Global equity markets have recovered swiftly from the jitters at the beginning of the year and the Indian market has followed suit. Despite India being a ‘bright spot’ in the global economy, Indian equities have done worse than emerging markets’ average this year.
One reason is because markets such as Latin America and Russia have done better recently due to commodities and crude oil prices bouncing off a bottom. While the Indian economy is likely to see a cyclical improvement on account of good monsoons, there are some domestic headwinds too. The most important of these are the lack of a boost from falling oil prices; bank lending being held back because of rising bad loans; the high leverage in some sectors; and ongoing fiscal compression. Corporate earnings are expected to expand but valuations, too, are no longer cheap. Nevertheless, the premium for the Indian market compared to emerging markets remains high and is unlikely to diminish.
The global environment is improving, but at a snail’s pace. Europe’s latest gross domestic product (GDP) data shows a marked improvement, but that is overshadowed in the near term by the fear of a Brexit. US macroeconomic data has hit a soft patch but that is helpful to the markets as fears of a Federal Reserve hike in June recede. Abenomics hasn’t worked in Japan, and though the Bank of Japan claims it has lots of ammunition, we will have to wait and see whether it is firing blanks. China remains a key risk factor—it was the spark that lit the prairie fire in the markets at the beginning of the year and also in August last year. There are plenty of doubts whether the recent bounce in commodities and oil prices can be sustained.
In these circumstances, the markets should continue to remain range-bound, with a tepid global recovery and local high valuations restricting the upper bound, while global central bank actions and abundant liquidity support the bottoms.