Sunday, October 22, 2017

Will 2017 be the year of uncertainty for Indian markets?

The uneasy mix of ambiguity and fear in the stock markets

By Narayan Krishnamurthy

Eternal optimists among stock market analysts and fund managers will not tell you, but the state of Indian economy and the markets can be best described based on what Winston Churchill once described Russia as a "riddle wrapped in a mystery inside an enigma". Popular market index, the Nifty and the Sensex ended the year rather flat with 3 per cent and 2 per cent growth respectively. In comparison, both the indices were in the red in 2015.

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 The signs are ominous this year on back of the impact of demonetisation in the last quarter of calendar 2016. Yes, the emerging market tag makes India an attractive investment destination, but it also makes us highly vulnerable to any policy changes or indications of the same.

 What the last few months have done is taken away some of the uncertainty psychosis and instead introduced fear psychosis too. But, for a large base of small investors, the reducing interest rates, more than average inflation and tepid equity returns in the past two years has resulted in heightened fear, which is not conducive for them. The recent push towards consumption is a wishful thinking, but it is unlikely to increase consumption or bring in new investments. The combination of fear and uncertainty will affect any chances of an early economic revival.


Source of fear

A lot of events are simultaneously occurring to measure a clear impact of their collective play. The GST is yet to roll out and how it will impact the economy is yet to be seen. The political developments from the time the GST bill was passed to the meeting of the GST council are yet to settle for a clear roadmap on the GST.

 Any talks of change in taxes – income and corporate immediately impacts the stock markets and investor psyche. Although a lower tax regime is welcome, rumours of tax scrutiny and harassment from the tax department are all scary for investors to commit money. Any change to the current tax treatment of long and short-term capital gains can spook the stock markets into a tailspin.

 Scandals and succession issues adversely impact market sentiments. The listing of the NSE and the BSE are up close and certainty. However, the exit of former NSE chief Chitra Ramkrishna in haste has left people with more doubts on the working of the exchange. The succession plan or the lack of it at most corporate houses is a cause of worry. One witnessed the re-entry of N R Narayana Murthy at Infosys a few years ago and what it did to investor wealth in the company. We are witnessing a similar incident with the Tata group.

 There are several large and important states that go into election from UP, Punjab and Goa this year. Political uncertainty does impact stock markets and there is nothing hidden about how important these state elections are midway into the rule of the BJP-lead central government. We are months from the change of guard at SEBI, which will see a new chief make way for U K Sinha, who had a long stint which was uneventful in rocking the markets. There

 Of course, everybody knows that in the long term, stock prices will rebound. The economy will turnaround because of the reforms and check on leakages in it. But the big question is: how much time will it take or how long is the long term? Nobody has a clear answer. Several sectors of the economy have already been badly impact – manufacturing, automobile and tourism are those that are suffering.

 Promises of government spending to boost the economy are yet to show, interest rates are yet to fall to levels that corporate India can confidently get into expanding. The government has made several provisions and announced action plan to get things on track. If most of them are fulfilled, the economy will emerge out of the uncertainty with only a few bruises. Or else be prepared for the worst that could hit us.

 For small investors, the writing on the wall is clear – you cannot avoid investing in equities despite the risks associated. Their patience will be tested, but they should not lose faith in the stock markets. Stick to simple facts on which the stock markets work – buy low, sell high. And, when you don’t know, hold on and sit tight. The role of the eternally optimistic stock market analysts and fund managers should be appreciate, especially the way they see a positive outcome with any move that impacts the markets.