IN the week starting July 30, 2018, we sent our clients a survey on the Nifty Index: the UBS Market Thinking Game.
IN the week starting July 30, 2018, we sent our clients a survey on the Nifty Index: the UBS Market Thinking Game. But instead of asking investors their own views, we asked them to predict what other investors think. This may be a subtle but important difference and arguably a cleaner way to gauge market sentiment. We asked investors two questions: (i) We asked them to rank five possible drivers for the Nifty in order of importance, according to their perception of other investors’ views. (ii) We also asked them to predict market sentiment around the Nifty, ranging from very bearish (a score of 1) to very bullish (a score of 5).
Oil prices, local fund flow perceived to be top drivers, not politics/currency
The responses indicate that oil prices are the most important driver, followed by local fund flow and the 2019 elections. The Rupee exchange rate turns out to be the least important driver out of the five, followed by bank NPL resolution. Market sentiment around the Nifty seems to be more “Neutral”, as 38% of investors indicated Neutral sentiment, while an equal number were bearish as bullish, with an average score of 3.03 on a scale of 1-5.
Our view: Oil/currency matter a bit but India structurally not near 2013 fragility
India’s macro stability still gets impacted by oil and currency, but structurally, India is nowhere near the 2013 fragility scenario. A $10/bbl rise in oil prices can increase India’s CAD by 0.3% of GDP and the fiscal deficit by 0.1% of GDP. A 10% rise in average crude oil prices could increase CPI inflation by around 25bp and cause a 30bp impact on GDP growth if the fuel cost is passed on to consumers.
The impact of Rupee depreciation is mixed—while 5% depreciation would push up inflation by 10-15bp, the impact on growth would be favourable. The earnings impact is actually fine: a 10% increase in oil prices is likely to keep Nifty earnings unchanged while currency depreciation drives higher earnings. However, the Nifty has generally underperformed relative to EM when oil prices rise more than 10% and also when INR depreciates >5% in near term.
Our view: local flow relevant for SMIDS; politics the BIG event for next 3Qs
Over the past two years, local mutual funds low has had more relevance than foreign flow for small and mid-caps (SMIDs), but we believe the best of local fund flow supporting SMIDs performance may be behind us. The pace of MF buying has slowed and SMIDs have underperformed the Nifty in 2018 – contributing to A Tale of Two Markets, which has hurt investors’ sentiment. We believe a key local factor for Indian markets over the next 3 quarters will be investors’ perception of will Modi win in 2019? Our discussions with investors suggest that most presume Modi will win the 2019 national election. We would remind investors to keep an eye out for opposition alliances, given the role of arithmetic vis-à-vis narrative in the context of the Indian electoral system .