Hopes dashed by slow pace of reforms, global uncertainty
At the outset of the outcome of general elections, Samvat 2071 started as a year of intense hope and optimism. With the BJP-led government coming to power and initiating economic reforms-led governance agenda, the Street was expecting the market to extend its outstanding performance of the previous Samvat.
However, slower economic momentum, lesser-than-expected shift in reforms, as well as global uncertainty around China and interest rate hike by the US Federal Reserve turned 2071 as the worst year for Indian benchmarks in four years. The benchmark Sensex has lost more than 2% of its value in Samvat 2071 which is set to end on Tuesday. In Samvat 2067, the Indian markets lost about 18% of their value.
Even as foreign institutional investors (FIIs) bought shares worth $7.1 billion, buying enthusiasm was certainly constrained, as many investors trimmed their overweight position on India awaiting the earnings recovery to pick up. As such, in terms of foreign buying as well, the Indian markets witnessed their most inferior performance since Samvat 2067 when they had bought Indian shares worth $0.9 billion.
However, the pace of purchase by domestic investors remained robust this year, as domestic institutional investors, including mutual funds and insurance players, lapped up shares worth Rs 50,667 crore or close to $7.98 billion based on an average rupee rate of 63.5 against the dollar.
According to Andrew Holland, CEO at Ambit Investment Advisory, equity markets may continue to be a preferred choice of investment for domestic investors given the trajectory of interest rate cycle and fading allure of real estate and gold investment.
While the India story may have witnessed a pause amid economic slowdown and delayed-than-expected policy reforms, the interest rate turnaround as well as lower commodity prices make India one of the better-placed emerging markets.
“Of course, outcome of the Bihar election has come as a setback as it can impact the BJP government’s ability to carry out swift reforms. Foreign investors would like to see if the poll has rattled the cage for BJP to start making changes in its strategy of doing right things for the economy,” Holland said.
Although the poll outcome is seen having an impact on BJP’s political policies, some experts argue that economically it may not have too severe an impact on the reforms agenda.
As per Nomura, due to lack of numbers in the Upper House of Parliament and risk of the BJP turning populist, the Bihar defeat will be seen as a sign of greater difficulty for the BJP in pushing its reform agenda at the Centre.
However, it believes that beyond the immediate negative reaction, the direction or pace of economic reforms to change dramatically in the coming year.
“In our base case, we expect incremental economic reforms to continue. What is clear though is that the government must outline a clear strategy for pushing through legislative reforms, particularly the GST bill, accelerate non-legislative reforms and work more closely with states on land and labour reforms, as these are on the current list,” said a strategy note prepared by economist Sonal Verma.
While the next year (Samvat 2072) is set to start under the shadow of the Bihar results and ongoing concerns over the lack of earnings recovery, even global factors such as a change in interest rate stance of the US central bank and ongoing worries about the state of the Chinese economy may continue to weigh on the economic and fund-flow prospects of India.
The latest earnings season has further lowered expectations of a recovery in financials of Indian companies any time soon. For a set of 1,308 companies excluding banks, financial services and OMCs, the aggregate revenue for the July-September quarter declined by 5.2% on year, while net profit remained flat, reporting a 0.1% increase compared to the year-ago period.
Analysts drastically lowered their earnings expectations for India Inc during the last few quarters. While about a year back consensus estimates pegged Sensex companies to report an earnings per share (EPS) of Rs 1,900 in 2015-16, now they see the Sensex FY16 EPS to stand somewhere close to Rs 1,522. Kotak Institutional Equities sees downside risks to the Indian market over the next two-three quarters until there is conclusive evidence of economic reforms and recovery and greater confidence in the Street’s earnings estimates.
It would be interesting to see how mid-cap space reacts to these expectations, given that the universe has generally outdone blue chip indices by a huge margin in Samvat 2071. The BSE MidCap rallied 19% last year, led by pharma, consumer and IT companies. In the largecap, names such as Maruti Suzuki, Lupin and Asian Paints have led the market performance this year, having rallied 25-46%.