewarded.

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