While the Fed’s first hike (in a decade) was on expected lines, there is no certainty about when and how it will move with respect to subsequent hikes
There was a rare consensus among brokers and market experts that the US Federal Reserve’s rate hike was a non-event for the Indian markets, with most saying a marginal increase had already been priced in. Still, as global markets rallied, the local markets too rose by 1.2% on Thursday. Stocks have risen by over 3% this week, erasing most of the losses since 1 December.
Investors evidently loved the Fed’s statement that it expects only gradual increases in its funds rate. But any celebration is clearly premature.
While the Fed’s first hike (in a decade) was on expected lines, there is no certainty about when and how it will move with respect to subsequent hikes. As the head of research at a multinational brokerage firm points out, no one knows how the rate hike announced on Wednesday will impact the US economy. Another uncertainty, he adds, is related to the movement of the renminbi, with China effectively de-pegging its exchange rate from the dollar.
As far as the domestic economy goes, while there are early signs of a recovery, it is foolhardy to take it for granted.
Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd, says, “In the near term, there are disappointments in terms of reforms and sluggish recovery, which could weigh on investor sentiment.”
Based on its most recent fund managers’ survey, analysts at Bank of America Merrill Lynch wrote, “Global fund managers’ positioning in emerging markets remain near record lows, as they perceive the region to be a value trap with a weak earnings outlook, sharply slowing China growth and see continuing headwinds from a stronger US dollar and higher bond yields. A recession in China remains the biggest tail risk for global investors.” Investors now think China’s growth is likely to slow to 5.5% by 2018 (down from 5.9% last month), the report added. Higher bond yields as well as stronger dollar are particularly value destructive for a number of Indian companies which have large overseas debt.
In the past months, outflows by foreign institutional investors have amounted to Rs.8,500 crore ($1.27 billion). The markets have absorbed this to some extent, thanks to heavy purchases by domestic institutions. But outflows by foreign institutional investors are likely to continue as long as commodity prices remain low, points out the head of research, citing that the wealth of some of the world’s largest investors are dependent on commodity prices.
In this backdrop, the outlook for Indian equities doesn’t look all that bright for the near future. Still, if the government is able to push ahead with reforms and there is greater evidence about the economy’s recovery, investors may still well flock to Indian shores for the lack of alternatives.
As economists at Bank of America Merrill Lynch point out in a 14 December note, growth in India’s economy should stage a shallow recovery in 2016-17, although it will still mean it will be the fastest-growing economy among emerging markets.
