The year 2016 started off with lot of hope and promise as far as the Indian Markets and the Economy were concerned. However globally most people were apprehensive with views like Crude going to $ 20 per barrel and its impact thereof, US rate hike cycle and a potential crash in equities, China concerns (which are there every year) etc. However the global economy showed clear signs of recovery and this was reflected in the performance of many equity markets globally which gave strong returns in 2016. We were also moving strongly till November before Demonetization hit us. As we enter 2017 there is a lack of bullishness and increased apprehension about India. The outcome might be very different.
First of all I would like to deal with demonetization. I have written about it in the past so will just reiterate that the bounce back from this move will be very swift and rapid. There is likely to be a V shaped recovery contrary to what people believe in general. The simple reason is that it is a short term liquidity issue and not a solvency issue i.e. people have money in their bank accounts, they feel that they cannot access it fully at this stage. This is leading to an increase in savings rate in the short run which will boost consumption later in the year 2017 as normalcy returns.
The government is likely to boost infrastructure investments as well as cut taxes to take care of the inconveniences due to this move. This will be positive for the economy. The impact on the rural economy due to prolonged cash crunch is difficult to gauge at this point of time, however it has not impacted agricultural growth for sure, as reflected in the winter crop sowing pattern.
What the public will be watching for is follow up action on corruption and views on that will determine the ultimate success or failure of the scheme in the minds of people. However its impact on near term black money generation will be real and positive for formalizing the black economy.
Significant rate cuts have been announced by banks at the start of the year. This will have a huge and immediate positive impact on corporates with large borrowings. A nearly 1% interest rate reduction is huge by any yardstick. Those saying that interest rate cuts alone can do nothing (they used to crib earlier that rate cuts are not enough) need to realize that it impacts the earnings of those who have large borrowings immediately and also increases their ability to service their debt. It also makes future investments more viable as the cost moves down. On consumer durables consumption it has a more immediate impact as lower rates does drive consumption. It will also have positive fallouts in the bidding for infrastructure projects. Low cost housing demand should see a perk up due to a combination of lower rates and perks announced by PM Modi on 31st December.
The economic recovery that got disrupted due to Demonetization is likely to restart very fast going forward. However we cannot evaluate how India will do without taking a view on the Global picture. Globally things are much better at this stage for risky assets. The US and European economies have stabilized and are on a recovery path. Japanese economy seems to be stable and a huge shift out of bonds into equities should play out over the next 3-5 years.
The main reason why Emerging Markets underperformed right after the Trump victory was the relentless rise in the US Dollar Index and the fact that money usually chases performance. As US, European and Japanese markets rallied the money shifted to those markets. However this kind of divergence in performance normally does not last. We should see the impact on Emerging Markets going forward. The OPEC deal is also positive for global liquidity flows as any zone of concern globally normally impacts the entire world. Given the fact that sustained prices in the $ 50-60 range will lead to significant pick up in Rig activity in the US Shale Oil fields we will see that production increase as we move through 2017. Fundamentals do not justify a runaway rally at this stage; however this is one variable that we will need to watch.
Overall the outlook for 2017 is much better than what you will hear all across. A quarter or two of subpar performance has little to do with the long term value of a company. There is a possibility of Fiscal Boost as well as lower taxes in the upcoming Budget. However my view of a positive outlook is not based on this. The recovery in the economy will be V shaped and the impact of Demonetization has already started to fade away in the minds of consumers. Lower interest rates will boost consumption and good agricultural production will be positive for the rural economy as well as inflation. The correction post Demonetization has thrown up many investment opportunities and 2017 will be a year where the overall markets should do well and there is also huge potential of outperformance via stock specific investments. The time for investments is when no one is taking about the “Mother” of all Bull Markets as that talk comes in when markets are already very high.