2017: A Year of Uncertainties for Equity Market
Mixed fortunes in store for markets
Markets are expected to move in a narrow range during 2017, with a perceptible recovery seen towards the latter part of the year. Unless the Union Budget surprises very positively through a tax-induced fiscal stimulus, the markets are likely to mirror the movement seen over past three months with foreign institutional investors (FIIs) continuing to stay on the sidelines while locals provide buying support.
In the first half of the calendar year, the markets will be influenced by a combination of both domestic and global factors. The articulation of incoming US President Donald Trump’s economic policies will be the most determining factor — particularly for FII liquidity — followed by the outcome of elections in France and Germany, how the UK manages Brexit and the path of the Chinese renminbi.
Among domestic factors, two events that will shape market direction are first, the Union Budget and second, the verdict from five state elections in February-March. The Budget is scheduled to be presented on February 1 and the election verdict will be out on March 11.
In the second half, domestic factors will take over as the key market determinants, particularly the rollout of the Goods and Services Tax. This may likely emerge as the single biggest determinant for economic growth and corporate earnings in the second half of the next Financial Year (FY18). As is true of the adage that the most effective medicine is bitter when swallowed, this highly anticipated economic reform may prove to be disruptive in the initial roll-out period, which could impact aggregate demand and corporate earnings.
At the same time, Trump’s economic plan, it is believed, should rebalance the policy mix and will be a game changer for his country. This can give a big boost to US growth. Fiscal stimulus and broad-based deregulation are expected to jolt the US economy toward a long-term equilibrium of higher growth, inflation, and interest rates.
The policy shift could see upside risks to both — US interest rate trajectory and the appreciation of the US dollar. Following Trump's inauguration on January 20 and the articulation of the new administration’s economic policy, the US dollar index could resume the appreciation trajectory, which could see FIIs either selling or staying on the sidelines, at least in the first quarter of FY18. The Indian government can possibly circumvent this by announcing a game changing budget focused on a massive rehaul of the direct tax regime in the country.