Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

What will drive markets in the next 60 days

Fiscal cliff, credit policy, earnings and Union budget will be key in deciding market's direction.

The Indian stock market made a good start in 2013 with the benchmark BSE Sensex rising at least 250 points in the first two trading sessions of the year. The reasons for celebration came from the US, as the US Congress managed to avert the fiscal cliff—short-hand for forced reduction in government deficit worth close to $600 billion.

The first two months of 2013 promise to be busy with market-moving events, both in India and abroad. There are four big events that will drive markets in the next few months. First, the fiscal cliff has not gone away. The discussion on reducing the deficit in the US will appear once again. Second, the all-important credit policy announcement on 29 January is rich with promise and markets are anticipating with bated breath a policy rate cut. Third, the numbers for the third quarter of fiscal 2013 will be out and we’ll know if we’ve bottomed out or not. Fourth, the Union budget which will be presented towards the end of February, and we’ll find out if 2014 elections has driven it or growth concerns. Here’s a quick run-through of the four events and their possible impact on the market.

The fiscal cliff and global liquidity

Though members of the US congress managed to strike a last minute deal and averted the so called fiscal cliff, the problem is not over by any stretch of imagination. The US government will reach the legal limit of borrowing somewhere in the middle of February. The administration will have to go back to the congress for raising the limit from the current level of $16.4 trillion. Also, members of both houses will have to agree on spending cut which were not part of the fiscal cliff deal. Therefore, irrespective of the contours of the deal, with spending cuts, the US economy is expected to slow down. Therefore, markets would expect the quantitative easing to continue and liquidity is expected to remain comfortable in the foreseeable future. Further, Bank of Japan, the Japanese central bank, is being pushed by the new administration for aggressive easing (read printing money), which will add to global liquidity. Says Ajay Bodke, head–investment strategy and advisory (institutional research), Prabhudas Lilladher Pvt. Ltd: “The risk-on trade will continue and the Indian market will benefit from the inflows." Bodke argues that there is very little incentive for money managers in buying government bonds in markets such as Japan and US as there is virtually no scope for yields to go down—bond prices and yields are inversely related. Therefore, money managers are expected to chase riskier assets such as Indian equities.

Credit policy

The Reserve Bank of India (RBI) will present the third quarter review of the monetary policy on 29 January and markets are expecting a 25 basis point (bps) cut in the repo rate (one basis point is one-hundredth of a percentage point and repo rate is the rate at which the central bank lends to the commercial banks). In fact, markets took a hint of a possible rate cut from the statement made by RBI governor D. Subbarao while he was presenting the second quarter review of the monetary policy. Subbarao had then said: “The baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of FY13." Therefore, analysts argue that markets have already factored in a 25 bps cut and may not react much if the quantum of cut is on the expected line. However, if the rate cut is postponed, market may react negatively, but it will not be shocked as it is now convinced the direction of interest rates is headed south. A 50 bps cut, though, would be a positive surprise. Says Daljeet Kohli, head of research, IndiaNivesh Securities Pvt. Ltd, a brokerage firm: “A 50 bps cut may push markets to higher levels, but is not warranted at this stage and could lead to disappointments later." Kohli argues that front-loading of rate cut will put pressure on the fundamentals to catch up and could lead to disappointments. Therefore, 25 bps could be the ideal quantum of rate cut that markets would be looking forward to.

Earnings

Indian companies will soon start declaring numbers for the December quarter and analysts are expecting muted growth in revenue and slight improvement in margins leading to improvement in profitability. Says Kohli: “We are expecting 5-10% growth in revenue and about 15% growth in profits. Though analyst numbers are at the index level, the action in the earnings seasons will be more focused on the performance of the individual companies. There would be, as always, some disappointments and some positive surprises. However, at the broader level, the important thing is that profits are expected to improve from here on and analysts are beginning to factor in about 15% profits growth for fiscal 2014 which will start on 1 April.

The Union budget

The Union budget will be an important milestone for the market. It also gets prominence because of the fact that market would hope to see the medium-term plan of the government for fiscal consolidation. The government after announcing the fiscal deficit target of 5.1% of the gross domestic product (GDP) for the current fiscal is now targeting 5.3% of the GDP. Says Madan Sabnavis, chief economist at CARE Ratings: “Markets are factoring in a deficit number closer to 5.8% of the GDP. If it turns closer to the 5.3% of the GDP mark, it will be positive for the markets." Sabnavis also adds that markets would be keen to see the deficit target for the next year. Anything close to the 5% mark will be a positive. Therefore, the most important number to look forward to in the Union budget will be the deficit number with the underlying condition that this could be the last full budget for the current government and it may be difficult to cut deficit at this point.

Mint Money take

While the sentiments in the marketplace will be driven by the above mentioned events, the biggest of them will be the Union budget. If the government gives in too much to the political compulsions, it will be negative for the market as any course correction will then have to wait for at least 18-24 months. As of now, the visibility on liquidity remains comfortable, but other macroeconomic challenges such as the high current account deficit could come into play anytime with negative consequences for the market.

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