This year has been eventful, financially and otherwise. The stock market has seen dramatic movements, thanks to events such as Brexit and Trump’s victory which have led to far-reaching consequences. We are yet to comprehend how such events could pan out in future.
In this article, we will discuss a few events of 2016 that hurt investors from an investment perspective.
Brexit – Exit of UK from EU
The referendum on Britain’s membership of EU, which resulted in Britain’s exit from the EU, has led to ripples in markets across the world. The result came as a surprise to many as majority polls had indicated that Britain was likely to stay in the EU. The Sensex opened lower by 635 points and then went up to close at 2% down. The Nifty followed with similar fall in its index value. The financial crisis resulted in erosion of jobs and with the UK and the EU being a major market for Indian IT, India’s market is likely to see long-term impact.
Raghuram Rajan’s exit from the position of RBI governor was seen to be bordering on the unceremonious in many circles. Media reports suggested Rajan’s ideas were at odds with what the Narendra Modi government wanted. Many of Rajan’s policies such as hisinitiatives to bring inflation under control have proven to be fruitful. This brought down the interest rate. It was expected that a second term for Rajan would lower the interest ratefurther since inflation had come down. Thus, the events leading to Dr. Rajan’s exit made the markets jittery. The stock market was down by about 1%.
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Donald Trump’s victory at the United States presidential elections did not just gate-crash the political establishment of Washington but also impacted the markets across the world. While Trump’s policies are favourable for jobs in the US, they are likely to cut jobs and affect the IT and BPO industry abroad. The promise to increase real wages of blue collar workers and manufacturing jobs in America have driven Trump to the Oval Office.However, his stance on illegal immigration, terrorism and economy had impacted the foreign market negatively. The Sensex and Nifty fell 1-3% after the election results were declared. However, the market was also impacted by the announcement about demonetisation of currencies which came about on the same day.
The sudden breaking of the demonetization move by the Narendra Modi government brought about dramatic changes in the economy and the spending and investing habits of citizens. After all, 86% of the currencies in the economy had gone out of circulation. The stock market saw a huge impact. The manufacturing sector which largely deals in cash has either halted production for the time being or slowed it down significantly. Real estate is another sector that has seen prices dip due to the erosion of black money from the sector. It may take another three-six months for the market to attain normalcy.
Fed rate hike
Developed markets have seen interest rates go downward in the recent past. In the case of the US, the interest rates have remained at near-zero levels since the Great Recession of 2008-9. In Japan, it has dropped to negative. This drove big investors to eye emerging markets such as India for better returns on investment. The Indian equity market still offers one of the best returns in the world.
But with the US Federal Reserve (Fed) hiking its rate recently, investors are attracted to the US market, especially with the dollar appreciating. This has led to an outflow of capital from the emerging markets to the US. The Indian market has seen an outflow of about INR12,500-20,000 crore since the Fed rate hike and about INR 60,000 crore since November.
(The author is CEO, BankBazaar)