May 26 marks Narendra Modi-led National Democratic Alliances’ first year in office. While the ‘hope rally’ saw the benchmark indices -- the S&P BSE Sensex and the CNX Nifty -- cross 30,000 and the 9,000 mark respectively, the Nifty has gained a net 14% in the first year of Modi’s governance.
Going ahead, brokerages remain divided on their targets for the Sensex and the Nifty.
Citibank, for instance, has trimmed its Sensex target to 32,000 from 33,000 earlier. It, however, introduced a June 2016 target of 35,000.
In April, UBS had slashed the year-end target on the Nifty to 9,200 from 9,600, due to a poor earnings outlook.
On the other hand, Bank of America -- Merrill Lynch, Nomura and Macquarie have maintained their bullish stance on Indian markets.
Here are 10 global and domestic factors that will determine the market direction over the next one year:
Rate hike by the US Fed: Though the US Fed chair, Janet Yellen, indicated recently that the central bank could hike rates this year if the economy continued to improve, analysts suggest that the strong dollar seem to be having a more sustained impact on the US economy, which will delay the first hike to the final quarter of the year. Reallocation of global portfolio flows into China, despite growth concerns could also dent sentiment in India.
Developments in euro-zone: Greece that has yet again warned that it could default on €1.6bn (£1.14bn) loan repayment due on its bailout loans next month, which has rekindled fears that the country was nearing a financial collapse and could see it breakaway from the euro-zone, which in turn can ruffle global financial markets.
Geo-political scenario: Developments across West Asia in countries like Yemen, Iran and Syria could put global economies at risk to higher oil prices that can derail global economic growth.
Crude oil prices: Crude oil prices have bounced back over 40% from the lows seen in December 2014. A rise in oil prices could dent the economic recovery in India, which imports nearly 70% of its crude oil requirements. This, in turn, has the potential to impact market performance.
Rupee’s trajectory: Over the past one year, the rupee has slipped around 8% against the US dollar, its worst performance in the first year of any Prime Minister since 1997, suggests a Bloomberg report. An April 2015 report by Citi had cautioned against the fall if the rupee, on a weekly basis, closed above 63 levels. “Given the large inflow of foreign money into Indian equities over the past 12 months, INR would likely come under pressure also. A weekly close above 63 would open the way towards 68-69,” it said.
Interest rate cut by the RBI: Most market participants expect the RBI to cut rates going ahead. A recent poll conducted by Business Standard suggests that the central bank could slash rates by 25 basis points in the upcoming policy review in June. A delay could negatively impact market sentiment.
Corporate earnings: Though earnings in the recently concluded quarter have been a mixed bag, analysts expect earnings and the capex spending to improve over FY16 and FY17. Going ahead, BofA-ML for instance, believes FY16 EPS growth to be stronger than FY15. Nomura expects a meaningful pick-up in capex in the second half of FY16F or the beginning of FY17. The markets will react negatively to any disappointment on the earnings front, analysts say.
Monsoon and inflation: A sub-par monsoon will stoke fears of inflation, which in turn, will act as a roadblock in the RBI’s decision to slash rates further. Since the markets are expecting the central bank to slash rates going ahead to revive growth, any disappointment as regards monsoon and possibility of a rise in inflation could see markets come under pressure.
Progress on reforms: While the government has done a few reforms, typically the impact of reforms is felt with a lag, analysts say. Clarity on retrospective tax issues like minimum alternate tax will also boost investor sentiment. “With markets currently trading at 16x 1-year forward PE multiples is discounting a large part of it. We believe markets would now wait to see the impact of reforms undertaken so far on economic growth and earnings before re-rating further,” points out a recent BofA-ML report.
Outcome of Assembly elections: While the government has adequate majority on the lower house of Parliament (Lok Sabha), it still needs approval of the upper house (Rajya Sabha) for successful implementation of its ‘reform agenda’. “The other state elections, such as those in Bihar (to be held in H2 2015), Tamil Nadu and West Bengal (H1 2016) will be more important in deciding BJP's tally in the Rajya Sabha,” Nomura had said in a February 2015 report.
Image: The Bombay Stock Exchange; Photograph: Hitesh Harisinghani/Rediff.com
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