The year 2015 was one in which almost all asset classes across the world closed in the red. All the major world currencies depreciated on the back of dollar strength. China devalued its currency, the yuan, for the first time in 21 years, creating a flutter across Asian currencies.All commodities — oil, metals, food articles and precious metals — have fallen double digits over the year, most touching multi-year lows.

There was serious risk aversion throughout, much more than what was seen in 2013 due to the ‘taper tantrum’. Emerging markets (EMs) were the worst affected as $70 billion redemptions hit the category. In all this, India stood out. While our currency and equity markets too fell, we relatively outperformed most EM peers. In the last year, the Nifty is down 5 per cent while the mid indices did relatively better, rising 5 per cent.

 As we stand at the beginning of a new year, it is reasonable to expect that 2016 would continue to see volatility in global risk appetite. Post the first US rate hike this month, the trajectory of future rate hikes would be shallow and totally data dependent, making it the “loosest tightening” ever for the US. The other major factor globally would be China, where the rebalancing of the economy from investments to consumption is going on, and it could be painful for global growth. Also, slowdown in China implies structurally lower commodity prices, which would help India, being a net importer.

Finally, for the first time after many years, we would see diverging monetary policies across the world — the US would be in tightening mode while the European Central Bank (ECB), Bank of Japan (BoJ) and China would be in easing mode. Slower global growth and low inflation would be the new normal.

 Against this, India clearly stands out with an expected 7.5 per cent gross domestic product (GDP) growth and 5 to 6 per cent consumer price index (CPI) next year. We expect current account deficit (CAD) to be reasonable at 1.5 per cent of GDP. The RBI has cut 125 bps on repo rate in 2015 and we expect 25-50 bps further rate cut in 2016. Thanks to the rising forex reserves, improving CAD and lower inflation differential to the world, the rupee should be relatively stable. Trend reversal in 2017

 India’s GDP growth over the year would be primarily driven by two engines — government expenditure and consumption. Budgetary allocations to infrastructure, such as roads, railways, defence, smart cities and renewable energy, would go up 2.5 times over next five years compared to the previous five years.

The consumption growth would be led by urban consumption driven by lower EMIs, higher real wage growth and improving job market. Some of the high-frequency data, such as airline traffic, auto sales, oil consumption and domestic CV sales all point to green shoots in discretionary consumption. The coming year will also see implementation of the Seventh Pay Commission benefiting about 2.5 crore government employees who will receive over ₹3.8 lakh crore. This would pump up discretionary demand in sectors, like cars, two-wheelers, ACs, apparel, footwear and housing. While foreign institutional investor (FII) flows into equity were tepid this year, domestic institutional investor (DII) flows have been the strongest in seven years with a net inflow of $9.1 billion primarily driven by mutual funds, which have seen net inflows for the 19{+t}{+h} month in a row. As the shift from physical to financial savings continues, flow into equities from DIIs is expected to sustain for a long time.

 Over the past few years, corporate earnings growth has disappointed the expectations set at the beginning of each year. In FY16 also, earnings were expected to grow in high double digits only to see a revision to single-digit growth.  This was on the back of three factors — back-to-back monsoon failure leading to rural slowdown, disinflationary impact on topline due to falling commodity prices and slow transmission of interest rate cuts. FY17 will see full benefits of rate cuts and its further transmission due to proposed changes in base rate formula. Lastly, due to the favourable base effect, we expect that the trend could reverse in FY17. With reasonable valuations and return of earnings growth, Indian equity markets provide an opportunity for long-term wealth creation. The key themes we expect to play out are consumer discretionary, private banks, non-banking finance companies, pharmaceuticals and infrastructure.

The writer is Co-Chief Investment Officer, Birla Sun Life AMC

 

 

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